Three Things I Think I Think

Some random thoughts as the weekend can’t come fast enough…

1)  How sad is it that fraud and corruption has become so rampant in the financial services industry that I literally don’t even care about SAC insider trading scandal?  This is one of the largest and most successful hedge funds in the world and they’ve just been accused of basically manipulating markets and fraudulently generating market beating returns for decades.

Maybe I am just out of the loop, but this seems like it should be a much much bigger deal than it is.  And yet many of us in the industry don’t really care about the story much at all.  We’ve become so used to big fish getting in trouble and not getting punished that it’s almost like we accept that it’s a rigged game and just don’t care any more.  Which is exactly what some people want.

Wall Street continues to be one of the few places on earth where you can continually prove yourself worthless or a damn near criminal and someone will always either forgive you or give you a second chance.  If you think the financial crisis helped clean up this industry you’re really out in left field.  Maybe on the warning track.  In foul territory.  With your face pressed against the wall.

2)  Is Europe actually on the verge of coming out of their dismal economic downturn?  It’s interesting to see how the current account deficits in many countries have substantially improved.  Growth is still anemic, however and debt to GDP ratios are still deteriorating.  Not to mention the fact that the peripheral countries are still suffering through something closely resembling a modern day depression.

I still don’t think Europe is out of the woods though.  I think they’ve pieced together a temporary fix and that the structural flaw in the Euro is still very much there.  I still think something will occur at some point that forces Europe in one of two directions – either full political unity with a central Treasury (something like Eurobonds) or a disbanding of the Euro (perhaps partially or entirely).  Single currency systems just don’t work without a rebalancing mechanism.  They cannot.  And this one has no rebalancing mechanism except deflationary depression.  Which is great if you’re an Austrian economics theorist, but horrible if you have to live in a place with a depression.  It’s unnecessary and illogical.  Something will either break them or they will come together.  There’s no easy way out….

3)  Did you see this video from Morningstar on investment fads?  I thought John Rekenthaler made some great points regarding the latest investment industry fads.  Among his topics were alternative investments, low volatility funds, multi-asset class income vehicles.

Look, I think it’s great that Wall Street creates lots of different investment options, highly competitive products, etc.  That makes the world a better place for those looking to access different products and plan accordingly.   But you have to be very careful about the latest fads and trends.  Some of the funds that have been created in the last 5 years since the crisis have been downright dangerous if misunderstood.  Funds like these VIX funds, many of the commodity funds with futures roll issues, the 3X funds, etc.  The moment where it struck me as a bit overboard was when I was reading the Prospectus of one of these VIX funds and it warned:

“The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment.”

Good lord.  If you have to write those words in a Prospectus that no one except me and a few other nerds will read, then why even bother.   You have to be very careful buying into Wall Street’s latest fad funds.  If you don’t have someone with some integrity who can walk you through some of this stuff then it’s probably best not to even bother.

Depressing stuff, huh?  Sometimes I wonder why I am not chopping wood full time somewhere very far away from all of this….Have a great weekend everyone.

Cullen Roche

Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.

He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.