Paul Farrell is one of my favorite financial writers. Not that I always agree with everything he says, although a lot of it is good, but because he’s not afraid to stand apart from the flock of institutional and media talking heads and tell it like he sees it.
As anyone who reads Paul knows, he’s not exactly sanguine about the future prospects for the American economy. Actually, he believes we’re headed for disaster – financial armageddon. Here’s 2 articles he’s written in the last few months. I’ll cover others in another post.
Anyone who still owns mutual funds after reading this beauty deserves to retire poor. It’s already a well-published fact that most mutual funds under-perform the market, so why do so many people keep Fidelity Investments in business? Laziness and ignorance. After management fees and trading costs, your chances of beating an index fund are slim.
Management fees are the ridiculously high amounts of money you have to pay some sharpshooter armed with a Wharton MBA to buy and sell stock at ever increasing rates in a furious attempt to make more money than the next guy who’s buying and selling stock at ever increasing rates. But that’s not the worst part.
The brokerage houses and market makers get paid billions of dollars in transaction costs when the fund manager “churns” your portfolio. So there is a conflict of interest that makes them rich and you poor. “. . . the total costs for you, if you’re an investor in an actively managed fund, is 3%, leaving you with just 4% on a 7% return. Yes, the casino’s operators are skimming off almost a third of your mutual fund to pay themselves some handsome salaries.”
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It gets worse. Taxes. ” . . . it’s even worse on an after-tax basis: “Because of the shocking tax inefficiency” the fund casino’s average turnover is often greater than 100% for an actively managed stock fund portfolio. So you deduct another 2%, says Bogle. When you compare index funds with managed funds “the real annual return drops to 8.9% for the index fund and to 5.1% for the equity fund,” almost half as much.”
Believe it or not, it gets even worse. When you factor in the effects of compounding over a 20 year period, the average actively managed mutual fund earns its investors only about 38% of the return of a passively managed index fund. Ouch. Does anyone know if McDonalds is hiring? Grandma needs a job.
Farrell quotes then Illinois Sen. Peter Fitzgerald: “The mutual fund industry is now the world’s largest skimming operation, a $7 trillion trough from which fund managers, brokers and other insiders are steadily siphoning off an excessive slice of the nation’s household, college and retirement savings.”
So why are you still invested in actively managed mutual funds, where finding a winner is like playing roulette at a casino? Is that really where your retirement money and funding for your children’s education should be?
One of Farrell’s darkest articles, in which he discusses the work of Simon Johnson, former IMF chief economist, and Peter Boone. The economic forces that brought you the global financial crisis of 2009 are just getting warmed up. Here he summarizes and quotes from one of their books:
Earlier, smaller emerging nations were at risk of collapsing. The threat has now shifted to developed countries, their financial institutions, government finances, and economic growth prospects are at great risk: And that world has “created enormous, complex financial structures that can inflict tragic consequences with failure and yet are inherently difficult to regulate and control … there are more and worse crises to come.”
The problem is that government and multinational corporations have created a symbiotic relationship in which corruption grows unchecked, which “will lead to another round of shocks, collapses, and bailouts.” More bailouts of corporations with the American taxpayer footing the bill, and more stock market collapses that wipe out the life savings of millions.
The source of the problem is out-of-control government borrowing and spending, and the shell-game of monetary stimulus the Fed has convinced everyone is a solution to something rather than the cause of economic failure.
America’s “financial infrastructure makes it possible to borrow a great deal relative to the size of an economy … far more than is sustainable relative to growth prospects.”
Worse, “the expectation of bailouts has become built into the system,” from Treasury and the Fed. Unfortunately, what’s owed is far “more than can ultimately be paid,” and growing fast. . . Banks that are ‘too big to fail’ benefit from giant, hidden and very dangerous government subsidies.
If you think Obama is going to rescue us from ourselves, it’s not going to happen. He couldn’t even if he wanted because the system is far too corrupt and larger than the small circle of power he wields. And that’s not counting his own intentional complicity with the system. “Politicians are obsessed with power driven by greed, selfishness and denial.”
“. . . our system has become “crisis-prone” a “financial and regulatory nightmare” posing “great dangers to global financial stability . . . it is too late.” Yes, too late. World markets and the global economy must first collapse.”
As I wrote in Stock Market Warning, there are signs that the economy is slowing. Despite the monthly tout by big media that China is recovering and Europe is fixed, the truth is that the global economy will get worse before it gets better. How much worse remains to be seen.
Expect a politically manipulated stock market rally through the holiday season when retailers make most of their money, but after that all bets are off.
On the Monday, August 20 session of Infowars Live, Alex Jones blasts through important news items, including information uncovered by an FOIA request revealing the Department of Homeland Security’s watchful eye is fixed squarely on Alex, Infowars sto…
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