The End of the Financial Slump

Illusions there are aplenty. In the popular mind, the slump of ’07-’09 is coming to an end by Christmas. Practically everyone says so – including Ben Bernanke himself. All the bailouts and stimuli are paying off, they think. Soon, it will be business as usual.

Yesterday, the Dow rose 90 points. Oil rose a bit too – to $71. The 10-year T-note rose too... with a yield falling below 3.5%. And gold held steady at $940. If the markets know what happens next, they’re keeping mum.

We have already told you, dear reader, why we do not expect business as usual ever again in our lifetimes. From WWII to 2007, the world economy had a single important driver – the US consumer. At the beginning of that period, he consumed because he earned. By the end of it, he earned because he consumed. That is, the more he was willing to borrow and spend, the more the whole world economy seemed to bubble up.

But now, that era is over. As Jeff Immelt, head of GE says, “you’re going to have a world where the US consumer won’t be the main driver.”

Or, as En Yu Faz put it, “there are only two forces in the world: life and death, positive and negative, up and down, yes and no, love and fear... ”

Yu Faz, as he is popularly called, was a mysterious Mongolian philosopher, believed to have lived in the 13th century, when he was an advisor to the Great Khan.

“I am a slave to my master,” Yu Faz said, “but my master is slave to me too.”

We were wondering what the hell he meant by that when we recalled that we were writing a financial commentary. So let us turn back to the financial news...

*** “Where was the SEC?” asked a sign outside of the courtroom where Bernie Madoff was sentenced.

Good question. And guess what. We have the answer. While Madoff was taking in his billions... and the biggest financial bubble was preparing to explode... the SEC was asking questions – of your editor!

Yes, dear... dear reader. All over the world, responsible authorities are demanding a more muscled approach to financial regulation. “Bernie Madoff’s life sentence should galvanize regulators everywhere,” says today’s Times of London editorial, speaking for the majority.

But it was not muscle that kept the SEC off Madoff’s case. At the very moment when a free-lance informant was tipping off the SEC about Madoff... the agency’s goons were beating up innocent victims... and grilling innocent publishers:

The New York Times reports:

“The Boston office of the Securities and Exchange Commission began the investigation around 2001. Three years later, formal charges were brought against Mr. [Richard] Kwak and seven others. By the time the case went to trial, in 2007, only three defendants were left; the others had settled with the S.E.C.

“In that 2007 trial, Mr. Kwak and another defendant, Stephen J. Wilson, were cleared of one charge, with a hung jury on the remaining charges. (The third defendant, who foolishly acted as his own lawyer, was found liable and fined $10,000.) “The S.E.C. retried Mr. Wilson in 2008. He was cleared. Finally, in March 2009, the S.E.C. retried Mr. Kwak, with the same result. The jury took less than four hours to exonerate him.

Mr. Kwak’s life is now in tatters. He is around $1 million in debt and suffers from emotional problems. He has struggled to stay out of bankruptcy. Although he is still a broker — he certainly can’t afford to retire — he long ago lost his job with Morgan Stanley, where he had spent several decades without so much as a hint of impropriety. Needless to say, his business is a small fraction of what it once was.

“It pretty well wiped me out,” he said a few days ago. He is extremely bitter.”

The story of our own brush with the SEC will have to wait for another day. It is still subject to a gag order imposed by our own lawyers. The case is still undecided – four years later. We can’t tell the whole story yet... but we can pass along the moral of it now: anyone who believes government regulators will stop investors from losing money to fraudsters is dreaming...

Stay tuned.

*** The election results were counted up last night. The Kirchners – the husband and wife team that governed Argentina – lost. The winner was the man accused of drug dealing... Francisco Narvaez.

As we remarked above, we’re suckers for underdogs, die hards and scalawags. That is probably one of the reasons we like Argentina; it is all those things and more. It is a measure of the lost cause status of the pampas that news of the election was hard to find. We looked through the TIMES and found no mention of it. The International Herald Tribune did pass along the news – on page 4.

Something went wrong in Argentina. The country was once a rival of the United States of America – with nearly the same income per capita... and about the same prospects. Now, it has less income per person than Chile and exports less beef than its tiny neighbor, Uruguay.

What went wrong?

We turn to Yu Faz for an answer:

“Tribes... empires... are just big people,” says the philosopher. “They must all obey the stars.”

We’re not exactly sure what he meant by that either. But we take it to mean that life is not exactly under our control. We doubt that a group of Argentines ever got together and decided to become a second rate country. Things happen.

And here at the Daily Reckoning we watch... and wonder what will happen next.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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