ETFS - The Next Wall Street Scam?

March 22,2009

You have to give the Wall Street thugs their due. Whenever they seem to have plunged all of us into bankruptcy, they just come up with something new to drain the last few drops of liquidity.

I remember the 90’s. I got a truly unbelievable call from my broker at one of the “big” name brand investment banks. He had a story that was too good to be true. He had an investment, a fund that was being put together for very special clients like me, that was just flat guaranteed. It seems that they had bought an insurance policy to insure against the investment going down. So if it went up, we collected the profit. If it went down, we simply made a claim against the insurance policy.

I remember this discussion vividly, especially how crestfallen he was when I rejected the idea. My words to him were “find out how to short that insurance company and I’ll buy into that.” Shorting, as you undoubtedly know, means you think the price will go down.

Turns out, of course, that there was no insurance company to short, no insurance policy, and it wasn’t appropriate for small investors like me to worry ourselves about such things.  That was my introduction to credit default swaps, the “financial weapons of mass destruction” as Warren Buffet described it. The non-insurance policy insurance policy was attached to a large, reputable insurance group to lend credibility to the scam. The Credit Modernization Act of 1999, signed by President Clinton, assured that the regulators would be shown the door. The head of the Chicago commodities board quit over it.

Now that the scam has come out of the closet, with some estimates as high as $600 Trillion, (yes that was a “T”) we can all have a good laugh and start over. Provided of course that they print enough money to make us think they is just another, predictable downturn in keeping with the gospel of supply side theory.

Now there is a new"investment" called ETFs. Again, I learned this from my own personal experience. ETFs are funds that “seek to reflect the performance, less expenses,” of some commodity. This way you invest in the fund instead of taking the massive, nearly incomprehensible risks of a futures contract.  You like oil, you can buy the ETF for oil and it’s almost like buying the real thing unless your car runs out of gas at which point it is utterly useless. You get the best of both worlds because you get to invest in a commodity but there is no expiration period like in futures and you can trade it like a stock.

The key word here, of course, is “seek.” In this case seek and ye shall not find. Knowing none the better I had the Wall Street brain fart and decided to buy in.

Based on the advisors that I read and trust, this looked like a pretty good investment vehicle to me. Oil, which I fully believed would rebound, was in the proverbial toilet, trading in the $30 to $40 dollar range after peaking at $140 just a few months before. Gold, one of the few investments where you have an asset without a commensurate liability, was in the doldrums trading water. Jim Rogers was pounding the table that silver was a better investment than gold.

So what better way to cherry pick the obvious over-reaction of the market than to go long on the ETFs for these commodities. Long, as you must surely know, means you are expecting the value to go up. What could go wrong?

First, let me dazzle you with my brilliance. On the day that I bought the oil ETF, just under four months ago, the underlying commodity finished the day at $35.30. Today it was $51.00. That is a $15.70 increase in just under four months a 44% increase. Annualized, it comes out to about a 144% gain.

Gold was $897 on the day I bought the gold ETF which is just over two months ago . Today its $952.60.  Annualized, it comes out to just under 75%. Silver didn’t fare as well. It was $13.00 when I bought in just over a month ago and only $13.60 right now so I’m only up $0.60. This translates to 55% per year.

Now let me tell you about the Lamborghini and villa on the French Riviera that I am about to buy. Provided I get a bailout or go to work for Goldman Saks.

According to my online broker, having ditched the high priced guys, I would have come out better, much better, with the mattress. Gold, having gone up at the staggering pace of 75% per year ince then, has only yielded a profit in the ETF of 5.25%. And that’s one of the good ones!

Silver popped up at a 55% pace – but I’m showing a gain of 13.81 %. Not terrible, but not at all in accord with the promised land I had believed in at the outset.

Yet the big winner was oil so it will all even itself out. Or so I thought. My oil ETF, my big winner so far with a monster 144% annualized return, is down 12.06%. You read that right – DOWN. If this “seeks” to reflect the performance of actual oil, it fails. - miserably.  They all fail big time. While it looks a little better to see green numbers than red numbers, the risks have not been rewarded on a single one of these things. I have guessed right, put my money down, waited for the future to unfold just as I predicted it would, and got screwed.

Oil is now at its highest point  since I bought in.  It’s been setting new highs almost daily. So how in the name of all things good and holy, can the ETF be DOWN 12%?  Let’s face it – 12% is a pretty big loss to swallow when things are going south. Yet it’s hard to believe that, the one thing that has skyrocketed forward is still a loser. Thank God it didn’t go up any more or I could be bankrupt I guess.

From the standpoint of the underlying commodity I should be seeing fantastic returns in each of these. Yet, overall, I am barely breaking even. If that’s the case, then who are the winners? What pocket did my money go into? If you are doing absolutely everything right on a risky investment that promises great returns for the lucky ones, how do you come away with less money than you started with?

There will be plenty of market double speak. The EBIDA of the P/E was misaligned in the short yield curve or some similar nonsense that essentially means “screw you buddy.  We’ve got your money and we aren’t giving it back.”

I Am Ashamed to Be a Boomer

The post World War II baby boom generation began its maturation as an exceptional generation. The results were both philosophical and pragmatic. The search was simply for a way to have a better life – one with personal freedom and spiritual growth and without war or prejudice. On the pragmatic side we had the Civil Rights Act and integration, the Moon landing, ending the Vietnam war, expanding environmental awareness and the seeds of a burgeoning awareness of the oppression of women.  In short, people cared about other people, the quality of life and not just material wealth.

For no discernible reason, we turned our back on our own promise and became the fattest, most selfish, materialistic generation perhaps ever.  We permitted the dumbest, most atavistic conventional members of our generation to become the leaders  - essentially the people who weren’t part of the progress became the rulers and leaders of everyone else.  Wasn’t it Voltaire that said “the problem with the world is that the dunce is cocksure while the intelligent person is full of doubt.”  (I actually think he said the “intelligent man” which is a small indication of our early success.)

These faux leaders were essentially the adversaries of the progress that was contemplated.  We sat silent while they took control of the media, the government, the press, and virtually ever other institution. We were busy buying new BMW’s, $4.00 coffee and $3,500 purses to notice that they (and we) were rewriting our legacy, essentially turning that early promise into a caricatured stoned out joke.

We have now permitted a government that is essentially dismantling the wisdom of the country’s forefathers.  It has been widely reported that President George W. Bush referred to the Constitution of the United States as “just a goddamned piece of paper.” He has modeled his administration much more on the model of the Soviet Union than Thomas Jefferson – torture, domestic spying, shredding rights such as right to trial, right to confront your accusers, protections against unreasonable searches,  shredding separation of Church and state and giving short shrift to the other branches of government.

It is a government seeking unbridled federal power while advertising itself as being anti government and we are just complacent enough to let it slide. We now have a KGB equivalent, surveillance of citizens without regard to law, gulag type prison holding people for years without counsel or trial and use of torture including the tortured re-definition of the word “torture.” “People say its like George Orwell’s 1984 but it reminds me more of Leonid Breshniv and Nikita Kruschev – power is tightly controlled by a small group that seeks to serve the elite and keep the rank and file docile, enforced by huge increases in domestic policing and surveillance, use of propaganda and fear,  and maintaining a fierce and aggressive military force.

They bandy the word “freedom” as a favorite bumper sticker but they absolutely hate individual freedom. The want to protect us from our own choice so we have rules and regulations governing everything.  In my state, famous for its court ruling that “a man can beat his wife with a stick no bigger than his thumb”  now requires six months  of coursework and  a license before you can give someone else a massage.

The war on marijuana and forfeiture of assets are a cash cow business for government agencies.  Forfeiture laws have filled the Courts with Lewis Carroll sounding cases such as “United States of America versus 1997 Ford Bronco” or United States of America versus 7,512 Dollars.” Many local law enforcement agencies set up roadblocks simply to search vehicles for fine producing infractions, undercover agent prostitutes lure the lonely, and contrived internet seductions and increase the number of stings.  It doesn’t stop there or anywhere near there. Doctors specializing in pain reduction are being searched and prosecuted for lawfully prescribing lawful medications. Bank tellers are responsible, on pain of jail time, to report when a customer deposits $10,000 in two or more transactions in a day.

The Democrats aren’t exempt either. They have pushed to maintain false truisms that promote programs of imbalance and therefore injustice.  They elevated political correctness to a crime punishable by law with so called “hate crimes”. Please show me the loving crimes. They have promoted anti-male myths to appease the discredited portion of the women’s movement.  For some time it was gospel among feminists that one quarter of all college co-eds are raped during their four years.  No one seriously believes that anymore but there was a conspiracy of silence surrounding this absurdity when it was making the rounds. The same is true in the oft cited differences in pay and promotions for women. The empirical studies do not support the contentions.

Schools have become indoctrination camps for political correctness. Educators have become enforcement officers. The brain dead zero tolerance policy rears its head with some absurdity about once a month.  Usually it starts with the internet and is then picked up by the press. Children are expelled for nail clippers, Tylenol and prescription medicines and indicted for playful slaps on the bottom. Cheerleaders are expelled for “insubordination” when they spell out the letters of their mascot on the backs of their bloomers. No one seems to care that the suspended high school senior cheerleader struggled to read her suspension notice.

Of course no one treated us that way. As children virtually all of us were free to play outside until dark.  We could bring an aspirin to school if we had a headache. There were no lock downs, pat downs, or searches in my elementary school. If an adult stranger stopped to ask for directions, no one started looking for a safe house. There were no helmet laws for bicycles, leash laws, restrictions as to what color our houses were painted or what type of mailbox we had to have.   Teenagers were not demonized and given long prison sentences for having sex with other teenagers. By my count, my entire junior year high school class should now be registered as sex offenders.

By not protecting us from imagined dangers our parents gave us a great gift. They allowed us to grow. Through our bumps and bruises, close calls, and missteps we were allowed to learn. Then we became the most rigid, controlling, paranoid group of parents the world has ever known.

Now, whether adult or not, you are not allowed to alleviate your pain with medical marijuana even if your state has approved it and a licensed, trained medical doctor has prescribed it. You may not end your suffering by taking your own life with the assistance of medical personnel.  States hard sell their lotteries while outlawing gambling.  The list could go on for days.  

Every generation has some boogeyman that requires us to give up our liberties – hippies and war protesters in the 60’s, communism in the 50’s, U. S. citizens that looked Japanese in the forties, and a black man traveling across state lines with a white women earlier. Our generation has paraded out a litany of reasons why we should roll over on our constitutional rights – the war on drugs, child porn, internet kidnapping, and the granddaddy of them all, terrorism. We are told that we need them to protect us from ourselves. And we are being taxed to support  it.

The essence of the genius of Madison, Jefferson, Washington, Franklin, et. al. was that they created a governmental system that held unbridled power in check. It effectively transferred power from Kings and Lords to farmers and teachers. Nothing like it had ever been seen and It worked during their horse and buggy days. Although our forefathers never heard of cell phones, airline travel, television, automobiles, shopping malls or suburbs, nothing has proved to be a better system since.  The brilliance of our system of government is that it intends to give all of us safety from the typical brutality and tyranny of governments. It is for precisely those reasons that those entrenched in power and wealth tirelessly try to combat its ideas.

They do that primarily by keeping us fat, dumb and happy. They persuaded us to exchange the Bill of Rights for entertainment, shopping malls, frequent flyer miles, sporting events, celebrities, and  sitcoms. When their power is threatened, as the forefathers arranged every four years, they smugly sell us their chosen candidate with lies, sloganeering, and sound bites. The media doesn’t follow campaigns - it leads them. They determine who they want early on and put all the good press around their candidate and mock, ridicule or simply ignore the rest of the field.

How many of us bothered to learn that Al Gore never said he invented the internet, virtually all studies show that marijuana is not a gateway drug but alcohol is, orthat Saddam and Bin Laden hated each other, Harold Dean’s scream seemed crazy because sound engineers removed the crowd noise that caused him to shout over the din, and that the picture of John Kerry together with Jane Fonda was a photo shopped fraud,

How many of us did anything at all about it?

The results of this are certainly predictable. If the dumbest rise to the stop, the results are going to be dumb. We have used up the oil, heated the globe, debased the currency, polluted and misused our water and air, and run up national debts like a third world dictator. We have left a legacy for our children that is only slightly short of calamity. People who dare suggest that maybe this wasn’t the wisest course are immediately derided as kooks, fringe groups, and all of the leadership quickly persuades the docile boomers that such people are really not acceptable.

The model for maintaining this control was perfected by the tobacco companies, many of which come from my state. First you deny the existence of the issue. When that begins to run out you invent an imaginary controversy over the issue. Then you recruit credentialed experts who are willing to sell themselves. Then you populate the media and insure that they carry your message through paid advertising, commentary and carefully placed press releases about new reports. If you can’t change the truth, you can at least forestall it.

But Winston Churchill spoke about truth. He said “you can deny it, you can deride it, you can coax and cajole it, but in the end, there it is.” We are now in the period of “there it is.”

Maybe we thought we could sling shot our indulgence until sometime far in the future. Maybe we really believed the hype that everything was getting better and better all the time. Or maybe we just chose the most selfish, self serving options at each turn with little or no regard for our own progeny.

What a generation. Now let’s see if we can rise to the challenge that we have created.