Thursday, August 29, 2013

Wall Street is constantly changing. If you listen to the news media you would think that everything remains the same until Congress or the SEC decides to increase regulation or get more involved. That is not the case. Recent volatility in the financial markets have an very important lesson for the immediate future and provide an insight into the state of the US markets. This lesson is lost on most bond fund managers, which is why if you are invested in a bond mutual fund you have been getting killed recently. Wall Street has been quietly cutting their risk profile,not in response to the hue and cry of Congress but because a lower risk profile make better economic sense in terms of profitability. The fact that the big trading firms are less willing to carry inventory means that when institutional investors want to sell large blocks of bonds the price will drop farther and quicker than expected. A study of the corporate bond market in the late spring / early summer or the municipal bond market this summer will illustrate this point.

Wall Street firms have learned lessons from the financial crash of 2008, mutual fund managers have not.

Congress, who never cease to amaze, is warming up for another bogus discussion of the debt ceiling. Since all revenue bills must originate from the House the fact that the House is now considering not authorizing the funds to pay for the laws they have enacted makes less sense that usual. It is the equivalent of holding a gun to their own head and threatening to shoot themselves unless you stop them from doing what they just did. This is not fiscally responsible, it is just stupid.

Monday, August 5, 2013

Random thoughts upon returning from vacation;

S & P is running radio ads touting what consummate professionals they are and how they " have taken to heart the lessons learned in the financial crisis" . What they have neglected to do is take responsibility for their actions in creating the aforementioned "financial crisis". S&P is acting like the financial crisis was some random event rather than a completely preventable occurrence if firms like Moody's and S&P had done their job.

Why does everyone admire JP Morgan as the "good" bank? In the last year they have admitted their risk controls are non existent (London Whale), paid large fines for manipulating both the natural gas and aluminium markets and been knee deep is the bogus financing that wrecked Jefferson County Alabama. If they are the good guys, what do the bad guys look like?

Fabrice Tourre of Goldman Sachs has been convicted of securities fraud in a highly publicized case recently. Maybe all the young hopefuls who swallow the Goldman Sachs kool-aid will pause when confronted with an ethical dilemma and at least think about it before trying to prove how clever they are. Secondly, does anyone think that Fabrice's boss had nothing to do with the fraud?

Nothing has changed in Europe in re countries like Greece, Portugal, Spain, Italy, Ireland etc. The only hopeful sign is that now the European Central Bank (ECB) realizes they must try to stimulate the economy. The bank tried to solve the liquidity and fiscal crisis by contracting economic activity through "austerity." I am not sure what economic theory they were using.