The Industry Offenders Are Busy Eliminating Transparency

Dodd Frank is 7 today

This article by Senior Economist Eileen Applebaum at the Center for Economic and Policy Research (cepr.org) published in the Huffington Post is very revealing and calls readers to action. She tells us that Pres. Donald Trump has appointed two private equity managers to important authoritative posts for the financial industry. They are Wilbur Ross, Secy of Commerce and Stephen Schwartzman, Co-founder of Blackstone Group who is now head of Trumps Economic Policy Forum. It seems rather obvious that these two have something to gain from de-regulation while industry groups composed of Private Equity managers overwhelmingly support regulation. They cite the value of consumer confidence that is instilled by the presence of regulations, regulators and monitoring. The article contains some serious charges to Private Equity prior to the 2007-2008 industry shock such as manipulation of the price of holdings; failure to share fees with investors; and “incorrectly” charging fee expenses.
The Trump Admin. seems to be pushing the Hensarling Ammendment that would exempt Private Equity managers from registration and reporting requirements by the securities industry. The Hensarling Ammendment is called the CHOICE Act.
President Trump leads the charge against consumer protection and Wall St. regulation by declaring Dodd-Frank to be “horrendous”. One has to wonder why Trump is plunging ahead to eliminate many reporting requirements and oversight of financial institutions still in the wake of the near financial meltdown just 10 years ago. How could the public be harmed by the required registration of PE managers who might have discretionary control over billions of dollars? A good deal of capital from public pension plans is held in private equity funds. Shouldn’t they enjoy the increased security of their investment brought by sound regulation? These are assets of good public servants, after all.

Do elections really matter to financial markets? Pt3

white-house Today is the first day after the election of Donald Trump. My earlier posts on this topic focused upon how a Hillary Clinton administration would affect the economy and the financial markets. I did not address how a Trump administration would affect them largely because I did not believe he had much chance of being elected. Now that he has been elected, I want to address this. Here is the editorial posted by the New York Times today: “Trump’s Revolt”.

Donald Trump opened his campaign with an attack on new immigrants to America; particularly Mexican immigrants. He claimed, without references that recent Mexican immigrants were “sent” by Mexico to this country and that Mexico was sending us “their worst”. Trump pledged that, as a remedy he would build a high wall the length of the US/Mexican border ostensibly to prevent more undocumented Mexicans and others from entering the USA without visas. This wall would be paid for by the Mexican government he said; threatening Mexico with adverse currency exchange rates if they did not. He stated that, if elected, he would mount an effort to identify and uproot the estimated 11 million undocumented immigrants and deport them to their country of origin. Trump has blamed these immigrants for displacing native and properly documented American workers. Donald Trump expressed alarm about the resettlement of war refugees; particularly those from war torn Syria and Iraq. Trump expressed much suspicion about Muslims living in this country.

On foreign policy, Trump claimed he knows more about the situation in Iraq and Syria than the US military commanders there. He stated he would “tear up” the multinational treaty to end the nuclear program in Iran. Regarding the war in Syria, he stated he would simply “bomb the s**t out of them”. During national security briefings he reportedly wanted to know why the USA did not use nuclear weapons more frequently. Trump depicted the current trade policy of the USA as being very unfavorable to the USA; citing the NAFTA for being “the worst trade deal in US history” and cited the US trade deficit as an example of government officials who “didn’t know what they were doing”. A regular theme of Trumps was to declare that Washington DC is a “swamp” of corruption and incompetence that he and he alone could fix.

Trump’s own business practices reveal a practice of lying and cheating his competitors, government regulators, his own employees, and those contracted to do work for him. His justification for these practices was that ethics really knows no place in business dealings; that the “art of the deal” is to win at any cost. He has displayed wanton disregard for the privacy and dignity of women and used his ownership of beauty pageants as a means to satisfy his sexual fantasies; bragging to other men about how he was free to intrude upon dressing rooms and even to take liberties with women without their consent; a practice many consider sexual assault. During the campaign more than 11 women came forward to assert he had sexually assaulted them; one of them a 13 year old at the time.

Trump is currently under investigation for fraud perpetrated upon thousands of students who enrolled in Trump University; saddling many of these students with massive debt with little to show for their money. There is evidence that he defrauded an insurance company of $17M claiming damages upon his Mar a Lago resort in Florida that was largely unscathed by a hurricane.  The US Dept. of Labor has issued three complaints against Trump for failure to bargain in good faith with a union representing workers at his Las Vegas casino.

President Elect Donald Trump will have Republican majorities in both the US House and Senate. Speaker Paul Ryan has already stated that his cohorts in the Senate are ready to scrap the Affordable Healthcare Act that has brought health insurance to more than 20 million uninsured Americans. They have no proposal to replace this program. This prospect suggests that those 20 million people will now have to return to waiting in emergency rooms when their ailments have reached extreme conditions. Hospitals; required to provide this care will now return to massive costs of uncompensated care. Here in Arizona, acceptance of the Medicaid portion of the Act brought an estimated $11B in insurance to hospitals and healthcare institutions saving many rural clinics from closing.

His suspicion of Muslim immigrants; particularly those war refugees led him to declare that he would no longer allow them to come to the USA.  I believe this suspicion could lead to a requirement that current residents from war torn countries in the Middle East would need to register with the Federal government and face an extended vetting process. The prospect of locating 11 million undocumented immigrants living in the USA would require massive investigations pitting community members against each other. Hillary Clinton depicted this process as likely to be “busloads and trainloads” of people forcibly removed from the country. I assert that it is likely that if Trump keeps this promise internment camps will have to be constructed as these people are processed for deportation.

Trump’s trade policy could cause the USA to attempt to renegotiate trade agreements decades old; causing constriction in trade between countries and possibly trade wars. The policies he has pledged to implement are likely to cause extreme uncertainty for investors in financial markets. I assert that the severe Market contraction of 2001 was more likely caused by investor uncertainty after the election of George W. Bush than it was from the so-called “tech bubble” or as some assert a “market bubble”. This contraction began a 10 year period in which the Dow produced no gain. The Trump policies are much more extreme than those of George W. Bush.

What vexes advisors in this extreme situation is that although we may believe there is a contraction coming due to this change in US leadership, there is no way to predict with accuracy when it will commence and there is especially no way to predict when the market hits the bottom. Systematically buying more shares of stock holdings as they decline in value will result in more shares ready to increase in value once the market turns up again. This “portfolio rebalancing” will produce better investment results over the long run but for those investors who are currently depending on their portfolios for income they face difficult times ahead. Election night saw S&P 500 futures slide 800 points until trading mechanisms closed the trading. Today’s 295 point Dow rally will be short lived, in my opinion.

 

China’s “miracle economy” and its impact on world poverty

china-street-market
rural Chinese street market

Perhaps many of my associates have been waiting patiently for frontier markets equity funds to produce some positive returns. Frontier markets number some 63 nations that are so latently emergent that they are not classified as “emerging”, the more common satellite asset class in advisor portfolios. So what is the prospect that we will see some progress by them? Part of the issue is the continuing divide; even antagonism between the economically developed world and the global frontier economies. Critics decry “neoliberal” policies demanded by the US and European dominated World Bank and the International Monetary Fund that steer emergent economies away from socialism. The US and European dominated World Bank and International Monetary Fund, for instance may demand the privatization of state-owned infrastructure such as railroads in exchange for credit. These policies, critics argue do more to open developing economies to predatory multinational corporations than strengthening these economies. This fosters dependence on the developed world economies and do little to foster development; the key element in frontier markets returns.

Mark Weisbrot, Co-Director of the Center for Economic and Policy Research takes issue with President Obama’s assertion at the UN yesterday that “globalization” is responsible for a substantial reduction in world poverty. Inadvertently, Weisbrot argues, the President gave high marks to the Chinese economic miracle and its patient transition from a planned (sometimes called “command”) economy to an economy of mixed socialism and capitalism. Weisbrot observes that most of the 1.1B people who have moved out of extreme poverty in the last 25 years live in China. Weisbrot argues that the Chinese economy is hardly the poster-child of “open markets”; the “way forward, not backward” in Obama’s words. China has also had a great impact on other frontier economies through liberal trade with these markets; increasing their share of frontier markets exports  from less than .1% in 1980 to more than 3% in 2010. China, Weisbrot observes has also “provided hundreds of billions of dollars in investment, loans, and aid to low- and middle-income countries in the 21st century”. Weisbrot does not support the Trans Pacific Partnership; the 11 country trade deal that has become a signature policy of Obama’s.

Brexit and investment strategy

Brexit Cameron and MerkelAs I write this the Dow 30 is down almost 500 points due to the shock to world financial markets of the vote by the British to leave the European Union. Here is the transcript of Dean Baker’s analysis given on PBS’s News Hour.  Baker believes that this is, in part due to strong anti-immigrant sentiment. Among the (perhaps) unintended consequences is the ease with which young Brits were able to seek and take jobs anywhere within the EU. It will also adversely affect the 2.5M British expats living on the continent.

What I expect to see is what I predicted to my client this morning where we see each other poolside mornings. I told him the Dow could plunge as low as 500 points today. If you are an investor with a well diversified portfolio of stocks, bonds (both domestic and international) and other asset classes is that your holdings’ values will dip as their underlying prices dip but you will not lose the number of shares you own. If you sell during this downturn perhaps speculating that the slide will continue, you will lose your shares, as well as their value.

Smart investors (and their smart advisors) will not sell holdings during this downturn but will examine their asset allocation to see which of them have been affected. This will be evident in the change in their proportion to the entire portfolio. If you, as other smart investors do, hold cash as a distinct asset class, you will have the liquidity to buy more shares to bring those holdings back to their target allocation. In this process you will be buying shares that have a (hopefully temporary) market discount. Please consult your advisor for confirmation of this general outlook. If you have any questions, please don’t hesitate to call. (520) 623-3646. Thank you!