Hedge Funds Buying Stocks, Wee Folk Selling
By Don Bauder
November 30, 2009
The so-called smart money (in this case, hedge funds) continues to buy stocks while small investors sell, notes Bloomberg News. Individual investors have pulled $37.3 billion from stocks since August, according to the Investment Company Institute, a trade group of mutual funds. The last time the small investor pulled out so much was in the 9 months leading up to February 2003, just before the market went on an upride that lasted more than four years. Hedge funds are buying as fast as small investors sell.
"The Fed (Federal Reserve) has said they're not going to let the market go down and they've done it by pumping liquidity into a variety of markets, ad that's spilled into the equity market," Harry Rady of La Jolla Asset Management told Bloomberg.
And that's what's going on. The Fed keeps saying it will keep interest rates near zero for the indefinite future. In effect, it is telling the big banks they can borrow at zero and gamble in market, and if they lose, they will be bailed out. Unfortunately, the banks are not lending out that money so the economy will grow. And as long as the economy doesn't grow, the Fed will continue its hyper-easy money policy. Hedge funds can borrow at low rates, too. But small investors pay more.
How long can this go on? It's anybody's guess. As I have said, stocks, bonds and commodities will probably continue to go higher as the Fed and other central banks keep the liquidity flowing. But the party will end abruptly.
The only real question is timing. When it all goes kablooey, and we know it is going to go kablooey, the wealthy and well-connected get another bailout and the small investors another empty bucket.
Perhaps, just speculating, the small investors are having to withdraw from the market now to raise the cash that the banks are refusing to lend. If you're about to lose your business bacause of cash flow problems, cashing out your 401k may be your only choice...
Here's another thing to consider, Fred: The Fed keeping the prime at near zero is not a good thing while the government continues to print money. It isn't a matter of IF inflation hits, it's a matter of when. And when it does, the Fed isn't going to want to up the prime rate. And by the time it has no choice, everyone is going to lose.
The sequence of events that historians will be reading fifty years from now might very well go like this:
Wall Street, with the blessings of the U.S. Government, invents schemes whereby the market finances housing loans that shouldn't be financed otherwise, creating a false demand for housing and driving up prices well above true market value. This creates a bubble, which bursts, and the U.S. Government then bails out the institutions responsible. A general economic recession quickly follows and the U.S. Government creates a stimulus package.
With all of that money printed and nothing behind it, the dollar loses substantial value, and meanwhile the recession seems to have bottomed out. With the prime rate at near zero, and the U.S. Government attempting to urge banks to lend money, inflation develops due to the liquidity and the Fed is reluctant to raise the prime. Waiting only until it is inevitable, the Fed begins slight increases in the prime rate once inflation soars to 5%. But it is too little, too late.
The U.S. Dollar, now free-falling against the Euro, is abandoned as the standard for the valuation of petroleum. The dollar falls further, and inflation soars to double digits. Canada and Mexico devaluate their currencies out of necessity. The prime rate is eventually raised to 15%, and inflation reaches 20%.
Guess what China is going to do now?
I realize that this is quite speculative on my part, and if nothing else I hope you find it entertaining, but I think it is a real possibility, never the less. I hope I'm really, really wrong.
Response to post #1: Remember, the small investors can't borrow for zero percent interest and know they will be bailed out by the government if their gambles fail. Commentators exult that the large investors are willing to take risks. But they really aren't taking risk when they can borrow for extremely low rates and know that if they get in trouble, Uncle Sugar will bail them out. Also, small investors are getting nothing on their savings. And they are unsure of employment prospects because corporations are worried about profits and won't rehire. These are reasons enough to storm the Bastille, but it isn't going to happen. However, there is fire burning in the grass. A match may cause a bigger conflagration then anybody now thinks. Best, Don Bauder
Response to post #2: Your scenario isn't as fanciful as you think. That is roughly what happened in the 1970s. My own feeling is that asset bubbles are more likely than inflation of products and services. I feel the Fed has surreptitiously decided that bubbles are preferable to inflation. But I could be wrong on that. And remember, the denouement of all this may not be in the Fed's hands. Best, Don Bauder
There is an article on Hedgefunds that came out a few days ago, and indicates that these funds are destroying American jobs in LBO's, while at the same time dringing down the living standards of the poor and middle class-and it further states that these Hedgefunds are getting a majority of their money from public pension funds-which is exactly what John Talbott wrote in "Where America Went Wrong" in 1990.
Here is the link to the Hedgefund article;
http://calpensions.com/2009/11/30/pensio...
Response to post #5: That article is worth reading. Most LBOs are scams in which the perpetrators should go to prison -- rather than being celebrated among the rich and famous. A bunch of rustlers takes over a company that is already publicly-held; piles debt on it; sucks money out of it; whacks employment, then brings it public again as a highly-leveraged company. Similarly, most mergers ad acquisition activity is either non-productive or counter-productive. For this, the Wall Streeters are the best-paid persons in society.They and their counterparts selling derivatives should be in prison. Best, Don Bauder
I agreew ith you 100%, LBO's are scams, and the go-go 80's proved that up. Unless we do somethign about the influence of money to the rule makers we are doomed, we see this at all levels of gov today.
This is a little off topic, but it goes to the pay scales in the private sector, which as we all know have been flat for the last 10 years and NO new net jobs created;
So I was checking the 2007 pay scales of some of my friends who are cops in Richmond, CA.-one of the poorest (bottom 10%) cities in the Bay Area (also very rough area due to the poverty). Poor for the residents, not the city employees.
The BASE cop salary in 2007 was $90K (was $32K in 85), they have the 3%@50 pensions-which with the other benefits (14 paid holidays, 5-7 weeks paid vacation, 12 days sick leave, medical, etc.) brings the base compensation to $180K. Then ALL of them (every single one) had overtime in the $50K-$75K range, which boosted their pay to about $250K per year. I then figured out how many hours they worked for OT (extra 20 per week) and compared it to Yale, Harvard, Stanford and the other top 14 Law School grads who make $160K per year (but work 80 hours per week). Guess what, the GED cops in Richmond are making MORE than the (handful of) top law school graduates in America. That is truly amazing. Mind boggling. Won't last though, the end is near.
The Bush-GOP era screwed up the economy so much that if Obama pulls us out of this he will be at least as famous in the history books as FDR is for saving America from the republican betrayals last time.
Heard something amusing in a CNBC interview a few months back, where an Ivy League law professor was explaining why there are no popular movements to unseat directors or otherwise seriously influence corporate governance by stockholder revolt: when people get fed up, they simply sell their shares to other parties not so fed up and more prone to speculation.
Obviously, the people who are least offended by corporate governance in America today are hedge fund managers.
Birds of a feather...
Response to post #7: That kind of obscene remuneration won't last. You can bet on that. Richmond could go the way of Vallejo. Best, Don Bauder
Response to post #8: And yet economists recognize that it was World War II that brought the Great Depression to an end. Best, Don Bauder
Response to post #9: Yes, hedge fund managers are quite tolerant of excessive corporate pay. After all, the hedge fund people bring home even more excessive remuneration. What is bothersome, though, is that pension funds representing workers, such as Calpers, do so little about excessive compensation. Best, Don Bauder
That is truly amazing.
=================
What is truly amazing is that you added benefits to the cops total compensation, but not to the lawyers.
What is truly amazing is that you added benefits to the cops total compensation, but not to the lawyers.
By JF
=======================
That is because most lawyers don't receive benefits, they work for themselves.
Lawyers who do get benefits don't get $100K in benefits-that's why. They may get a non matching 401K and medical after 1 year. That is it. They also are not paid OT.
But eb=ven more tot he point-I was specifically referring to the very BEST law school grads-the ones who are (were) making the $160K (not anymore though-the pay has dropped and most of those jobs dried up) pay packages. Most law grads today, more than 50%, cannot find a job. Even the top law school grads are not getting jobs today becuase of the legal market meltdown.
But, as usual JF, your GED mind missed the bigger picture of the post. GED cops in Richmond, a city where the median income is about $30K are pulling down a quarter of a million dollars in pay and benefits-8-9 times more than the average citizen in the city. That is also MORE pay, for less work, than the TOP law grads in this country make.
It's OK JF, we know you are a liar, and will do anything to try to make your ridiculous pay and benefits seem like they are normal. But like Don said-those days are coming to an end.
Response to post #13: Can't compare apples and oranges. You're up, SP. Best, Don Bauder
Response to post #14: Yes, but a significant number of lawyers don't work for themselves. It seems there is an adjustment you have to make. Best, Don Bauder
I have an email in to a buddy working at Skadden Arps in New York- the Biggest of BigLaw.
I am trying to find out what she gets for benefits-I will report back once I get that info-that way JF will see see that these minimum benefits at Big law (for the best lawsyers in America) are nothing like a Richmond cop's benefits.
And I won't even go into the financial/time costs associated with graduating Harvard/Stanford/Yale Law School.
Response to post #17: I look forward to hearing what she says. Best, Don Bauder
Johnny, Johnny, Johnny. How soon you forget. The 2006 California State Bar Member Services Survey has an excellent rundown of attorney demographics in California.
www.calbar.ca.gov/calbar/pdfs/reports/20...
Let's see, you claim that attorneys work 80 hours per week, while Richmond cops work 60 hours. According to your own survey (yes, you're the one who posted it initially), only 7% of attorneys work more than 60 hours per week. I guess the others are too busy working to respond to the survey? So attorneys are working less than cops. The rest of your analysis is just as flawed.
Really, what you're telling me is that prospective attorneys weighing their career choices are making some very poor decisions. That's hardly my fault.
Incidentally, I wonder if you have these conversations with your cop "friends" in Richmond. I can't imagine you saying the things you say here to their faces.
Response to post #19: It's my experience that paralegals do all the work and the lawyers bill the client at a lawyer's rate. Best, Don Bauder
According to your own survey (yes, you're the one who posted it initially), only 7% of attorneys work more than 60 hours per week. I guess the others are too busy working to respond to the survey? So attorneys are working less than cops. The rest of your analysis is just as flawed.
=============
The issue is not how many hours attorneys work per week, but rather, how many hours they bill each week. While most attorneys do not work more than 40 hours per week, most attorneys bill their clients for 200 hours or more of work per week. At many law firms each attorney has 40 or more billable hours in a single work day. Webster Hubbell was no slouch and had legal talents that enabled him to bill out 800 or more hours in a single work week.
Sounds like the story of the attorney who appears before St. Peter.
Our hero tells the good saint that there must be some mistake; he's only 35. St. Peter replies, "Yes, but in billable hours you're 96".
Response to post #21: About 40 years ago, someone calculated that legal fees constituted a significant percentage of GDP, then called GNP. Lawyers howled in protest. Best, Don Bauder
"The issue is not how many hours attorneys work per week, but rather, how many hours they bill each week."
================================================================
The lawyers lament: Only 24 billable hours in a day.
Post a comment
Commenting requires registration.
If you don't wish to register at this time, but still want to post a comment, please use our guest Username: sdblogger and Password: sdblogger.