Financial Advisors paying up for bad decisions

2007 was a poor year for investors in finance companies but it was a worse year for the financial advisers who directed those investors. Many investors, or more accurately, clients are taking legal action against their advisers. Some of the stories are quite unbelievable with advisers directing money into investments which struggled to meet any kind of benchmark relating to their clients risk parameters and investment goals.

Sadly many financial advisers have little market experience and come from the selling side of the business. It’s the old “churn and burn” mentality. They can’t manage risk because they don’t know much about it. They simply direct the traffic into a range of investment choices differing marginally in yield.

Many advisers are now paying clients out in full to avoid legal action. Fair enough. They act in a position of trust and supposed expertise and should be accountable.

The Myth of Free Markets: Fundamentalists Exposed

I like this piece from Naked Capitalism.com. It talks about the issue of moral hazard and the interventionist policies of all the so called “capitalist” supporters like Reagan. History shows us that far from allowing markets to be free successive governments and central bank authorities have constantly intervened to keep the ship afloat, quite often to feather the nests of others.

As Jamesy commented in the previous post, the LTCM collapse was a good example. The rescue of LTCM was a huge earner to the banks that participated over the carcass and being there at the time I can confirm the glee that surrounded this bail out.

Free markets might actually be good if they were free, just like free trade and anything else with free attached to it. Control is everywhere and freedom is a myth. Just ask people servicing mortgages, caught in the grip of death.

Markets bomb: What’s next?

Well the 20% drop I predicted in December has happened pretty quickly but that’s coming off a big high. We’ve had liquidity injections, stimulus packages and now an emergency rate cut of 75bps.

So far so good but what happens next?  Well if this was a standard asset bubble/recession I would imagine a lowering of rates globally, a bond market rally, a rise in unemployment and so on. But this is different because its really a money crisis.

I say money instead of credit because to all extents and purposes money is credit. But whereas money is secured on confidence, credit is secured on assets. Those assets are now worth a lot less than previously imagined (another word for risk analysis!).

We’ve seen some major US banks bailed out, a major UK lender go bust and be bailed out and a complete collapse of the US sub-prime market. The stock market reaction is simply an inevitable response. But don’t let that distract us from the real crisis which is global financial insolvency.

So the next issue will be a major US (or other) financial institution going to the wall. I mean a big player simply collapsing. To prevent this the Fed and other central banks will have to underwrite the whole system of interbank credit. A major collapse simply cannot be allowed to happen.

We may not even hear much about it but right now credit lines are frozen solid and at some point that pressure will cause an explosion somewhere.

So I wouldn’t be getting too excited about cheap assets just yet

Holiday reflections

I’ve just spent some time up in the Abel Tasman National Park, one of my favourite places in New Zealand. It’s a stunning coastline Park with a lovely walking track and numerous bays and beaches to swim or kayak in. It also has a stunning eco-lodge for weary walkers to rest up in and relax.

As I walked, sam and lay on the beach I reflected on the past year and wondered where we were heading. Looking at the end of 2007 didn’t fill me with optimism: G7 financial system in a state of collapse, the biggest asset bubble since 1929, oil at record highs and conflicts continue in the middle east and africa.

And opening up 2008 with huge falls in global stock markets….why can’t they fall another 10-20%. No reason at all. Will the latest stimulus plan work? Who knows? There’s been so many I’ve lost count as well as interest.

A good film to watch now would be Paul Gringnon’s Money as Debt. You can also find it on Google video. I highly recommend it especially for the scene where the bankers try to re-inflate the economy for the umpteenth time.

There simply isn’t an answer to this.

It just has to play out.

2008 Markets: Out of order due to financial tsunami

Well Christmas brought some quiet stability to the markets but the New Year has seen an immediate stampede for the exit. What is so interesting about the current economic malaise is that it’s very hard to analyze with any clarity. No one really knows what is going to happen because we’ve never had a crisis of this magnitude before.

We know the credit bubble has well and truly burst. We’ve seen it before with Japan but that was really a closed market and the response was non existent thus causing a 15 year depression. We have Central Banks who are very keen and swift to act but will their actions just make things worse. Henry Paulson today said a correction was inevitable given the price increases of the last 5 years.

Nice to know the guys running the country are on top of things….crickey! Can anyone explain what a stable economic system looks like. Clearly the current bunch of economic leaders haven’t got a clue.

Ambrose Evans-Pritchard argues that we are experiencing a 1929 type situation. I think he is spot on. The bailouts we’ve seen recently could well become more widespread. If that happens then quite clearly the stock markets will fall another 10%. The impact on BRIC (Brazil, Russia, India, China) will decide whether the global financial system collapses or not.

Immediate rate cuts will be forthcoming from the Fed, BOE and maybe even the ECB. All this nonsense about watching inflation needs to be ignored. Inflation will keep being a problem but its a diversion. 2 years out and land prices could be off by 30% or more.

Investing now is for the brave hearted, foolish and very wealthy following the maxim “The way to make a small fortune is to start with a large one”.

ECB opens the floodgates

Hot on the heels of the Fed comes the ECB with a massive Christmas present for the markets in the form of a half a trillion dollars……yes that’s right. They are taking no chances of an end of year credit squeeze and have basically opened their doors and said take as much as you need.

It’s probably a sensible step but doesn’t exactly fill one with confidence. This comes as Moody’s prepares to downgrade another $175bln worth of collateralized debt obligations (CDOs). At least the US and Europeans are singing from the same hymn sheet here. Liquidity must be maintained at any cost.

The question for all us is what that cost turns out to be.