May 10, 2017 – Who’s running the country? After 100 days of the new Trump Administration, I am still not sure how much Trump is in control of the Executive Office. I am more confident of the people he surrounded himself with but this latest dismissal of FBI Director James Comey who was leading a criminal investigation into whether Trump’s advisers worked with the Russians to change the outcome of the election does not sit well with me nor with many sensible political pundits. For many of us who supported Trump, the jury is still out whether he is a genius or a madman. After all he said, “I know how to do this” so we believed him and put our trust in him that he is not the same run of the mill politician. Amidst a multitude of domestic and international problems, the panic selling in the stock market, a 10% to 30% correction which I expected to start happening a month ago has not yet happened. But believe me folks, it will happen perhaps unexpectedly and sooner than you think. The market may lose 20% in just the first ten days of a downward trend that may not necessarily be a bear market but a correction. We all know stocks are overvalued and many smart investors are just waiting for the next bad news to push the sell button. And there are lots of bad news here and abroad. The Taliban is taking over large portions of Afghanistan again and our country is sending thousands of additional troops to at least get the other side to the table for negotiation. Kim Jong Un, the North Korean dictator does not seem afraid to pull the trigger and there is a real possibility that the unthinkable may happen. The North Korean problem is more complicated than most people think. Maybe if we get rid of Kim and somehow convinced (or bribed) NK to become more democratic, be more like SK, join the family of nations everything would be fine and dandy in the world, right? Wrong! China does not want that to happen. The DMZ (Korean Demilitarized Zone) will continue to exist as long as China is in existence just like the Berlin Wall continued standing until the USSR was no more. There is no light at the end of the tunnel with this North Korean problem. To make matters worse, although Iran seems to be under the radar at present, the Iranian nuclear problem will start brewing again soon. Pres. Obama made a bad deal that will come to bite us real soon after Iran has freed all its assets from our control.
Wow the Dow recovered 400 points in 2 days. The gloom sayers are wrong again. Who got out of the market 2 days ago when the Dow went below 18,000? Remember, the market goes up and the market goes down but in the long run the market will keep going up in a free market economy like ours. Many know-it-all commentators tonight are predicting an up market if Hillary wins and a down market if Trump wins. What do they know? Here is what I’ve heard finance gurus on TV say: Trump may fire Yellen and may start a trade war that is why the market may drop quickly at the hint of a Trump victory. Price of gold may also rise quickly according to them. On the other hand, according to them, a Hillary victory will stabilize the market and cause less volatility because Hillary’s administration is a continuation of the Obama administration’s policies which has brought sluggish growth, stable dollar and stocks will keep going higher. These finance gurus know as much as you and me.
Goldman Sach’s Chairman and CEO Lloyd Blankfein had to dumb it down for his interrogators during a 3-hour question and answer session of an 11-hour marathon hearing last month on Capitol Hill. The hearing was about the Securities and Exchange Commission’s (SEC) civil case against GS. Several members of the Permanent Senate Committee on Investigations asked similar questions different ways that Blankfein had to find the proper words in the hope of making himself understood by an audience of what appears clearly as a group of “investment banking neophytes”. At one point he caught himself almost about to use the word “fiduciary”, stopped in time and had to struggle to describe what he meant in much simpler terms.
Lloyd Blankfein who received his business and law degrees from Harvard University and who was named “2009 Person of the Year” by the Financial Times, was probably the smartest person in the room during that senate hearing. Blankfein had skillfully steered GS&Co. through the financial meltdown. The company earned an impressive $13.4 billion last year and has not recorded a losing day from the first business day of 2010 through the end of the first quarter. To acquiesce to political correctness, he announced compensation caps for his company last year despite the company’s huge profit. Some report that GS received $10 billion of TARP money. If true, they clearly did not need it and it must have been paid back with interest. The Treasury Department used most of the TARP money to increase the capital of “too big to fail” banks and other financial institutions, such as GS whose assets have fallen when “mark to market” accounting method is applied.
As to the SEC’s suit, I see it as nothing more than a political move by the SEC which is composed of a decision-making body of 5 commissioners headed by a Chairman. The commissioners are appointed by the President and their terms are 5 years each but are staggered so that each commissioner’s term ends on June 5 of each year. To make the SEC non-partisan, no more than 3 commissioners may belong to the same party. So much for that non-partisanism. The decision to sue GS was not a unanimous decision but a 3-2 split along party lines which leads me to believe that this is all a political ploy, possibly to call attention to some kind of Financial Reform Bill which Obama and the Democrats have been trying to push through. If the SEC had a stronger case, I would argue that they would have gone directly to the Justice Department for a criminal prosecution rather than file, what in my opinion is a frivolous civil case.
GS&Co. has nothing to fear from the SEC. Goldman’s lawyers issued an initial statement indicating the allegations of “securities fraud” are completely unfounded in law and in fact. I agree. Let us briefly examine the allegations: SEC alleges, 1) “GS&Co …made misleading statements and omissions in connection with a collateralized debt obligation (CDO-ABACUS 2007-ACI)) it structured and marketed to clients…” Paraphrasing Blankfein’s reply, “If no one is willing to buy them, we cannot sell them.” In other words, the buyers of the CDO’s were well aware of the risks as well as the high returns. Says Blankfein, “We do this thousands of times a day. We buy and sell securities”. 2) GS&Co. failed to disclose in their prospectus that ABACUS 2007-ACI, which was backed by sub-prime residential mortgage securities (RMBS) was partially structured by hedge fund, Paulson & Co. Paulson shorted the portfolio it helped create by buying CDS (Credit Default Swap) securities from GS&Co. Paulson’s interests were sharply conflicting. Here is my spin on this: My understanding is that there is nothing in the law that requires the marketer of the securities to disclose that a selector of the securities in the portfolio took an adverse position by hedging against the portfolio. If Congress wants to introduce a law for that specific disclosure, let them do it right after the resolution of this case. Second, the SEC alleges that investors in ABACUS lost over $1 billion and Paulson’s opposite CDS yielded him approximately $1 billion. John Paulson is not God. The market could have gone against him. If anyone knew what we know now, in 2007 no one including Warren Buffet would have bought ABACUS. As it is, GS&Co. sold 10 billions of dollars in ABACUS stocks to mostly savvy investors. Would it have made a difference if those savvy investors knew that the selector of the funds took an opposite position? I don’t think so. Not when Chris Dodd and Barney Frank kept assuring us as late as June 2008 that there was nothing wrong with the housing market and that Fannie Mae and Freddie Mac were still good investments. Before the sky fell, ABACUS was highly rated and yielded an annualized double digit return.
This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein.
Any opinions and views expressed herein are the sole responsibility of the writer.
According to the Wall Street Journal, there have been 11 recessions in the United States since World War II. These recessions lasted between 8 months and 2 years, the longest being the Carter-Reagan recession. This Bush-Obama recession has a potential for lasting longer than that. I believe this because the Obama Administration appears to be in a state of chaos. It is sending mixed messages and appears to be playing it by ear, making adjustments as it stumbles along. If Obama is having problems dealing with the economic crisis, I shudder to think how he could deal with an international crisis if one develops.
If Obama allocated the bulk of the $800 billion stimulus package to tax cuts and in rebuilding infrastructure and schools, as I thought he would, consumer confidence would have gone up. Instead, a big chunk of the stimulus package is going towards pork barrel spending. To make matters worse, the Obama Administration is talking about taxing the rich, those making over $250,000 by removing the taxable income limit for Medicare Tax and limiting the mortgage and charitable contribution deductions. Geithner does not even have a deputy secretary yet. He appears to be working alone, formulating policy and making anti free market suggestions that the Administration will increase taxes on capital gains, corporate profits and foreign investments. There is no doubt in my mind that the stock market plunge of over 3,000 points in the Dow since the election is a direct result of investors’ lack of confidence in the Obama Administration. When retirement accounts lose 50% of their value, consumers get scared and postpone spending. It so ironic that China, a communist country has no capital gains tax which must be the primary reason their stock market has recorded the highest gains this year.
When will the left wing radicals learn that taxing the rich will hurt the poor people more? The rich are the ones who eat at expensive restaurants, go on vacations, buy luxury items and employ people. I am not rich but I do not envy the rich because my goal is to get rich myself. We all have an equal opportunity to acquire wealth in this country provided the government does not stand in our way.
Our free market economy will recover despite Obama. Recessions are part of a normal economic cycle. Soon consumers will come back and resume buying necessities such as refrigerators, TVs, computers, cell phones, furniture and cars. 42% of stocks in the S&P 500 gained since the beginning of the year. Energy costs have only increased a little bit since sinking to their lowest level last December. According to the Los Angeles Times, the highest concentration of foreclosures and decline in property value are in 5 states; California, Nevada, Florida, Michigan and Ohio. 90% of homeowners are still paying their mortgages on time. The dollar has recovered nicely against major foreign currencies which means anything we import is costing us less. Still, stumbling and uninspiring Obama can prolong this recession by talking down the economy.
If Obama and his cabinet members are listening, I have a sure fire way of ending this recession immediately. Geithner has no plan yet on how to use the $300 billion allocated to fix the banking system. So these are my suggestions. 1) Announce the formation of RTC2 (Resolution Trust Corporation) to take over toxic assets from ailing banks. This move is similar to what solved the Savings and Loan crisis of the early 90s. This will restore confidence in our banking system. 2) Announce the reduction of the capital gains tax from 28% to 7%. This will attract local and foreign capital back into the stock market which would increase the value of stocks. 3) Announce the reduction of corporate tax from 34% to 10%. This will stimulate business activity and companies will start hiring again.
What are the chances that the Obama Administration will follow my advice? I will not hold my breath. They are a group of ideological left wing intellectuals who have their own agenda of equal wealth distribution and of government intrusion into our lives. Therefore let us prepare ourselves for more pain and say hello to the Obama Recession.