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Warren Buffett is All Wrong About Goldman – Something is Rotten on Wall Street

Shaun Rein, Forbes.com 

Vanguard’s Jack Bogle: Investors Take Heed… A Financial Crisis Is Imminent

“If we do nothing, we’re headed for a real crisis.” – Jack Bogle

Jack Bogle is 81 years old, but he still doesn’t pull any punches.

I visited him at his headquarters outside Philadelphia – and it didn’t take long before he expressed some strong opinions about Wall Street…

Jack Bogle’s Had “Enough” of Wall Street

For starters, Jack Bogle is madder than hell about the recent troubles on Wall Street. Specifically, that includes excessive compensation at Goldman Sachs (NYSE: GS : 149.32, -0.18) and speculation from the likes of John Paulson, who’s profited from contrived doom-and-gloom investments (for example, on the real estate collapse).

Citing Teddy Roosevelt, Bogle argues that “rank speculation” is bad. “If you’re adding value in society, the sky’s the limit. Bill Gates can earn all he wants, but when John Paulson makes $3 billion shorting the real estate markets, that’s enough.” (Bogle recently wrote a book called Enough.)

Bogle continues: “Wall Street doesn’t lose. Speculation on Wall Street subtracts value from our society. It’s a gamble, like Las Vegas, pitting one investor against another.”

As such, Bogle sees little value in trading or speculating by hedge funds or day-traders. He said the $6 trillion in trading by Wall Streeters every decade is a “real waste of the nation’s resources. It makes no useful contribution to society. When I came into this business in 1950, the turnover on the NYSE was 25%, now it’s 250%.”

And he was critical of Fidelity funds, a competitor, for hyping its returns and encouraging short-term trading.

I countered that speculators and traders offer a vital benefit to Main Street by raising much needed financial capital for new companies (IPOs). But Bogle, known as the “conscience of Wall Street,” would have none of it. His only hero is the long-term investor (Vanguard’s primary customer).

As founder of the Vanguard Group of funds, his investment company is famous for providing low-cost investing (the annual expense ratio of Vanguard funds is only 20 basis points). Established in 1975, the Vanguard S&P 500 Index Fund is also the largest mutual fund in the country, with a combined value of $150 billion. The Vanguard Group as a whole manages over $1.3 trillion.

But the fact that turnover has catapulted so much and the cost of doing business on Wall Street has fallen sharply is arguably something that Vanguard has contributed to. Because of the financial revolution, bid-ask spreads and commissions are at historic lows.

So how should you invest in this new era?

Jack Bogle Says to Keep it Simple… And Invest According to Your Age

Overall, Jack Bogle is optimistic about America. And while he likes President Obama, he’s worried about a looming financial crisis, due to excessive deficits and unfunded liabilities:

“He inherited most of this mess from Bush, but listen, if we do nothing, we’re headed for a real crisis.”

To solve the deficits, he urged “strong medicine” – for example, raising taxes, including a $1 gasoline tax, and reducing benefits.

From an investment standpoint, I asked Bogle about putting money into various asset classes, such as bonds, growth stocks, foreign investments, real estate and gold. Specifically, I mentioned David Swenson’s strategy and Alexander Green’s Gone Fishin’ Portfolio – both of which have proved very successful recently.

Bogle likes the idea of a simple mix of bonds and stocks. He suggested that the percentage of bond holdings should equal your age. For example:

• If you’re 30, then 30% should be in bonds, 70% stocks.
• If you’re 80, then 80% should be bonds, 20% in stocks.

But otherwise, he’s skeptical about adding real estate, gold and other exotic investments to one’s portfolio. “I don’t like the idea of complex investing, other than simple stocks and bonds.”

So if you’re looking for the cheapest way to buy a broad-based index fund, consider:

• The Vanguard S&P 500 Index Investor (VFINX)
• Or the Vanguard Total World Index Investor (VTWSX).

Finally, I asked Jack Bogle about his lasting legacy and lesson in life. He responded quickly: “Character counts. I think I’ve made the world a little bit better for investors.” Indeed, he has.

Is It Time to Go to Cash?  

By Charles Hugh Smith

 
The Wisdom of Crowds: Americans Refusing To Buy Into the Rally

By Charles Hugh Smith

The U.S. stock market has been rallying for over a year, yet “retail” investors are selling, not buying. Is this “the wisdom of crowds” in action?

A funny thing happened on the way to the greatest stock market rally since the 1930s–the “retail” (individual) investor is selling stock mutual funds, not buying. As I noted yesterday, According to BusinessWeek/Bloomberg, U.S. investors dumped $369 billion into bond mutual funds since March of 2009, while according to Reuters, they extracted $26 billion from equity/stock funds. In other words, the great unwashed public isn’t buying into the “return of a new Bull Market” and “the recession is over, we have a V-shaped recovery” stories being relentlessly flogged by “tout TV,” the MSM and inside-the-Beltway hacks and factotums.

Perhaps they are taking note of reality on the ground, and refusing to accept the pearls of wisdom being forced on them by their “betters”?

Analysts and other “experts” are confounded that the public is recalcitrantly refusing to buy into their usual “pump and dump” schemes. In the normal course of events, “experts” pump stocks as the greatest investment opportunity of a generation and that making money in the market is like stealing candy from a baby, etc.

Then, as the “retail” investor/speculator buys into the hype, the insiders sell (distribute) their shares, leaving the “retail” marks holding the bag as the insiders go short and profit from the collapse of stock valuations.

This worked extremely well for the “smart money” in 1998-2002 and again in 2003-2007.

Individuals are shunning stocks like the Devil himself (more than an analogy) while placing their money in “safe” bonds (safe until interest rates rise–see yesterday’s entry) and money market funds, which are holding about $3 trillion in cash.

The “experts” and apparatchiks are drolling over that $3 trillion; they keep hoping the retail investors will finally break down and transfer those trillions into the stock market, and thence into the accounts of the “smart money.”

Remarkably, individual investors seem to have learned the old lesson, of “once burned, twice shy” rather well. Having lost $11 trillion since the global financial meltdown began in earnest in late 2008, “the little guy” no longer believes the stock market is a fair and open market, nor that it is a “wise investment” to “buy and hold” as their “betters” keep insisting.

This raises the interesting possibility that the “crowd” has more insight and wisdom than the “experts” and shills. The notion that groups have a collective wisdom which exceeds that of “experts” was explored in two recent books: The Wisdom of Crowds and Crowdsourcing: Why the Power of the Crowd Is Driving the Future of Business .

“Crowdsourcing” is now a hot buzzword, but in essence any transparent market is form of crowdsourcing. But as we all know, the transparency of the stock market is only a useful illusion–useful to those pulling the strings behind the screen.

The crowd is no longer buying the “the stock market is a transparent, open market” propaganda, which is partly why they’re pulling money out of equity mutual funds.

In other words, the crowd is speaking by staying away in droves.

There is abundant evidence that the “smart money” has melted the market higher by buying and selling to themselves in various forms of high-frequency trading and manipulation of the futures contracts. None of this raises an eyebrow on “the Street” or in Washington; the “smart money” players are benefitting, and the only fly in the ointment is the retail investors’ annoying refusal to jump on board the “Bull market rally” so insiders can sell to them before pulling the plug.

It seems clear that the crowd of individual investors is telling the “smart money” that they can take this rally and shove it. The “experts” continue to cluck and tsk-tsk that the “dumb” individual who is sitting on cash instead of being fully invested in the wonderful stock market is foolishly mssing out on a rally which “has plenty of legs” and “is only moving higher as corporate profits recover” and all the other enticing siren-songs they have long mastered.

Maybe the “smart money” experts are right, and the market will only keep rising essentially forever, as it did from 1982 to 2007. But then maybe the “crowd” has sniffed a rat and is refusing to play the 3-card monte game offered by the “experts.”

Interestingly, corporate insiders are selling at a furious pace. Doesn’t that give the lie to the “smart money” assertions that corporate profits are set to skyrocket and the stock market is the one place you want to be if you want to rake in stupendouly easy gains?

We’ll see who is wiser, the crowd or the “smart money.”

Stock Market Casino Royale – S&P 500 is Overvalued by 100 Percent – Earnings do not Justify Current S&P 500 Levels. Financial Markets Setting up for Another Correction.

Posted by mybudget360

When I look at the S&P 500 like most people do, you would expect that this wide cross-section of companies in the U.S. would reflect an accurate measure of the true health of industries in our economy.  Yet the S&P 500 is fully disconnected from any historical measures of valuations.  It is startling to see people talk about the wild swings in the stock market as if this were somehow standard in a regular market.  The S&P 500 fell by a stunning 58 percent from the peak in summer of 2007 to the low in March of 2009.  But from March of 2009 to February of 2010 the market has rocketed back up by 63 percent.  This kind of massive market volatility is not indicative of a healthy stock market.  This is a symptom of a system that is having a really hard time valuing assets since much of the toxic financial assets are still lurking in the murky black box of many financial institutions.

Let us first look at the S&P 500 price to earnings ratio (adjusted for inflation):

Source:  Robert Shiller, www.multpl.com

130 years of data and each major financial crisis has sent the PE ratio falling between the 5 and 10 range.  This crisis has kept PE ratios elevated to the point that the S&P 500 is still valued at twice of what it should be if we use moderate historical valuations.  And if we measure the bubble via earnings, valuations during this bubble got even more out of line compared to those prior to the Great Depression.  Yet in this crisis, valuations never made it down to a more realistic level.  This is endemic of our current financial system where market alchemy is suddenly supplanting any rational analysis of earnings and actual potential growth.

Take a look at inflation adjusted earnings:

Earnings have collapsed during this market turmoil yet the market is up some 63 percent.  What is the rally based on?  A lot of the rally is based on easy money flowing into financial institutions that are using their black box to make trades and maneuver around accounting rules to make out with billions in profits while the real economy is mired in real fundamental problems.  And this is easy to see since all you need to do is look at how consumer credit has contracted over the crisis:

Now ask yourself the following question; if we are a consumption based society and a large part of our consumption is fueled by debt, doesn’t a massively contracting credit market mean people are spending less?  Of course.  The above chart merely reflects what average Americans are dealing with.  They are adjusting their household budgets to reflect stagnant wages or lost jobs.  They are battling with the reality that their homes are not worth what they once were during the halcyon days of the bubble.  Yet the stock market has rallied as if we are back to the heyday of 2007.

This rally is really something to behold:

The only other time we saw such a sharp drop and rally was during the Great Depression.  Yet the depression dragged on for over a decade and here we are less than one year from the bottom of this market correction and all of a sudden we expect the market to be valued at these levels with no justification from actual earnings?  It just doesn’t make any financial sense.  We are back to seeing bubble like behavior.

Middle class Americans are largely not participating in this rally.  Clearly banks aren’t lending anymore even though they clamored for additional funds to provide credit to Americans.  The home loans banks are making are all backed by the U.S. government which only adds further fuel to the flame.  If you really want to see what sector by and large has benefitted the most from this rally, just look at the financial sector:

While the S&P 500 is up 63 percent and that in itself is stunning, the financial sector index is up a stunning 173 percent in this same period.  Have the banks really gotten that much better?  Is credit really flowing from their doors?  Not really but banks have managed to take taxpayer money and funnel it back into the stock market that is largely becoming more and more like a casino.  The structure is setup for quick profits even if it means long-term destruction for our economy.  Why try giving a boring 30 year fixed mortgage and earn a modest fee, even though the client will be better off in the long run when you can dish out a toxic mortgage with a high commission but will eventually lead the borrower to ruin?  That is the structure of our current financial system and nothing has really changed even though we have seen the most volatility since the Great Depression.

The current stock market valuation tells us that the stock market will hit another correction.  Short of incomes going sky high or earnings doubling each subsequent quarter, at a certain point valuations need to come back down to Earth.  Ironically the low reached in March of 2009 actually reflected a more sensible valuation of the economy.  Right now the S&P 500 is betting that things are back to the good old days but clearly this is not the case.  We should now be absolutely cautious when people try to value stocks or assets on potential values and not what reality is currently reflecting.

Many Americans are not buying the recent stock market rally.  This is being reflected in multiple polls showing negative attitudes towards the economy and Wall Street.  Wall Street is so disconnected from the average American that they fail to see the 27 million unemployed and underemployed Americans that now have a harder time believing the gospel of financial engineering prosperity.  Americans have a reason to be dubious regarding the recovery because jobs are the main push for most Americans.  A recent study shows that over 70 percent of Americans derive their monthly income from an actual W-2 job.  In other words, working is the prime mover and source of their income.  Yet the financial elite have very little understanding of this concept.  Why?  42 percent of financial wealth is controlled by the top 1 percent.  We would need to go back to the Great Depression to see such lopsided data.

Many Americans are still struggling at the depths of this recession.  We have 37 million Americans on food stamps and many wait until midnight of the last day of the month so checks can clear to buy food at Wal-Mart.  Do you think these people are starring at the stock market?  The overall data is much worse:

Source:  William Domhoff

If we break the data down further we will find that 93 percent of all financial wealth is controlled by the top 10 percent of the country.  That is why these people are cheering their one cent share increase while layoffs keep on improving the bottom line.  But what bottom line are we talking about here?  The Wall Street crowd would like you to believe that all is now good that the stock market has rallied 60+ percent.  Of course they are happy because they control most of this wealth.  Yet the typical American still has negative views on the economy because they actually have to work to earn a living:

The above daily poll asks Americans about their view on the health of the economy.  Only 13 percent believe the economy is good or excellent.  Funny how that correlates with the top 10 percent who control 93 percent of wealth.  Many Americans were sold the illusion of the bubble.  They were sold on the idea that their homes were worth so much more than they really were.  And many used this phony wealth effect to go out and spend beyond their means.  They started spending as if they were part of this elite 10 percent crowd.  But once the tide rolled out, it was clear they were not.  And the horribly built bailouts demonstrate who is controlling our political system.  This was not the rule of a capitalist system but a corporate run government.

Just think about the bailouts and which companies were saved.  We ended up bailing out the worst performing and troubled companies thus keeping alive companies that should have completely failed.  Did we bail out Google?  Proctor and Gamble?  Of course not.  These companies actually produce something that people want.  Banks and especially the Wall Street kind merely keep that 42 percent happy by making sure their stock values stay high so they can keep on making money while the average Americans is sold up the river.

Yet many were brought into the easy money fold by going into massive amounts of debt.  And who has most of the debt?  That is right, the average American:

The bottom 90 percent have been saddled with 73 percent of all debt.  In other words much of their so-called wealth is connected to debt.  Debt is slavery for many especially with egregious credit card companies taking people out with absurd credit card tricks and scams.  Yet the corporate propaganda machine is strong and mighty.  Have you ever received an inheritance?  A large one?  Probably not because only 1.6% of all Americans receive an inheritance larger than $100,000.  If this is the case, why in the world do politicians worry so much about the tax impacts of this?  Because they want to keep the corporatocracy alive and well so their spawn can get a piece of their pie.  They give the illusion to average Americans that if you only work hard enough you too can join this elusive club of cronies.  The data shows otherwise.

But if we start looking at investment assets, the true wealth in the country, we start realizing why Wall Street is all giddy about the recent stock market government induced rally:

Of investment assets 90 percent of Americans own 12.2 percent.  The rest goes to the top 10 percent.  Welcome to the new serfdom.  The bailouts that went out to the filthy rich were more about protecting their tiny corner of the world than actually making the economy better.  That is why it is interesting to see companies fire people and Wall Street cheer for the increase in earnings per share.  Good for the few at the expense of the many.  Yet the propaganda out of Wall Street and our government is what is good for Wall Street is good for you.  Just like that 1.6% inheritance issue, the vast majority of Americans won’t deal with that and their primary concern is simply a job.  A job that has provided stagnant wages for a decade while the ultra wealth get richer and richer in a phony form of corporate socialism.

If you break down the data you realize that most Americans don’t have time to speculate in stock markets:

Only 34% of U.S. households make more than $65,000 per year.  What is that after taxes?  Let us use a state like California for example:

Now if we breakdown this data further you will realize that most of the money is consumed by cost of living necessities, not Wall Street speculation.  Just to show this example let us look at a family budget for someone in California making $100,000:

Notice after running the budget we are in the hole for $1,000?  That is because of many costs that typical families have.  We can debate the merits of where they are spending money but the point is this; are these people really making beaucoup money from the stock market?  They are putting away $12,000 a year into their 401k.  As we have now found out, 8 percent a year is never guaranteed in the stock market although the corporate powers would like you to believe that so they can have other suckers to unload stocks onto.

“Yet the median household income in the U.S. is $50,000 and not $100,000.  They have even less to invest.”

They are more concerned on working to have a paycheck to pay for necessities.  They are more concerned about paying their house off by the time they retire and hopefully, have a little bit of retirement funds coming in.  The sad fact is most Americans rely on Social Security when they retire.  All those ads of unlimited golf and daily trips to Tahiti are propaganda of how Wall Street lives and they want to sell you the sizzle, and clearly not the steak.  They live their lives paper pushing and sucking the life out of the productive part of our economy.  The average American should now realize this since this financial crisis was primarily caused by them.  They are now on a massive campaign to blame Americans for this.  This is hypocrisy to the next level.  Many Americans have paid for their mistake by losing their home through foreclosure.  We have 300,000 foreclosure filings a month.  Many have taken a hit to their overall stock portfolio (if they have one).  Yet the corporate cronies have protected their horrible economy crushing debts at the taxpayer expense.  Unlike you, many hold bonds on the companies and not common stock like many Americans.  Bondholders have been protected at all costs during this crisis.  Goldman Sachs through AIG received 100 cents on the dollar for their horrible bets.  The banks have unlimited back stops thanks to taxpayers.  This is how the top 1 percent rule the new feudal state.

Welcome to the 2010 serfdom.  Time to wake up and restructure the system.  Many people are starting to wake up to this massive scam.