Wall Street Bankers: The World's Most Privileged Outcasts

Today we turn our attention to the world’s most privileged outcasts.

“Once envied, Wall Street bankers are now mocked,” says a headline at the International Herald Tribune.

So many people are getting on the bankers’ case; we’re beginning to feel sorry for them. After all, what did they do wrong?

Well…they floated the whole world economy on a sea of debt… even making loans to people they knew were going to sink.

And they took bonuses on profits they hadn’t actually earned.

And they paid themselves the cash that their banks now desperately need.

And, they created trillion-dollar debt torpedoes – which are now exploding all over the planet, leading to $32 trillion in losses…so far.

And they set the stage for a cycle of mass unemployment, strikes, depression, protectionism, riots, revolutions, poverty and probably even starvation.

And, oh yes, they blew up their own banks too.

But aside from that, they are pretty decent fellows, no? More about bankers and CEOs…below…

Meanwhile, in Spain, unemployment grew 47 % in the last 12 months. 14% of the workforce is out of a job.

In Ireland, “public sector workers face pay cut,” says the Financial Times. The Irish government is running out of time and money.

In China, 20 million people have had to give up their city jobs and go back to the countryside in search of work.

IBM says it cut salaries by 15%. UPS said it froze its payroll.

U.S. property owners lost $3.3 trillion last year, says Bloomberg. Houses in Las Vegas fell 41%. In Phoenix, they went down 43%. Miami homeowners saw a 40% decline.

But yesterday, investors thought they saw a little light on the horizon…perhaps a rescue ship? The number of pending sales, of existing houses, actually went up in December. This was enough, according to the press reports, to bring them back into the stock market and raise the Dow 141 points.

Oil held steady at $40. And gold rose $14 to $892.

Our guess is that the little light investors thought they saw will turn out to be another torpedo blowing up. Millions of homeowners and stock market investors have gone down already…but there are many still afloat. And many torpedoes that still haven’t found their marks.

In Japan, for example, property prices began falling in 1991. They fell for the next 13 years…reaching a low in 2004 equal to where they had been in 1973!

If that pattern plays out in the United States, the housing market won’t hit bottom until 2020…when you’ll be able to sell your house for what you paid for it in 1989.

As for stocks…

“Despite the vicious bear market we experienced in 2008,” writes our old friend Marc Faber, “the Dow Jones in real terms is still higher than at its 1929 and 1966 peaks.”

Marc admits that the inflation adjustment figures – provided by the people who create the inflation – may not be perfectly accurate. But even if you adjust the numbers to much higher levels of inflation since ’29, “stocks in real terms would still be nowhere near their 1932 or 1982 lows.”

You can avoid the fuzziness caused by inflation by looking at the price of stocks in terms of gold. Over the very, very long term, gold holds its value. An ounce of gold buys about as much stuff now as it did during the reign of Julius Caesar. How could that be? The explanation is simple: mankind adds to the quantity of gold above ground at about the same rate that it adds other goods and services.

That doesn’t mean that gold’s price is stable – far from it. The price goes up and down – depending on what else is going on. Generally, the more confidence people have in the financial system, the less need they have for gold. But over the long run gold has been the world’s most reliable, most universal store of value.

The stock market low of the early ’80s coincided with a low-ebb of confidence in the dollar and in bonds. At one point, the price of gold rose over to $800 an ounce…while the Dow fell to 776. That one-to-one ratio marked a turning point. Thence, stocks soared and gold fell.

The next turning point came 17 years later – in 1999 – when gold was back to $260 and the Dow was over 10,000. At the peak, it took 43 ounces of gold to buy the Dow stocks.

Since then, gold has been in a bull market, while stocks have declined. But even now, it still takes about 10 ounces of gold to buy the Dow stocks. Which tells us that this correction still has a long way to go. Wait until the Dow and gold reach the same number…then, the light you see on the horizon may be daylight.

*** The Singularity is Near is a book by Ray Kurzweil. It refers to a time – in the not-too-distant future – when machines will be smarter than bankers. And now, the Financial Times tells us that the moment is not far off – only a few years. Then, machines “will solve problems including energy scarcity, climate change and hunger.”

Which makes us wonder; what’s in that pink ink? Something is addling brains at the FT. Machines can already think better than humans. That is, they can already do calculations faster than we can. And they can remember things better too. And, using Google, they can find things and make connections faster.

Machines can help build safer bridges. They can help cure diseases. They can play chess and tell you where you left your car keys. But they can’t solve social and political problems…at least not directly. A smart computer could help build a more energy efficient automobile, but it can’t solve the problem of energy scarcity. Because there isn’t really an energy scarcity problem. Engineers, technicians and businessmen produce and sell energy – just like they produce and sell diamonds or custard pies. Stuff – including energy – is always ‘scarce.’ Even sand is scarce. The Sahara may be full of it; but when you want some for your backyard, it won’t be free. Machines – as smart as they are – can’t solve this ‘problem.’ Resources are allocated either by the invisible hand – the give and take of free people – or by the heavy hand of whoever is in power. Smart machines aren’t going to change that.

*** “The Great Repression” Niall Ferguson calls it. He’s referring to the fixers’ attempts to stop the correction. Ferguson favors treating the oversized debt with a mixture of boondogglization and liquidation. He thinks the state should take over banks…recapitalize them…and re-privatize them “say in 10 years.”

“Honor the rule of law…in the breach,” he continues, oxymoronically. He would simply force mortgage-holders to accept new terms and conditions – notably a much lower interest rate. This would lower homeowners’ payments, thus allowing more of them to hold onto their houses. In effect, he proposes a kind of pre-emptive default…like removing a man’s kidneys before he is dead…or having a cigarette before making love. By order of the government, a portion of the mortgage’s value would be liquidated…stiffing the lenders, but favoring the borrowers.

*** In the complaints about corporate pay comes a tedious refrain. Corporate jets are a “symbol of greed and excess,” says a Financial Times comment.

But this time, the FT comes to defend the CEOs: “The reality is that boards that lavish tens of millions on a top executive would be squandering resources by asking them to spend precious hours in security-obsessed airports…” continues the report.

Again, we wonder what has gone wrong at the FT. Have they ever spent any time with a “top CEO?” In our experience, a CEO’s time is taken up with countless meetings…countless conferences…luncheons…phone calls…briefings and reports. A corporate jet is a marvelous addition to his routine. It enables him to fly off to yet more meetings…while having a staff conference en route. Then, when he arrives at the airport, a limousine awaits him…with yet another person with whom he must meet …along with briefing papers and preparation documents for his next rendezvous.

If he is aggressive and acquisitive, one flight will take him to a meeting with lawyers, where he will discuss the strategy of a takeover. The next flight will take him to a meeting with the financiers, where he will discuss the terms of the options and other emoluments to be distributed. And yet another flight will take him to a meeting with investors…where he will recite the lines given him, with authority and confidence. His firm is not merely in pursuit of excellence, he will tell his audience; it IS excellence embodied. Just look at the last quarter’s results!

All of this makes him feel terribly important…and it describes the life of the typical Wall Street big shot during the bubble years.

Too bad corporate boards didn’t cancel the jets 10 years ago. Maybe…sitting in an airport without an Internet connection, the CEOs might have had a moment to think. About how little they really understood about their own businesses… About what mediocre clowns and connivers they really were. About how markets routinely turn geniuses into morons and heroes into schmucks. And maybe…maybe a bright light might have shone forth from their reflections…causing them to realize that they were on a flight to Hell.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning