Thursday, March 12, 2015

Symbiotic, Parasitic and Parasitoidal Cycles of Finance


Part of my big macro economic piece (posted here) planted blame for the 2008 Financial crisis squarely at the feet of the financial industry. The is the very same industry that I've worked in every day since I graduated from University in 1993 with a degree in Economics (hey, don't laugh..).

I started working as an investment advisor at a bank owned brokerage firm, one of the big four, and as crazy and stressful as it was, I wouldn't change the experience for anything in the world as it really helped open my eyes to how the system worked and where the REAL incentives lay.

From my perspective, seeing first hand how the bank culture took over the brokerage side was a fantastic experience and the lessons I learned there helped me refine my instincts and skills as a money manager.

Now - if you've been reading this blog at all you will know that I am absolutely NOT an economist nor an analyst. As such, most of the comments and observations I make here are usually rough, unscientific and lack the polish and eloquence provided by many of the other people who take time to share their thoughts on the markets and the economy. But I think what I lack in written eloquence, I make up for by having a keenly observant eye and an obsessive passion for figuring out what's going on.

So - with all of that stated, let me start my "point".

I have long used the analogy that the financial industry is much akin to a tape worm that is attached to the stomach of the global economy. As the economy grows, so does the tape worm and the tape worm's associated appetite. This mostly clumsy analogy suggests that there is a parasitic relationship shared between the financial industry and the global economy.

I would suggest that over history, finance and the global economy have experienced parasitic cycles that ebb and flow from one extreme to another. Those cycles could be broken down into three distinct classifications:

i) symbiotic
ii) classic parasitic
iii) parasitoidal

In a symbiotic relationship (which is not 'officially' parasitic, but bear with me) both the financial industry and the global economy benefit from the relationship. A simple but effective example from my own little retail investment world would be the creation and mass distribution (by the financial industry) of zero coupon, or "stripped" bonds. These things are fantastic for client accounts (RRSPs and RRIFs) as well as being a huge source of revenue for the financial industry.

In a classic parasitic relationship - only one party (the parasite) benefits, and at the expense of the "host".  You can take your pick here from a multitude of brutal parasitic financial plays, but to keep things simple let's just refer to the Goldman/Paulson/Abacus deal - Boo!

In this situation Goldman and Paulson did very well, while the buyers of Abacus (the hosts) got blasted.

Finally in a parasitoidal relationship - the parasite draws so much in the form of resources that it ends up either sterilizing or ultimately KILLING the host.

Again - take your pick, but for me the biggest (but as of yet 'unproven') example would be the plethora of debt instruments that have been made available to consumers. Each of these debt instruments draws a charge in the form of interest - that depletes the financial health of the host.

Sub prime mortgages, credit cards, lines of credit, 9 year car loans, car equity loans, Home equity loans, etc etc etc..

Again - if you read my larger macro piece, you know that I believe we hit 'peak debt' in 2007 and are now mired in a balance sheet recession of biblical proportions.

But, what I think the financial industry hasn't figured out is that all of these debts, all of the resources that they've drawn from their host (the consumer) has ended up KILLING them, or pushed them past the point of no return as we were motivated by profits and bonuses rather than fulfilling our fiduciary duties to provide SUITABLE financial advice to our clients.

This is why economists are always so flummoxed why the economy isn't bouncing back after 6 years of zero rates and unprecedented intervention and stimulus.

At best the host is now on life support in the ICU and is in a coma, and that's hardly a good thing.


Unfortunately for us, the financial parasite will never learn their lesson as they have sociopathic tendencies (as discussed here:  http://www.gubbmintcheese.blogspot.ca/2014/05/the-farmer-and-viper.html) and as such will never change or ease off in their thirst for more resources.

NB: Another great discussion of the status-quo parasitic/parasitoidal relationship between finance and the rest of the world can be found in Jesse Eisinger's outstanding piece here: http://mobile.nytimes.com/2015/03/05/business/dealbook/despite-changes-an-overhaul-of-wall-street-falls-short.html?referrer&_r=0

THIS is why I think the economy continues to struggle.

Now I know these points may sound a bit far off given my rambling, choppy writing style - but please, don't kill the messenger. For those who prefer glossy, professional, researched views look at what the BIS just wrote:
 

Call me crazy but I think this just confirmed by parasitic tie in.. (See what I mean? I can see it and write about it, but will leave it to other people to do a more thorough and eloquent job or researching and writing about it. )

So what to make of all this information?

Well first and foremost, I would take EVERYTHING that Wall Street says with a large grain of salt. Don't get me wrong, there are some very honest and amazing people who work in this industry.. not everyone is a bad guy or girl.

Unfortunately though, the incentives are hugely misaligned.. which means the little people who still believe in the fiduciary relationship with their investment people, are probably getting taken advantage of.

As Stephen King said, "Trust of the innocent is the Liar's most useful tool".

Keep that in mind when you are told that 'stocks are cheap' by people on the Street - even as the Shiller CAPE sits just below 28, a level only surpassed in 1929 and 2000...

Plainly put - we desperately need another Ferdinand Pecora, and we need him asap.

Great read here: http://en.wikipedia.org/wiki/Pecora_Commission

Unfortunately it appears as though government and regulators are still far too cozy with the financial industry to make any changes - which suggest we are (as of now) simply doomed to repeat yet another crisis.

I hope we can get this sorted out before another break comes, but it's certainly not looking great at this point.

Maybe tomorrow.

Cheers all.

Gubb



1 comment:

  1. "I hope we can get this sorted out before another break comes"

    The break is what the sorting out requires.

    ReplyDelete