Wednesday, December 16, 2009

Lenzner: $12-Trillion Lessons From Saving Wall St.

By Robert Lenzner
December 15, 2009 | Forbes.com

When you add up all of the direct and indirect costs, saving Wall Street was a task that required an amount of money almost equal to the value of the entire U.S. economy. It cost $12 trillion to prevent the massive failure of the financial system. A fraction of that amount stabilized Detroit's automobile industry.

This $12 trillion package gifted a goldmine to Goldman Sachs and JPMorgan Chase while granting Citigroup, AIG, Bank of America and Wells Fargo time to come back from the precipice for renewed fortune hunting. Washington public policy transferred an agglomeration of wealth so magnificent that one investment banker in a high position likened it to the way Putin transferred Russia's wealth to a handful of oligarchs.

Investors in the nation's financial institutions can thank this massive bailout for the astonishing recovery in financial shares: Goldman Sachs has more than tripled from its low, and Morgan Stanley has more than doubled. Bank of America shares are worth six times what they were at the bottom, and even Citigroup is a quadruple, going from 97 cents to around $4.

This leads us to a powerful lesson from the last year: A steep and painful bear market meltdown is followed by a sharp, upward spike in stock prices. It happened in the 1930s, and coming out of the 1973-1974 bear market, and it happened this past year.

This lesson in boomerangs is still hard to absorb. How else to explain how the Dow Jones industrial average came back from its low of 6,500 in March 2009 to a peak of 10,600 this fall. The lesson learned by savvy market strategist and Forbes columnist Ken Fisher, CEO of Fisher Investments, is this: "Just about the time you think that everything you ever thought no longer works, it all starts to work perfectly again."

Classic end of bear-market behavior becomes classic bull-market behavior--sounds simple, doesn't it? But how many investors really thought it was a credible reaction to 2008. Not many. They didn't listen to how money talks, trillions of dollars of it.

Another lesson we learned was that markets around the globe trade in tandem with each other. China and other emerging markets were more devastated than the U.S. during the meltdown because of panic selling by hedge funds, but these markets rebounded simultaneously and with even more forcefulness than we saw in U.S. stocks.

Many asset classes also traded in parallel patterns, as commodities and stocks moved together, tough at not precisely the same pace. Some nations' economies grow more dynamically, like China at an 8% annualized pace, compared with 2% in the U.S.

We also learned monetary lessons, like deflation is a greater risk than inflation. We learned to expect continued cheap and easy money until there are signs the economy has strengthened and the unemployment rate is declining.

We are still suffering from excess capacity, a high inventory of housing and cautious consumers.

Individual investors are still scared and risk-averse. There is an enormous amount of cash on the sidelines earning zip. Investors are selling equity mutual funds and seeking the relative safety of fixed-income funds. Treasury financings are oversubscribed, despite interest rates as low as they were in the 1950s.

Gold and the dollar trade in an inverse relationship to each other 80% of the time, so if you believe the dollar is doomed to be weak, you can confidently bet on the upward slope of gold. Gold is up 30% in 2009 while the dollar has declined, on average, 16% against other world currencies. You can also bet on the price of oil and copper rallying when gold rises and the dollar falls. For the moment, the dollar is rallying, which acts to push gold, oil and copper down.

A final lesson, or perhaps admonition, is that Goldman Sachs is getting too smug, arrogant and selfish for its own good. It is intending to spend about 50% of its net revenues on bonuses, come hell or high water. That's $20 billion, more or less. It doesn't change the magnitude of the wealth transfer if the top 30 Goldman executives will not get cash but stock over a five-year period. This will set off a firestorm across the nation.

Goldman is awash in money because Bear Stearns and Lehman are no more, and Citi, Bank of America, Wells Fargo and Morgan Stanley--not to speak of several European financial giants--have been wounded. Goldman's largesse to its employees is a function of immensely reduced competition. Let's see if Goldman can maintain its advantage.

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