Thursday, November 19, 2009

Some Scary Comments on CNBC This Morning

I sat down to read the Wall Street Journal with a cup of coffee this morning and was greeted with some truly horrifying remarks on CNBC.

Two people, TARP oversight committee chair Elizabeth Warren and AutoNation CEO Mike Jackson nearly scared me to death with their creative rewriting of last year's financial meltdown and consequential government intervention.

Warren, who is a lawyer by training, not an economist, recalled a non-existent past by claiming full economic revival of the US economy as the TARP's original mission. Though she cited then-Treasury Secretary Hank Paulson's "frozen pipes" comments, regarding the financial sector, Warren asserted, with a straight face and that professorial scowl behind the funny glasses, that this really meant completely returning the economy to a healthy state.

Thus, she implied, her testimony before Congress later today will almost certainly support extending the TARP.

During the discussion with her, current Treasury Secretary Geithner's intentions to extend the slush fund were shown onscreen. Warren sort of punted, only saying the TARP funds should be saved if there weren't 'good ways to spend it.'

My goodness, in what alternate universe does Warren live?

Well, Harvard, I guess. Silly me.

Because no thinking person who is of her age can possibly think any government administration, Republican or Democrat, won't swear that they have 'good ways to spend' a few tens or hundreds of billions of dollars.

Warren then, of course, excoriated the nation's financial institutions for finally coming to their senses, as mentioned by Doug Dachille a few days ago on CNBC, as I described in this post, and returning to more historically prudent lending standards.

To hear Professor Warren, financial institutions are now senselessly hoarding government money, when they should be giving it away to any and all comers.

Weighing in with kindred views was AutoNation's Mike Jackson. A perennial cheerleader for government intervention, Jackson credited the dubious "cash for clunkers" with providing an important economic boost this past summer, and declared that, if not for TARP, the US would still be in a depression, not exiting a recession.

Then Jackson carefully stated that, of course, the economy isn't really out of the woods yet, so we, of course, still need massive government intervention and lots of cheap money.

Neither Warren, nor Jackson, showed the slightest understanding that the US economy cannot return to health so long as the only source of growth is printed government money dispensed at zero interest rates, along with generous government guarantees for any business in danger of failing.

On that point, it was clear that Elizabeth Warren is completely clueless. Jackson is simply behaving as any expedient businessman would, elbowing his way to the trough of free government largess while it lasts, and calling for more whenever possible.

On another note, the CNBC morning program interviewed one of Obama's top financial backers and general good old buddy, John Rogers, of Ariel Investments, to let him talk his funds' investment books.

In a somewhat casual aside, Rogers mentioned something that I found pretty shocking, but not in so scary a manner as the earlier comments about which I wrote above.

Rogers was asked what equities he held, and, in more probing questions, which, if any, technology issues any of his funds had bought.

He replied that they had bought Dell some months ago, when, like many equities, it's price was depressed due to general market conditions, just to ride it back up, as it was presumed to track "the market." In effect, Rogers accidentally revealed a rather clever way that his firm and, I would bet, many other mutual fund groups get paid for effectively investing in an index.

Rogers made it clear that his analysts didn't favor Dell for any specific reason. No, they bought it because it was expected to just track, say, the S&P, on the way back up. If Rogers group had just bought an S&P index fund, investors would howl. It's inappropriate for an active manager to charge fees for putting your money into any sort of passive fund, especially if it is an index vehicle.

But a more clever way of doing the same thing is to just select a small group of equities with betas near 1, or judged to be of sufficient size and quality to reasonably mirror equity index performance. Then the manager can earn fees for essentially passive, defensive moves calculated to simply match the index.

Just goes to show how active you should be in watching the investments of actively-managed mutual funds.

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