Wall Street Snake Oil

I'm sure that movie buffs are familiar with the snake oil salesman character which appeared in many Western films. He was a “doctor” with dubious credentials that traveled by covered wagon from town to town. The fast-talking salesman would sell “medicine”, such as snake oil, using lots of marketing hype and bogus “evidence.”

In order to enhance sales, the snake oil salesman would also always have an accomplice in the crowd (a shill) who would attest to the marvelous beneficial effects of the snake oil. The snake oil salesman would, of course, attempt to leave town before the swindle was discovered.

This practice became known as grifting and its practitioners grifters. Fast forward more than a hundred years and we still have snake oil salesmen who try to sell the public something of no real value. Such characters abound on Wall Street and, like their brethren of the Old West, they usually attempt to “leave town” before the swindle is discovered with millions of dollars from bonuses, etc..

A recent example was that terrific grifter, Bernie Madoff. He sold lots of bottles of snake oil promising investors smooth, steady returns year after year. He sold these bottles with the help of his shills – the feeder funds – who promised their investors that to keep their portfolios healthy they needed a dose of Bernie's “medicine”.

For another example of grifting, just look at all of the complex products that Wall Street sold around the world as “safe” investments without anyone being concerned about the risks involved with many of the securities contained within the products.

That scenario reminds me of a Three Stooges short where Moe, Larry, Curly were trying to sell bottles of medicine. Curly and Larry asked Moe, “What is this stuff used for?” Moe replies, “You want to know what this stuff is for?” Curly and Larry say yes. As Moe slaps them, he says “It's for SALE!” That sure sounds like a Wall Street sales meeting to me.

Wall Street Snake Oil Salesmen

People have to realize that Wall Street firms rarely have the best interests of their clients at heart. If anyone has some spare time, they may want to peruse a new book by John Kay of the Financial Times called The Long and the Short of It. Mr. Kay thinks that the financial world is greedy, cynical and self-interested. Gee, I wonder how long Mr. Kay has known John Thain?

Mr. Kay goes on to say in his book that individual investors should avoid most “professionals” and manage their own money. He has several good reasons for this. Mr. Kay points out that professional money managers need to make money off of your investments, whether you make money from the investments or not. Just think of all the fees paid out by investors to “professional” money managers in 2008, only to have these “professionals” lose a large chunk of their money for them.

Another reason that Mr. Kay thinks that individual investors can do a better job of managing their own money rather than “professional” money managers is that the individual can focus on long-term returns and absolute returns, not “relative” returns. Here's a direct quote from Mr. Kay's book - “The major risk a financial advisor runs is not the risk that his clients do badly, but the risk that his clients do worse than other people”, meaning other advisors' clients.

So if a person goes to their financial advisor and says “hey, I lost 30% last year!” their advisor will say, “Yes, but you outperformed the averages!” The emphasis of “professional” money managers is on relative performance, not on absolute performance.

As Mr. Kay also points out, Wall Street “professionals” think only in the short-term. Their primary goal is to beat the “benchmark” on a quarterly basis. If the “benchmark” is negative 30 per cent, Wall Street money managers are very pleased to have clients' portfolios return a negative 20 per cent. That would mean that they are a “star” in the Wall Street universe.

Unfortunately, this type of Wall Street “outperformance” can be very damaging to a client's long-term portfolio, such as a retirement fund. But such concerns really don't matter to Wall Street “professionals”. Where your portfolio stands in 5 or 10 years doesn't cross their radar screen.

I want to again emphasize another point about most Wall Street professionals who appear quite often on CNBC air. Most of these Wall Street people do not think for themselves, or think outside the box. Most of the guests on CNBC air simply run within the supposed safety of the “herd”.

Professor Richard Sylla, financial historian at New York University's Stern School of Business, says that Wall Street analysts and money managers have little incentive to produce anything that deviates significantly outside of the consensus.

Professor Sylla says, “They reinforce each other. That's the only way they keep themselves off the hook.” In other words, Wall Street money managers have their views skewed by one thing – self-preservation. If the money managers stay inside the safety of the “herd”, then their cushy jobs will be safe. Whether their clients make any money is well down on their list of concerns.

I did laugh when I saw one humorous line from Mr. Kay's book which was in agreement with my contrarian instincts. Mr. Kay said, “The best way to use the expertise of the financial services industry is to do the opposite of what they recommend”.

The Latest Bottle of Snake Oil

This brings me to the latest bottle of snake oil that the “doctors” on Wall Street, with dubious credentials, are selling – deflation. The deflation trade has become an extremely crowded trade. This trade will probably become even more crowded over the next few months as government figures will come out showing deflation.

This will be the bogus “evidence” that the Wall Street grifters will be pointing toward. The shills on CNBC will be telling everyone “Yes, deflation is here and will be here for a long time. Step right up, pardner, and buy these wonderful zero per cent Treasuries! It will lead to healthy portfolios.” Please do not be suckered by Wall Street's short-term thinking shills, who never look ahead more than three months.

People that want to ride along with the deflation “herd” should take a really hard look at what actual deflationary expectations Wall Street has priced into the Treasury market. According to the Financial Times, the Treasury's inflation protected securities (TIPS) market suggests 4 per cent deflation this year and next, with inflation barely returning in 10 years, and also very little inflation for the following two decades.

This is staggering – the Wall Street “herd” is expecting our country to be wandering in the deflationary desert for the next 30 years! This did not happen even during the Great Depression. Anyone believing this delusional scenario deserves to lose their money to Wall Street, just the same as people who bought snake oil from a “grifter” in the Old West.

For contrarian investors, while the Wall Street “herd” is wandering in the deflationary desert, this scenario should lead them to buying TIPS (TIP) over the course of the next few months. Where else can an investor get a 4.5 per cent risk-free, real yield?

Don't Become a Victim of Grifting.

Disclosure: No positions

Comments

[Prudent Man...:]

How was the epitome of peddling "snake oil" missed, Goldman Sacher. They constructed incomprehensible, worthless securities and derivatives, peddled them to their institutional clients, then went short. No conflicts of interest here. No violations of the Law of Agency. No violation of fiduciary responsibility. No prosecution because they own Congress and the Administrations and have their people placed in powerful political executive positions.

I know that other financial institutions have done the same thing but not on the scale of the Sacher. No firm has placed so many employees in such high offices of government without even Congress' hearings or consent because they don't want the conflicts aired in public.

Jan 29 10:48 AM

[E Thomas St.:]

TIP isn't paying a dividend at the moment and I haven't seen any news that they will. IPE is very thinly traded and could be shut down. The irony of decrying snake oil here.

Jan 30 02:22 AM

[Studebaker:]

I agree with this. True, we are in a deflationary environment-for now. But surely, with all of this debt and money being issued, inflation will come back with a vengence. The 64 Trillion dollar question is when. Will it be 6 months? 1 year, two years, three years? That is what the markets are really asking, and nobody knows.

Jan 30 08:13 AM

[Tim Miles:]

After Madoff, who will trust anyone on Wall Strett?

Jan 30 09:27 AM

[SivBum:]

Deflation? Yes, but only after a huge bubble in commodities and housing prices. Not so when normalize data over 5 years.


On Jan 30 08:13 AM Studebaker wrote:

> I agree with this. True, we are in a deflationary environment-for
> now. But surely, with all of this debt and money being issued, inflation
> will come back with a vengence. The 64 Trillion dollar question is
> when. Will it be 6 months? 1 year, two years, three years? That is
> what the markets are really asking, and nobody knows.

Jan 30 11:19 AM

[Tony Daltorio:]

In my article specifically, I did not recommend buying the ETFs. I recommend investors buy actual TIPS bonds from Uncle Sam. The TIP ETF symbol was added after I wrote the article.


On Jan 30 02:22 AM E Thomas St. wrote:

> TIP isn't paying a dividend at the moment and I haven't seen any
> news that they will. IPE is very thinly traded and could be shut
> down. The irony of decrying snake oil here.

Jan 30 01:38 PM

[Tony Daltorio:]

You are absolutely correct about Goldman! What this country needs is to have no future Treasury secretaries from Goldman Sachs.


On Jan 29 10:48 AM PrudentMan, CFA wrote:

> How was the epitome of peddling "snake oil" missed, Goldman Sacher.
> They constructed incomprehensible, worthless securities and derivatives,
> peddled them to their institutional clients, then went short. No
> conflicts of interest here. No violations of the Law of Agency. No
> violation of fiduciary responsibility. No prosecution because they
> own Congress and the Administrations and have their people placed
> in powerful political executive positions.
>
> I know that other financial institutions have done the same thing
> but not on the scale of the Sacher. No firm has placed so many employees
> in such high offices of government without even Congress' hearings
> or consent because they don't want the conflicts aired in public.

Jan 30 01:54 PM