Wall Street WARZONE
Warning: Wall Street’s Deadly “Alpha-Hunters” Out-to-Kill Main Street “Beta-Builders” as Bernstein & Bogle Philosophize on the Psychology of Winning
by Paul B Farrell, JD, PhD
| Discuss | | 10/15/2010

Warning, Wall Street’s high-tech “Alpha-Hunters” (benchmark-beaters) are in an aggressive psychological war with America’s 95 million Main Street investors, the “Beta-Builders,” average folks who are happy with portfolios that match the market averages.

Strip away all the esoteric rhetoric about Modern Portfolio Theory, the Capital Asset Pricing Model, Efficient Market Hypothesis, and you’ll see that Peter Bernstein’s brilliant book, Capital Ideas Evolving, is the perfect combat training manual for these “Alpha-Hunters” in a war worth over $200 billion annually to Wall Street.

Twenty-three centuries ago, Sun-Tsu’s Art of War guided generals. Two centuries ago, it was Clausewitz’s On War. Today it’s Petraeus’ Counterinsurgency Field Manual. But if you’re an “Alpha-Hunter,” then you need Capital Ideas Evolving. It’s a perfect manual, building on Bernstein’s original 1992 Capital Ideas: The Improbable Origins of Modern Wall Street and his 1998 Against the Gods.

But for Main Street’s “Beta-Builders,” this is a dangerous book, a wake-up call about a very dangerous enemy. Every day the Alpha-Hunters go into battle, and you are their enemy in a cunning psychological battle that targets your mind; distracting, misleading, softening, disarming you. Alpha-Hunters want you defenseless, the better to control your behavior, get you acting against your best economic interests.

Know your enemy: This book has no defensive strategies to help you Beta-Builders protect yourselves against Alpha-Hunters. No, it was written for Wall Street’s “Alpha-Hunters” on the attack. But you’ll be better able to defend yourself knowing your enemy’s strategies and weapons. This book should be in your library. But be forewarned, reading it will drive you nuts.

Brilliant, sophisticated, best about alpha-hunting quants!

Check the back cover: The lead endorser, Jack Bogle, says it’s “eminently readable.” Plus the second endorser is popular Wall Street Journal columnist Jason Zweig. So you’d assume it’s the perfect book for Main Street investors. Right? Wrong: Before you buy Bernstein’s book based praise from two guys popular with the masses, remember, it’s written for Wall Street insiders, hotshot portfolio managers, quantitative mathematicians, PhDs and Nobel Economists. Be prepared to wade into a minefield of confusing styles that will drive you nutty as it constantly shifts back and forth between what could be three separate books:

· History of the Markets: Bernstein covers the development of America’s financial markets from 1953 when Markowitz defined “Modern Portfolio Theory” to today’s “merger” of behavioral finance and quant math as Wall Street’s deadliest weapon. At the center of this unfolding drama is a war raging between beta and alpha, between generating average market returns and beating those averages, between indexing and active-management, between Main Street and Wall Street, between Beta-Builders and Alpha-Hunters.

· Interviews with Leaders: Bernstein’s book is based on interviews updating the thinking of theorists covered in his prior works; academicians like Samuelson, Markowitz, Sharpe and Shiller, today’s big-money gurus at institutions like Barclays, Yale and Goldman Sachs; plus new behavioral finance experts.

· B-School “Case Studies:” Between history lessons and interviews are endless esoteric text-book examples of core theories and practices, stuff familiar to professionals but ponderous for average investors: Everything from Fama’s Efficient Market Theory; Kahneman, Thaler and Odean’s studies of heuristics (mental shortcuts); Sharpe’s Capital Asset Pricing Model (CAPM); to Gross’ “Portable Alpha;” and much more. (More)

Oliver Stone’s New ‘Wall Street’ Film: Market-Timing Signal for ‘Crash of 2010?’ Or the ‘Death of America’s Soul?’ Michael Lewis Discovers Both for Vanity Fair
by Paul B Farrell, JD, PhD
| Discuss | | 6/17/2010

Yes, Oliver Stone is suddenly America’s hottest market timer, as well as the voice of the inner “American Soul,” warning investors of a collapse. Remember the Crash of 1987? One-day 23% drop. Happened just before his 1987 “Wall Street” film hit the theaters. He says he can’t predict the future. Don’t believe him: Even if he’s unaware of  his “source,” it’s stirring again, rising from deep in what Carl Jung would call the “collective unconscious” of the “American Soul,” warning us again of a collapse, using Stone as a stock trader’s “alert.”

Wake up Wall Street!
This film’s your biggest market timing signal of 2010!
Seriously, why now? Why after 23 years, did Stone decide to update the message of his famous 1987 “Wall Street.” Great question: The interviewer was Michael Lewis, former Salomon trader, author of Liar’s Poker, a guy who understands Wall Street’s soul.

Stone’s answer is in “Greed Never Left,” Lewis’ Vanity Fair review of Stone’s new movie, “Wall Street: Money Never Sleeps.” Stone had to think about it: “Why did I go back?” Why? “Because it’s important. It’s the collapse of capitalism and the collapse of our society. It is. Our way of life is going to change.”

The “collapse of capitalism?” Yes, Stone’s predicting the “collapse of capitalism.” Not just a stock market crash, the “collapse of capitalism.” He’s predicting the “collapse of our society.” Worse, Stone’s predicting: “Our way of life is going to change.” Is this really a market timing signal? Hey, it was in 1987. Will history repeat? The odds say yes.

Remember Stone’s predictions when you see the sequel, “Wall Street: Money Never Sleeps.” Lewis says Stone’s goal is not just to entertain you for a couple hours then send you back home to continue denying everything Wall Street’s fat-cat bankers, the real Gordon Gekkos, are doing every day to destroy capitalism, destroy democracy, destroy your retirement portfolio … no, Oliver Stone, the All-American filmmaker of Born on the Fourth of July, Platoon, JFK, Nixon, W, World Trade Center has a message … wake up America, you’re sleepwalking.

Wake up? America is unprepared for the coming disaster
Stone’s message is clear and powerful: You’re ignoring the coming collapse of capitalism … of our society … collapse of America. We are ignoring the end of our experiment in democracy. We are unprepared … “our way of life is going to change.” Wake up.

Unfortunately, Stone’s voice will likely be as ineffective in 2010 as in 1987. Few listen. Since the first film we’ve had bigger bubbles, bigger busts. Remember the Asian-Russian crises of 1997-98? Dotcoms in 2000? Subprime meltdown of 2007-08? “Oliver Stone’s 1987 Wall Street succeeded brilliantly in capturing a culture,” says Lewis, “and failed miserably as a call for change. To the director’s dismay, thousands of financial hotshots dreamed of becoming Gordon Gekko.” It was like a recruiting poster for terrorists. Why? (More)

“Temple of Hubris:” Newest Monument to Wall Street’s Out-of-Control Greed is World’s Tallest Building, $4.5 Billion Burj Dubai Desert Skyscraper … is Empty!
by Paul B Farrell, JD, PhD
| Discuss | | 5/5/2010

Years ago I was a radar-computer tech in the Marine Corps. After that, I studied architecture, worked in construction and development. Later with Morgan Stanley’s Real Estate Investment Banking Group, advising Mitsubishi Int’l, Tishman Realty, Burlington Northern, the U.S. Dept. of Housing & Urban Development. etc. Today my eyes naturally lock on fascinating news like LATimes architectural critic Christopher Hawthorne’s review of the opening of the new 2,600 feet high, 160 stories Burj Dubai skyscraper, now the new tallest building in the world. The headline, “Temple to Hubris,” is a grabber: Another dark reminder of Wall Street’s catastrophic meltdown. Sitting on the other side of the planet, this giant monument to oil wealth is also a physical symbol of what’s left of the soul of the Wall Street that has been advising American and Gulf investors. Hawthorne hit the nail on the head: (More)

New “Disaster Capitalism:” How Wall Street Makes Billions from Catastrophes, Fear, War, Terror … While Destroying Capitalism & Democracy From Within
by Paul B Farrell, JD, PhD
| Discuss | | 4/29/2010

Hot tip for all you “mad money” aficionados: Invest in “Disaster Capitalism.” This new investment sector is the core of the emerging “new economy” that generates profits by feeding off other peoples’ misery: Wars, terror attacks, natural catastrophes, poverty, trade sanctions, market crashes and all kinds of economic, financial and political disasters. Wall Street is a “master of disasters. ” We first covered it in 2007 before the subprime credit melttown. In late 2008 we saw how accurately this amoral strategy fits Wall Street.

First we watched in awe as our Treasury Secretary and Fed Chairman threw away $787 billion in taxpayer money to bailout an arrogant, corrupt and bankrupt Wall Street. Then, within a year, in a dramatic turn-of-events as the economy sank deep into 17% underemployment, and after creating an estimated $23.7 trillion in new taxpayer debt, Wall Street quickly returned to business-as-ususal, paying record $25 billion averaging $500,000 bonuses while screwing the public at every possible turn, such as inflating credit card fees and manipulating the Fed to keep Wall Street’s own interest rates near zero. Bottom line: Once again Wall Street demonstrates they’ve not only lost touch with reality, they’ve lost their “moral compass” and are adrift in the dark world of “disaster capitalism.” (More)

Obama Charges Goldman With Fraud: Political Move Attacking Wall Street’s Big Donors Bolsters Dodd’s Financial Reform Bill, and Two-Term Presidency!
by Paul B Farrell, JD, PhD
| Discuss | | 4/20/2010

Finally, Obama’s SEC is going after Wall Street’s “too-political-to-fail” banks, ironically some of the biggest campaign donors and lobbyists that put Obama in the White House. Ah, sweet revenge, biting the hand that feeds you! The Journal says Goldman, ”one of the few Wall Street titans to thrive during the financial crisis,” is now ”charged with deceiving clients by selling them mortgage securities secretly designed by a hedge-fund firm run by John Paulson, who made a killing betting on the housing market’s collapse.” He’s off the hook because hedgers have no disclosure duty to investors.

But it’s the other Paulson, Hank, the former U.S. Treasury Secretary, that should be worried. Why? Earlier Bloomberg reported that back in August 2006, the new Secretary privately warned the White House: “Over-the-counter derivatives [were] an example of financial innovation that could, under certain circumstances, blow up in Wall Street’s face and affect the whole economy.” Yet even at the last minute in 2008 Paulson was misleading America that they were “contained.” They weren’t and he knew it.

We saw this coming a year ago in our MarketWatch column about suing Goldman Sachs for RICO racketeering activity. Yes, we’ve been nudging Obama’s White House and the SEC for a long time. Here’s some more background on Goldman from my earlier columns:   

Even Jack Bauer can’t stop ‘The Goldman Conspiracy:’
10 reasons Wall Street has absolute power over America’s democracy (April 20, 2009)
http://www.marketwatch.com/story/even-jack-bauer-couldnt-stop

The ‘Goldman Conspiracy:’ RICO? Or Medal of Freedom?
Vote: Racketeers to be indicted or revolutionary American heroes? (April 28, 2009)
http://www.marketwatch.com/story/lets-nail-wall-street-with-a-racketerring-charge    

‘Goldman Conspiracy:’ Bogle’s ‘pathological mutation?’
Machinations on Wall Street, in government give rise to 13-episodes (May 4, 2009)
http://www.marketwatch.com/story/goldman-conspiracy-explosive-13-episode-tv-show   

Cheers for King Henry — world’s greatest nudger
Goldman Sachs “owes” Paulson a $1 billion bonus (July 20, 2009)
http://www.marketwatch.com/story/goldman-should-pay-paulson-a-1-billion-bonus   

Goldman’s new ‘American Socialism Manifesto’
8 ways ‘The Conspiracy’ is destroying our American democracy (August 4, 2009)
http://www.marketwatch.com/story/the-8-point-goldman-socialist-manifesto-2009-08-04   

But this fraud suit against Goldman is just the tip of the iceberg, expect more banks to share Goldman’s pain, even the former Secretary’s legacy is under attack. Bigger question: Politically you have have to wonder, will this chase away more of Obama’s supporters? The Wall Street lobbyists’ are turning against him, the “GOP Tea-Party of No” did long ago, and so have many independents … or will this guarantee he’s a two-term president?

Bull Market 2010? Warning, Trust No One! “Too-Greedy-to-Fail” Banks Will Be Broken Up, Says Michael Lewis … plus 12 Wall Street Gurus Predict a Collapse!
by Paul B Farrell, JD, PhD
| Discuss | | 4/15/2010

Warning, the Wall Street bubble machine is spinning at top speed. Here’s the hype in USAToday: “Dow sets bull-market high … The quality of the stock market rally keeps getting better. In a sign that the year-old rally on Wall Street is broadening, the blue-chip Dow Jones industrial average hit a fresh bull-market high Wednesday, erasing all of the losses suffered in the brief winter swoon.”

But over at Reuters, “Liar’s Poker” author Michael Lewis wasn’t buying the propaganda. In an interview for his new book, “The Big Short: Inside the Doomsday Machine.” Lewis tells Reuters that a ”Wall Street reckoning is coming,“ a very different message for investors compared to what’s coming from Wall Street’s bubble machine. Here are a few quotes from Reuters and Lewis: 

Wall Street’s biggest banks could be broken up by the U.S. Congress in the coming year in an eventual reckoning over the financial meltdown of 2008. Lewis predicted a war will be waged in Washington as Senate Banking Committee Chairman Christopher Dodd tries to revamp U.S. financial rules. “Things can be busted up. I really think there is this collision coming that is just starting to happen with the Dodd bill,” Lewis said. ‘There is a war that is about to happen over not just who regulates Wall Street but what the rules are. … To put it in the crudest possible way, these firms have to be smaller and less profitable … If they were regulated properly and the rules of their game were sane, it would be less profitable to be a trader at a big Wall Street firm … It is really a war over money.’

The Big Short follows a motley group of outcasts who profited from the collapse of the subprime market. There’s the one-eyed doctor-turned-money-manager with Asperger’s Disorder and a penchant for reading regulatory filings and the lazy fund manager with a comic book obsession mourning the loss of a young son. There’s a bond trader with hair like Gordon Gekko in the 1987 film ‘Wall Street’ and a personality to match, plus two geeks working in a garden shed with a $110,000 brokerage account. ‘I could have picked others who were equally odd,’ said Lewis, noting nearly all of Wall Street was on the wrong side of the biggest trade of all time and the establishment failed to see disaster coming.

Yes, Lewis’ warnings not only run contrary to the “Wall Street Bubble Machine” hype, he’s echoing the warnings we reported on earlier about a coming collapse. Yes, 12 leading market experts warning that Wall Street won’t be able to “fake it” much longer. So for all you optimists who plan to actively invest in 2010 here’s some contrary input to factor into your equation. For a moment, take off your rose-colored glasses and listen to Shiller, Taleb, Faber, Grantham, Soros, Biggs, Stiglitz and others: (More)

Bailout Rage & Financial Reform: Will Meltdown 2012 Finally Drive Wall Street Banks into Bankruptcy? Will Second “Great Depression” Finally Clean Up Wall Street’s Toxic Culture?
by Paul B Farrell, JD, PhD
| Discuss | | 4/14/2010

Another meltdown coming, soon? Yes. Maybe as early as 2012. More bailouts? No lessons were learned in the last one. But new Wall Street bailouts? Fuggetabout it. Not only can’t we afford them, there will be a populist revolution fighting them: All hell will break loose. First: We got the Bush-Cheney-Greenspan dotcom crash. Second, the Bush-Bernanke-Paulson subprime credit meltdown. Third, the coming Obama-Bernanke-Goldman anti-bailouts revolution. Robert Shiller predicted a “third epidemic,” to follow Wall Street’s 2008 meltdown, one that “will spread irrational pessimism and distrust, not exuberance.” It’s coming soon.

Yes, a “revolution.” Rolling Stone’s ever-provocative Matt Taibbi warned of an attack brewing in “The Big Takeover, how Wall Street insiders are using the bailout to stage a revolution.” Wall Street’s arrogant assumption that Main Street will bail them out when they fail again will backfire, with huge unintended consequences, the “Great Depression II.” Wall Street thinks it’s invincible, after avoiding the big one with the $787 billion TARP bailouts and an estimated $23.7 trillion in debt from The Fed and taxpayers. No, not avoided, merely delayed. And the next crash will grow ever bigger the more we delay it by pushing new debt onto future generations.

In “Future Bailouts of America: The Price Tag For Future Bailouts, Not Just Fannie & Freddie”, New York Times columnist Gretchen Mongenson updates ideas we found earlier in books like Barry Ritholtz’  Bailout Nation, which exposes America’s new ”Socialist-Capitalism” a new ideology that “privatizes profits” for Wall Street’s too-political-to-fail banks and leaves “socialized risk” for the taxpayers. Morgenson says: (More)

Wall Street’s “Too-Political-to-Fail” Investment Bankers: “Greed is Very Good!”
by Paul B Farrell, JD, PhD
| Discuss | | 4/8/2010

Gordon Gekko is alive and his motto “greed is good,” rules Wall Street more than ever today. And at the top, the investment bankers are the chairmen of the joint chiefs of the central command in the “War to Control the Investor’s Mind.” Wall Street’s bankers are indeed leading the charge, in full command, using all the psych-ops weapons in the behavioral finance arsenal to maximize the effectiveness of their propaganda and hype machine in the battle to capture and dominate the minds of America’s 95 million Main Street investors.

When I joined Morgan Stanley in the early seventies it was a relatively small “family,” several hundred people who knew each other. But today, things are different. Morgan Stanley now has roughly 60,000 employees worldwide, and like all the other giants, only one thing matters, living up to Gekko‘s motto and getting independently wealthy. How else does an investment bank like Goldman Sachs amass $20 billion for year-end bonuses. Very simple: You use the “Iron Law of Wall Street” to maximize the returns to the million or so insiders in Wall Street’s War Machine, increasing their take by reducing the returns to America’s 95 million average investors. (More)