Funeral For A Friend

And it seems to me you lived your life
Like a candle in the wind
Never knowing who to cling to
When the rain set in
And I would have liked to have known you
But I was just a kid
Your candle burned out long before
Your legend ever did 

"Candle In The Wind" by Elton John

Watch it on YouTube: Marilyn Monroe

"Candle in the Wind" is an appropriate song for todays missive on the loss of a dear old friend, but even more appropriate is the 11 minute epic "Funeral For A Friend" (Elton John - Funeral For A Friend (Love Lies Bleeding).

The global economy entered 2007 with two types of countries: those with sound financial systems and those without. The globalization of the financial system has tied the good to the bad, and no country was spared the pain of the financial systems collapse and ensuing recession. Fortunately for those strong countries, while their financial systems were strained, they were able to weather the economic storm as if it were a regular recession. Many of them are having strong economic recoveries, and are already withdrawing stimulus. Ironically, some of those strong countries are who we normally think of as emerging; China, India, and New Zealand, but also Australia, Canada, and Norway.

Unfortunately those citizens of the countries with weak financial systems entering the collapse, are faced with serious cultural adjustments. Their solution to the over-indebted collapse of individuals (housing), and financial institutions, was to print more money, borrow, and bail out the ever growing list of "to big to fail". Now they are faced with economies where not only consumers continue to de-lever, but their Public sectors must also find ways to de-lever. This de-leveraging leads to the reneging of social promises made, and the increase of tax rates. None of this leads to economic growth. So the fiscally weak countries; the United States, Great Britain, and most of Europe, are faced with years of social unrest and below normal economic growth...if everything goes well. This is vividly playing out in both Greece and Dubai. The real risk to these weak countries is that they have very little ammunition left to fight any unforeseen economic problems.

While economic growth will be sub-par, volatility will not be. There will be a great deal of uncertainty and psychological swings, that will lead to increased financial market volatility. Traditional asset allocation and diversification models will prove ineffectual, and investors will need a much more flexible (open-minded) tactical approach. 

Multiple congressional hearings, endless books, and countless hours of financial news reporting, have tried to lay the blame of the financial collapse at the feet of many. Banks, hedge funds, insurance companies, unions, politicians, and yes even the consumer. While all these parties were active, and sometimes more than willing participants, they were really not part of the cause. No, I believe that this sorry state of affairs began several decades ago, around the time that the cold war ended. You see, one of the consequences of the end of the cold war was a concerted effort, a movement towards globalization. By tying the financial fates of one country to that of another the impetus for war was greatly diminished. Local companies soon grew to become global companies, and nowhere was that more evident than with financial conglomerates. Globalization has had a very beneficial impact on millions, maybe even billions of poor, by helping to raise their standards of living, but it wasn't without a casualty. The greatest casualty of the "modern" global financial system was a gradual, but persistent deterioration of the concept of "fiduciary". As the industry's size, complexity and demand for growth accelerated over two decades, the concept of fiduciary was quietly put to rest. The core values of "trust" and "do no harm" were gradually and systematically replaced by maximizing short-term profits, size, market share and incentive bonuses. R.I.P Fiduciary.

The Honorable Paul Volcker, in his recent testimony to Congress, implied that it is not material whether proprietary trading and internal money management lost money or were instrumental in causing bank failures. The need for their separation is a matter of ethics. Banks and their shareholders should not benefit from profits made on low interest loans subsidized by the public taxpayer. And, banks should not be allowed to profit at the expense of their customers. He went on to warn Congress that if allowed, banks would revert to avarice and "if the new regulation gives free reign to speculation (with taxpayers' money), I may not live long enough to see the crisis that ensues, but my soul will come back to haunt you!" Congress, instead of asking for clarification of his ethical concerns, met his remarks with snickers. Enough said.

As investors, where does that leave us? Politicians have stepped in and stopped the natural capitalistic cleansing of the system, by rewarding those companies ready to fail with the "to big to fail" label. The re-regulation of the massively complex, interconnected financial system will slowly move ahead. Bankers, lobbyists, Congressmen, and special interest groups will do whatever they have to to ensure that they do not kill the goose that has given them all so many golden eggs. The globalization of the financial system can not and probably should not be reversed. Politically, the system can not be meaningfully changed. The prospect of legislating morality is absurd. The outcome will be a nip here and a tuck there, but unfortunately for Mr. Volcker and other consumers, strong regulation and the reemergence of the fiduciary is not likely. While the flame of the fiduciary may have burned out, luckily the legend burns on, in a few lone partitioners out there. Some have been able to survive in the bowels of the financial conglomerates, while others toil away at much smaller firms where the goal is still to "do no harm". However, your best fiduciary is still yourself. You, whether you like it or not, have to take a bigger role in protecting your assets. You, have to be ever vigilant, expecting the unexpected, you have to be your own fiduciary. You do not want to be on the other side of the trade with Gordon Gekko, who so appropriately said, "A fool and his money are lucky enough to get together in the first place." 

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.