Friday, July 27, 2012

The Financial Meltdown - A Darwinian View of an Inside Job and Some Random thoughts on Reconstruction and the New Road Ahead.....

While some were sleeping and others at work.......The Financial System was Rewired...
After all was said and Done:

1) The Ethical Level of the Industry was near ZERO
2) The Competency Level of Regulators was near ZERO
3) The Financial Literacy of many "sophisticated" Individuals was Near ZERO
4) The Money was gone - Fortunes were Made and Lost
5) The Course of History was Changed - and the Band Played On

       The DEvolution of the American Financial System  - the repeal of Glass-Steagall - Allowed the Universal Banking Model/Monster to be created - This set The US Financial System Back 40 years  - allowed it to become fragile and incestuous -  while the rest of the world was Evolving after the fall of communism - and eventually spiral out of control and collapse under the force of unabated greed as it was now free (entitled) to roam the country and consume everything in its sight. It took over 20 years and 300 million dollars of lobbying but on November 4, 1999, The GLB - Gramm-Leach-Bliley Act or - The Financial Services Modernization (fgf, Reconstruction / ReWiring ) Act - was passed. Bankers were finally able to "persuade" politicians to remove the subtle Checks and Balances in the Financial System and begin to Fully Assimilate the Components into their culture for their purpose. Activities that were commonly known to be conflicts of interest were now renamed Business Synergies for the uninitiated. In December of 2000, another "upgrade was installed" - The Commodity Futures Modernization (fgf, No-Obstruction /No-interference -  Don't Ask/ Don't Tell) Act - was signed, that exempted complex derivatives from regulation. Thomas Jefferson understood the dangers to Democracy posed by the Banking System. Ironically, it was William Jefferson that willingly signed both Bills.The rest as they say is History..... Expertise and Accountability of Roles - that is what makes and keeps a Complex Dynamic System Robust - After all was said and done, both were conspicuous by their absence at every level - Take a minute to think about that .........

     This opened the door to "legally" loot the capital base of the country, and reward themselves with outlandish sums never seen before for a job well done - and replace it with taxpayer debt - by handsomely employing a combination of willing and unwitting shills, cheerleaders and wannabes at many levels to front for them, many literally clueless to "WTF" they were actually doing.- Under the ruse of  "free market capitalism", "financial innovation", "One Stop Shopping", "AAA-Rated", "Efficient Markets" and the final Coup d"Etat - "Too Big to Fail"  - which now makes the Federal Reserve System an Official BSE (Bank Sponsored Enterprise) -  All of which was Financial Gibberish and self-serving hogwash and nobody was held accountable - think about that ... "Murder on The Orient Express"... Masterful. "Golee Sargent Carter what happened to my 401-K Plan". The System did not break down -Quite the contrary - it now did exactly exactly what it was now hard -wired to do. Serve the exclusive needs, wants and wishes of those in charge. The System has always functioned like the Seasons, in Four dimensions that overlap. Those who function in it, those who can't, those who improve it and those who game "it", each plays an asymmetrical role in its development and evolution. The fourth dimension can usually be identified by the traffic pattern in that Realm, it all goes One Way. This series of events served to Amplify the Fourth at the Expense of the other Three. A bifurcation that now creates a new dynamic going forward, because "Life, Liberty and the Pursuit of Happiness" - its Existence and Growth -  like Guns and Butter - needs to be financed  - Somehow.

   Complex Dynamic Systems require checks and balances - like football has rules and referees with flags and whistles - and referees that watch the referees - they serve a vital role - they are there to maintain the "integrity" of the System/Game - so it doesn't get out of hand and morph into something else. This is now more than part of our History, it is now part of our future as well. Financial bubbles are a by-product of financial markets. Equity bubbles are usually isolated and contained and somewhat productive - they teach every generation a valuable lesson, investors take their lumps, get a little wiser, and the band plays on. Debt bubbles are a different animal, they leave a bill that has to be paid and often require painful restructuring and limit the ability to finance future growth or simply day to day expenses -  they consume and divert present and future cash flows - at the Sovereign Level - they can and have literally changed the course of history. The last tsunami falls into this category. The true cost when you include the opportunity cost to current and future generations will never be known but is already staggering.This is now starting to be played out at the state and local levels and is still yet ahead.

   Democracy / Capitalism without effective checks and balances leaves the door open for mob rule or crony /phony capitalism - the founding fathers knew this and took the time to get it right. Most people assumed they were still in Play. That allowed Financial WingDings and Third Grade Bankers to go to work and "do their Thing". The new financial legislation (crafted by the same financially bonded band of WingDings) is a step in the right direction but does not go far enough to change this dynamic (wink,wink). To big to fail just got bigger. Dinosaurs still roam. This will continue to provide a negative feedback ( more Input than Output, Harm than Good - negative Alpha  - See financial Times FTfm - 04.04.2011" the bulk of the value destruction, almost $1,1000bn a year, EQUIVALENT TO 1.9% OF GLOBAL GROSS DOMESTIC PRODUCT , IS SEEN AS IMPACTING ON CLIENTS.) when the economy attempts to go organic as many of their operating units and their business model in general is now trapped in a state of arrested development/evolution - it is still unable to adapt to and function in the parallel universe we live in and consequently will still need to to feed off the system to survive ( generate profit) and thus continue to pose a systemic risk the system can ill afford. As a patch, the monolithic, state-created FSOC ( Financial Stability Oversight Council) was given the power and authority to sort things out by autocratic whim. A dynamic that also allows them to charge more for "their services" (wink,wink).  Consequently, when the QE2 life support runs out and the organic rehab phase begins, we are likely to see QE3 or some other free money incarnation (in addition to Zero Interest Rates) for the Dinosaurs to make money or ALL HELL Start to Break Loose or a combination of both  - there is little else on the Menu - The System as a whole is still fragile - Its dynamism has been diminished and our competitive advantage has been compromised. The rest of the World Sees this and it affects "our Political Currency and Capital" as well, the only good news being relative. But this also creates another dynamic going forward. It was the US that was the Ring Leader in this debacle as the undisputed leader of "free markets and Capitalism". The World is now less willing to follow this lead going forward.

       You eat what you kill is moving from Wall Street Bravado to a Main Street Reality, both here and abroad - this should be the wake up call that will finally allow "Americans" and "American Politicians" to see through the smoke and mirrors and  re-examine how sustainable Prosperity, Growth and Wealth  is productively created and distributed and their responsible and vital role in that process for it to function properly and survive and how they were unwittingly duped, instead of how it can be taxed, transferred, handed out wholesale as entitlements to placate special interests or artificially engineered and inflated  for political purposes - and start thinking about the business at hand. How about promoting Dynamic Capitalism - Organic Growth - Jobs and Incomes - the Business of Business and the Model and Culture that once made this System so Robust - Back to the Future -"Two Way" Capitalism - Education - Productive Work - Competition - Incentives for Innovation - Opportunity - Self-Reliance - Saving and Investing - Civil Liberties - a Sound Currency - Property Rights -The Rule of law - a Sense of Humanity and...oh yes - Checks and Balances and the Green Bay Packers. When you can collectively play to win, or simply become more productive, something Magical Happens, the whole becomes more than the sum of the parts, the pie gets bigger, there is more to go around for every one who bought in. In economics this is called the Law of Comparative Advantage. In Game theory this is negatively explained by the Prisoners Dilemma. In Sports this is positively explained by Talent and Teamwork with purpose in a noble pursuit.A dynamic that requires a belief in the integrity of the system and the integrity of the components in it. A dynamic that fosters a sense of optimism and Pride in people for who they are and what they can be individually - and what they are part of collectively. The ability, confidence and desire to compete on merit, the will to succeed and the financial rewards and sense of accomplishment that goes with it. The type of Optimism and Pride that generates the backbone and courage needed to aggressively defend it against the onslaught of  religious fanatics, home grown terrorists, financial and political WingDings, or anyone or anything else that wants to step into the ring to replace it. A Complex Dynamic System, that created the most Innovative Organic Growth Model and Standard of Living the World had ever seen  - and the ability to pass that hard earned, fought for legacy, with the opportunities and responsibilities that go with it to the next generation. By definition dynamic systems are not and will never be perfect and are never in equilibrium. Dynamic systems pursue productive improvement if not excellence and learn from that pursuit.They require a level of energy and intensity. At the high end, Success breeds Success, evolves and marches forward, they figure it out and get awarded for it. Mediocrity productively pursues little beyond what it already is/has, breeds Mediocrity, Marches slowly and falls behind as the parade goes by and the band plays on. It is not necessarily a bad thing. It just plays to a different standard and things don't matter til they matter.

      It is not about ideology or religion. It is about Complex Dynamic Organic Systems, Sustainable systems that involve human beings and human behavior. Communism ultimately collapsed because of its inability to finance itself and evolve. If it could have - it would have. If a system cannot evolve fast enough on its own, it takes a revolution to fix it. Europe has been around for thousands of years, the EU (European Union)  is its latest incarnation and still evolving,  China has a new story to tell as does Russia, Brazil, India and Tunisia-  as we speak this is now being played out in Libya and the Middle East -  It is all driven by the Freedom and Economic needs, wants and demands bonded groups believe is in reach or are entitled to. Dynamic Systems are influenced by the culture and  behavior of the participants/components they comprise, the governing body is vital but can invariably be different. Nirvana and Socialism are not Dynamic Systems, they are a stationary state of mind. Wasn't that the lesson of the seventies? They cannot merely be packaged or assembled, they need to adapt and evolve to the environment they are in.This requires leadership in addition to administration not Rulers, and can spring from anyplace within. Dynamic Systems also need to be ready, willing and able to defend themselves.This is part of theYing and the Yang that keeps them Dynamic. "The End of History and The Last Man"  is still a work in progress, until then......

     The Real Question Now is: Can Our Model be revitalized? How will it continue to Evolve? Our best guess is that for starters, it will take Statesmanship Politically and Stewardship Financially and could take a generation or more, once the will and leadership begins to appear and the Out of Control WingDings, Third Rate Bankers and their unwitting entourage of  "employees" and WTF's this devolution spawned and supported, are repriced, retrained, reassigned, redeployed, reborn or quietly retire with their dubious legacy intact. Only then can the financial system re-generate and restructure itself organically and competitively to a point where it can perform and profit from its productive purpose and vital role in the Eco -System - now Global Eco System - to finance, protect, promote and expand the productive engine and capital base of the real economy. The machinery that produces the real money, the goose that lays the "golden" eggs. The good news is, the talent is there, there is still a standing army of First Class, hard working, experienced and brilliant individuals in the industry, and if need be, a good number of fully evolved recently unemployed human beings and primates available to fill the void. Unfortunately, the financial industry needs to get smaller to get better not bigger. It needs to be re-rewired properly for the task at hand, not artificially regulated and tethered. The real threat however, is that the system is slow to re-evolve and expand in that capacity and the economy limps along when the life support is removed, the traction is too slow and real growth, incomes and opportunities cannot be created fast enough. The ability to service the debt becomes untenable and puts a strain on the system and everything else on the back burner. We lose another decade and the course of history continues to march in a new direction to the Same drum, Farcism, as the Boomer Generation begins to retire, MAIN Street America watches the parade on their flat screen TV and  Generation Y starts to get pissed and begin texting "WTF" to their newly "elected " Officials. The fabric begins to tear, the crystal shows a crack and we are forced to adjust to and deal with that dynamic then. Kicking the can down the road may no longer be an option. What will be the new standard of life this new reality is both willing and able to support. That could be the Next tsunami and happen sooner then you think. We simply don't know, when you factor in globalization, there are too many variables, we have never been here before.YES that's right, we have been THERE, but never HERE before. This is what  the Tea Party seems to be concerned about. They just might have bonded together because they sense something many Economists, Bankers, Politicians and Market Technicians have yet to factor into their Quantitative Models and Charts of the future

        An Economic System is also a function of the Culture (behavior) it breeds, and can become dynamically defined by it. You reap what you sow, What's comes around goes around, Everyone / Culture / System  has a term for it....This has been referred to as the multiplier effect in classical economics in reference to the behavior of money, the theory of reflexivity in Financial Markets and Emergent Computation in Complexity Science -  the result of the the second and third derivative - the consequences /behavior either intended or unintended, positive or negative that are also produced as a result of a given policy or action and feed back into the system and take it in a new direction.
       Sorry for the rant, but I was born and live and work and believe in America and I want to see it back on track too. The future is always full of potential and very exciting for those who are able to participate in it. Life and growth, guns and butter, need to be financed. Fortunately, it is not our job to make policy  - but to analyze and anticipate the outcome of various initiatives and deduce their effect and results in the Financial Markets. To that end we need to call it like we see it. The policies in place have never been implemented before, they are academic constructions, developed by many of the same people, hence thinking and models, that were responsible for this debacle in the first place.. No one knows how they will eventually play out, we obviously have serious reservations. We are not out of the woods until we see the patient walk on his own. Hope and blind faith can be a disastrous investment strategy. We think the future is far less certain for the aforementioned reasons than many of the stationary, closed  equilibrium "models" being used are leading us to believe. Investing in this environment will therefore require incorporating a larger perspective, Toolkit  and  flexible strategy to navigate successfully.

        So far, we view this as a transitory bull market party - funded by our Rich Uncle - Bet the Farm Ben - with your Money - and vulnerable at this level to any exogenous shock, of which there could be many - the Middle East and the Price of Oil being the soup du jour - and /or disappointing economic momentum after QE2 runs out, which remains to be seen, but is now around the corner and will need to be factored in, as well as the now apparent endogenous devolution of its makeup both structurally and culturally. This we believe is the Wild Card that is being overlooked.

           Uncle Ben's Bet, is a very BIG Gamble and not a sure thing. It may pan out and have saved the system from going off the cliff and self destructing but we find it difficult to make a case for the "The Roaring Twenties" straight ahead and unfortunately he too will go bust, if after all said and done - it turns out he was persuaded to go all in on a lame horse to bring home the roses and the Alchemy of Finance turns trillions of dollars of "printed  money" into dust instead of the Protein Powder the System needs and he is Hoping" for. Reagan made a big bet because he could "feel" and "see"' the other side of the trade, it was part of his makeup - organically not cosmetically - and you could sense that in him - he believed it would unleash a pent up supply of ambition, a previously untapped reservoir of productivity the prevailing system had smothered ( the marginal tax rate was 70% - you don't have to be Einstein to figure that one out). His ticket got cashed. He understood how organic systems work. He challenged the Russians to a game he knew they could not afford to play - Star Wars. His ticket got cashed. Extrapolating these policies to the Financial Realm proved misguided and another Story for another Time ( the financial realm works in reverse). Uncle Ben is a very Smart Guy. What does he know, see and feel that we simply don't? He professes to be total control, but does not exude confidence and often appears smug. His body language is suspect. Reagan was a President, a Leader, an Actor, a Sportscaster and a Politician. Uncle Ben is an Academic, an Economist a Banker and a Politician. It doesn't make him a bad person, he is just wired differently and has a different job and a different job to do. We are concerned he may be making his bet with the tools that he has - textbooks, charts, models and rose colored contact lenses and may lack some tools he needs, the field glasses, gut and the freedom to say what he "really" Sees and "Feels". If "his" ticket does not get cashed - Then it will be - every man for himself - across the board - and take more than a Tea Party a Printing Press and eighteen months to put Humpty Dumpty Back Together Again. -  If "his" ticket gets cashed he deserves his due - only time will tell - it's Orgel's Rules not Moscow Rules that are now in play.

       We think it would be prudent and fruitful to have some powder dry for the next race. The odds here appear asymmetrical with the upside, under the best case scenario limited, while the downside, when you factor in a broader spectrum of potential and  possible outcomes, could be significant. A second financial  consolidation in our opinion is likely and needed at some point, both technically and fundamentally to reconstruct the type of base and foundation necessary to support a more robust and sustainable organic recovery. It is true - Bull Markets do Climb the Proverbial Wall of Worry. To clear this one on a single bound we believe will require more than an Olympic Record or a "Hail Mary Play". Investing is about managing risk - Speculation is about possibilities, Dynamic Capital Management requires a broader assessment of the probabilities, duration and magnitude of the forces in play. Fortunes have been Made and Lost mistaking one for the other. Make sure you do your math before you go to the window so it's not your money that goes out of it, this time around. For now, Enjoy the Party, it's a humdinger, but don't overstay your welcome. In the Financial Realm, there is a Time and a Place, a Purpose and a Price for Everything, and things don't matter til they matter - but sooner or later the country will have to go back to work to pay the bill, and then they will matter. Only Time will tell what kind of work that will be, what it will pay and what it will be able and willing to support. It's Orgel's Rules and the Voice of the Nightingale that will determine and write the next chapter. Gildilocks is on vacation. Looking out now based on the past is all Speculation. That is where and when we believe the next game will be played, and where new opportunities will begin to appear.They could be Substantial. Patience can be more than a Virtue. You can trade and hedge the Micros, it's all stationary math, but you cannot consistently predict, hedge or win a bet on what you cannot or do not correctly see and feel. It's Orgel's rules these are the Macros - the other piece to the puzzle and the other side of the trade in the Economy and the Market. MACROS NOW MATTER - ESPECIALLY WHEN YOUR TIME FRAME IS MORE THEN EIGHT HOURS. Trading the Macros is a horse of a different Color. Fortunes have been made and lost mistaking One for the Other. MLMOFO.

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