“Risky Investments in a Market Full of Conmen”
by Bill Bonner
by Bill Bonner
"Dow up more than 100 points yesterday. Gold up $18. Google…Apple…what more do you need to know? “Blah, blah, blah…don’t you feel you’re wasting your time?” Our friend was being sympathetic. She gave us a look of pity, tightly controlling her face muscles; as if it might slide into contempt at any moment. After spending so much time with rocks, dirt, cement…cattle, grapes…doing such real things, we admitted that writing about economics and finance seemed a little light. As if there is nothing real there. “I mean, you were building things…changing the landscape…and improving people’s lives. Putting water in their houses…digging reservoirs…setting up solar power systems.”
Yes, it was true. There is the world of real things…real work and real results. And there is a whole phony world of economists, commentators, speculators, blowhards and show-offs…hustlers and conmen…fools and knaves. Wall Street…and its victims. But while the real world is more satisfying…the phony world makes us laugh.
It shouldn’t come as a surprise that the insiders are taking advantage of the “crisis” they caused. But the scale of the rip-off…and the audacity and subtlety of it…are breathtaking. Yes, it is fun to watch a good flimflam artist at work. And those managing the US financial system are among the best.
One day, years ago, when our office was still in the slums of Baltimore, we got a knock on the door. It was after 7pm, but we were still at our desk… Standing in the doorway was a slender white man in blue working clothes…he looked like a mechanic or a dishwasher repairman. “I’m so sorry to bother you,” he said with a slight Pennsylvania Dutch clip to his words. “But I saw your light on…and well, I just didn’t know what else to do. You see, I’m a neighbor…I work at Dunbar’s (an air-conditioning contractor) down the street. I hate to bother you. It’s embarrassing for me. But you see, I was working late too…everybody had gone. I realized I was the last one in the shop. So, I locked up at Dunbar’s. I was in a bit of a hurry, I guess. And so, I…I locked my own car keys and my wallet in the shop. I’d just call another of the employees. But I’m the only one with keys, except the boss and he’s down the ocean (a local expression for having gone to Ocean City, MD). So I didn’t quite know what to do. What a mess. I’m really embarrassed to be bothering you with this. But here’s the problem. It’s my wife. She’s deaf. So, I can’t call her and tell her I won’t be home tonight. I’ve got to get home or she’ll worry herself silly about it. I could take a bus…I live up in Pennsylvania…not too far over the line. But I locked up my wallet. I don’t have any way to pay for a ticket…”
He went on to explain that he hated to borrow money. That he’d never borrowed money before in his life. Your editor had no money on him. So, he went to borrow it from a co-worker. “Sounds like a lot of BS,” she said, pulling a $20 bill from her wallet. “Oh no…he seems completely sincere,” we replied. We gave the man the money. He added that his wife made the best apple strudel in Pennsylvania, and solemnly pledged to come back tomorrow morning with a pie as well as our money. The next morning, we watched our watch. 8AM…not yet. 9AM…he must be waiting to take a break. 10AM…guess he’ll come over at lunchtime. At 12:30 we gave up. We repaid the co-worker, who laughed out an “I told you so.” “Yes, I’ve been had. But you know something, it was worth it.”
A gentleman lets himself be rolled from time to time. Suspicion and cynicism are unflattering. Besides, he will spend $20 on lunch and forget it immediately. A good hustle, on the other hand, is memorable. And a good flimflam is rare and elegant.
So it is that we look on the Fed, the Treasury, and their Wall Street accomplices with admiration. They have flimflammed the entire nation… Almost 100 million households in America…and not one in 1,000 has any idea what is really going on.
And more thoughts on the greatest flimflam ever… Pushing its key rate down to zero…the Fed gives its insider friends money for nothing. Trillions of dollars’ worth. The outsiders reach for their wallets. They know they are being robbed, but they have no idea how…or by whom. Instead of getting a fair return on their savings, they get practically nothing. The idea is to force them into riskier investments. The Fed admits its strategy without shame or remorse. And it works. The poor Mom & Pop saver takes his money to Wall Street. And then, Barry Dyke author of "The Pirates of Manhattan II: Highway to Serfdom" explains what happens. He calls it “a biblical transfer of wealth…from Main Street to Wall Street.”
Wall Street, the mutual fund industry and corporate America has hijacked America’s savings through 401(k) retirement plans. It uses workers’ savings in 401(k)s funded with mutual funds to fuel outrageous compensation packages, fund shaky companies going public, accelerate speculation and to finance the corrupt Wall Street business model. It is an unprecedented biblical transfer of wealth from Main Street to Wall Street and corporate America. It is an unprecedented transfer of economic and investment risk onto the little guy. Main Street America has been taken to the cleaners with 401(k)s. It is a biblical transfer of wealth which will take most Americans years to recover from.
The major problem today is that there is no savings or patient capital for regular Americans. The US Commerce Department found savings to be around 1% of earnings during the 2007 housing bust, up to 8% in 2008, down to 5.8% in September 2010 and slid to 3.6% in September 2011. There is a major difference between saving and investing, but to Wall Street and the mutual fund industry the only way to save according to them is to put it into volatile highly-complex no-guarantee stock mutual funds.
Putting money into a 401(k) is NOT SAVING. It is speculating. Here’s the proof. According to the Investment Company Institute 2011 Fact Book, Americans’ have 77.4% exposure to volatile equities in their retirement accounts. That is horrific. The Federal Reserve is at the heart of this savings debacle. By dropping interest rates next to zero, The Fed has forced Americans into volatile markets in search of yield. The only winners in this tragedy are the mutual fund giants, Wall Street and corporate executives with pay packages which would make King Solomon blush. In many respects this wealth transfer is worse than the Great Depression when people were more self-reliant and had a stronger family unit.
The Fed, the federal government, bankers, government workers and highly paid executives rarely speculate with their own fortunes the way Americans are forced to speculate in their 401(k)s. Mr. Dyke might have added that pushing money into Wall Street also pushes up prices on stocks, bonds, and other Wall Street products. At first, this makes the small investor feel smart. His ‘investments’ go up. Of course, not as much as the rich ‘1%,’ who own far more of America’s capital structure than he does. But negative interest rates create bubbles. The Fed is now inflating its third major bubble in the last 15 years. This time, in US Treasury bonds. When it blows up, a good portion of the savings of American households — locked in pensions, mutual funds and insurance programs — gets blown to smithereens.
Then, there is consumer price inflation too. You can’t add $2 trillion to the nation’s base money supply without some effect on prices. It could take a while to show up, but it would take a doubling of consumer prices just to bring the current base money supply per person back to normal levels. And that assumes the Fed straightens up…and does no more money printing. And who will bear the hurt? The clever elite? Those who understand the hustle? Those who own gold…houses…offices and apartment buildings? Or those whose wealth is counted out in drips and drabs…from wages and meager savings? Oh Dear Reader…watch out!"