This is an exciting week thanks to an unpredictable presidential election and a big 'ole storm headed for the Eastern Seaboard. I'm going to make it even more exciting with some financial sarcasm.
U.S. markets are closed for extremely bad weather. This is more than a puncture wound to the self-made myth of Wall Streeters as indestructible masters of the universe. It's a sign of how vulnerable equity markets are to the physical isolation of a single city block. There is no substitute market if the NYSE were forced to shut indefinitely after a physical catastrophe. The dark pools of liquidity sponsored by major asset managers are not sufficiently transparent to substitute immediately for an open market. The internal crossing networks of major asset managers are pretty robust but firms like BlackRock and State Street would be reluctant to immediately open them without strong-arming from the SEC. This country is in serious trouble without a decentralized equity trading market, but unfortunately that's just the way our mandarin class wants to treat us.
US and UK regulators are ready to sweep the Libor scandal under the rug with a few slaps on the wrists at money-center banks. Business as usual! The fraud and rigging will continue so insiders can keep getting rich at the expense of outsiders. Read my blog articles from some months ago. I predicted this outcome.
If the above items haven't got you depressed, the next phase of Great Depression 2.0 will do the trick. The fiscal cliff's negative impact on the economy will be exacerbated by reduced consumer spending. Call it the flip side of the marginal propensity to consume; poor folks spend proportionately more of their income and will have less of it to spend once layoffs really get rolling in first quarter 2013.
We've finally hit the peak of the junk bond curve. Companies with deteriorating credit quality can issue more high yield debt than ever and investors just eat it all up. How stupid can hedge funds be? They're the ones driving this nonsense because their market-lagging returns push them farther into losing territory. They'll reach for extra yield even if it means reaching for junk bonds that should default. Most hedge funds should just close up shop rather than chase each other over a cliff, but I'll enjoy watching them hit the wall. Maybe the biggest intellects really do gravitate to private equity, since they're driving this junk bond issuance to extract the last drop of dividend juice from their portfolios before the big collapse.
Wild pursuit of dividends for their own sake can make any investor dumb. Money managers are actually considering special dividend payouts as a type of special situation investment. That's really dumb. Experienced investors should know that exchanges reduce the price of a stock on the dividend payout date by the dividend's amount, with no guarantee that the share price will recover in subsequent trading. These portfolio managers will have to explain to their clients why they went for the amateur's trick of "trading dividends" (a tactic I outgrew years ago, thank you, after a run of good luck). The fiscal cliff will do a lot more than force temporary changes in corporate dividend policies. It will hammer the prices of stocks that investors bought on the cusp of a recession.
I can't let myself feel sad about all of this pending misfortune. Professional investors have access to all of the information I have and then some, and they still buy the wrong investments at the wrong times for the wrong reasons. I am very happy that hard times will flush these people out of finance and put their assets on sale just for me.
