Now more than ever we can choose who we listen to.  Why does it seem that investors are not exercising that option?

Burn me once, shame on you, burn me twice, shame on me

Imagine if the "locally owned" restaurant group (in Tucson they call themselves "Tucson Originals) was paying people to write positive reviews on Zagat.com.  You'd had moderate success with these reviews so you didn't really care that the person writing the review was paid to try and help the restaurant group.  You also didn't happen to notice that most of the reviewers that you were listening to NEVER gave a negative review.

You then read a review that is generating a lot of buzz with the headline, "You are seriously missing out if you do not eat at this place!"  You think to yourself, "hmmmm, maybe we should try it."  Unfortunately, something is amiss at the restaurant and you and everyone who ate there that night end up in the hospital for 2-3 months after eating food tainted with the Hepatitis A virus.

While in the hospital, you vow to never trust any of the people on Zagats that recommended this restaurant.  You stick to that belief for a few years until you begin hearing from your friends about some great experiences at some locally owned restaurants they heard about on Zagat.com.  You decide to try one of the recommendations.  After enjoying the meal and not getting sick you decide to go back to using Zagats.  Everything is great for a couple of years........until you and everyone that ate at the same restaurant end up back in the hospital with listeria.  Many of the people spend nearly 3 months there as their bodies fought off the bacteria.  Sadly, some do not make it.

The people in town are outraged.  "How can this happen, not once, but twice in our city?"  The city council calls for an investigation.  They find serious neglect at the Department of Health, they discover that the restaurant group was paying hundreds of people to write positive reviews on Zagats, and they propose laws to prevent this type of outbreak from happening again.

The restaurant group fights the new laws saying that they will ruin the locally owned restaurants and make them uncompetitive.  A new mayor takes over and decides to replace the head of the Department of Health with the supervisor of restaurant inspectors who had been with the Department of Health his entire career.  Many of the chefs from the restaurants, including those that worked for the restaurants that caused the illnesses, begin telling the department of health how they should regulate them.

Time passes without any further illnesses, so the urgency to make changes diminishes and people go back to using Zagats.com, ignoring the source of the glowing reviews.

So why does this not apply to our investments?

Go ahead, keep on burning me

This week there has been a lot of news out about "price targets" from Wall Street banks.  Most of the big banks have been either re-iterating or revising their price targets for the S&P 500.  These are numbers they use to give clients guidance on what type of returns they can expect from the stock market.  With these announcements, the financial media has given a lot of air time to the people making these targets to back them up.  I felt like I was in the Twilight Zone listening to these people.  Was this 1998, 2007, or 2011? 

Corporate earnings have been strong, people are too negative, we shouldn't worry about the financial problems spreading, we aren't going into a recession, if we do go into a recession it will be very mild, the Fed is going to help us out, this is a great buying opportunity, etc, etc, etc.  One person even compared this to 1998.

The two that jumped out to me were the targets from Citigroup and Bank of America -- not so much for what the targets are, but the fact that these two banks were literally saved from extinction by the Federal Reserve and Treasury Department in 2008 -- a year that started with 1500 price targets by these same analysts.  If they had no clue that their own employer was imploding, why are we still listening to them?

By the way, both Citi and BofA have a 1400 price target for the S&P.  For those of you doing the math, that's a 19% rise -- in 3 1/2 months.  What's even more surprising is that the average target of the 13 largest Wall Street firms is actually higher now than it was at the beginning of the year.  Here is a snapshot of where the Wall Street firms think the market is heading:

These firms continue to always offer rosy assessments of the market.  They had absolutely no clue the market would lose 50% not once, but twice in the last ten years.  Yet for some reason we keep listening to them.

Go ahead, pick your punishment for burning us

Equally frustrating this week has been the cries from Wall Street over regulation.  CNBC dedicated 2 hours to the former chairman of Citigroup (the one in charge while Citi accumulated so many toxic assets that it needed to be bailed out).  He told the viewers about how regulation is hurting the economy and that if the government would just let the banks function without regulation they would be able to fix the economy.

There was no mention that deregulation in 1999 that allowed the commercial banks to intermingle with investment banks caused the financial crisis.  Nor did he mention that the reason for all of these regulations is that the banks needed $800B from TARP, another $1.2 Trillion in secret emergency loans, and an additional $2 Trillion of Quantitative Easing because of their mismanagement.  Yet somehow we're supposed to trust them to do the right thing to get the economy going?

Even more aggravating is the head of JP Morgan Chase calling the call for stronger regulation on international banks "unamerican" and "anti-competitive".  Correct me if I'm wrong, but isn't using taxpayer money to bail out the banks that screwed up so badly that they wouldn't have survived without it "unamerican"?  In America, we are supposed to be rewarded for success, which also brings the real possibility that we will suffer if we make mistakes trying to succeed. 

The people calling for less regulation seem to be forgetting that the regulators continue to back down on the rule that requires banks to "mark to market" their assets.  This allows them to carry the loans and investments they made at the peak of the housing bubble at the original cost, not the current market cost.  Marking the assets down to the real market value would cause the banks to take serious hits to their earnings and require them to raise a substantial amount of capital to stay in business.  Every other publicly traded company is required to report the real value of their assets -- except the banks.

I'm all for less regulation, but not when the banks are already allowed to hide what their assets are really worth.  How can we trust a banking system to do the right thing when it has screwed up so badly?  How can we trust the banking system when they fight so hard to hide what their assets are really worth?

You didn't see this coming?  Here's a promotion

Finally, I think it is laughable that so much faith is put on Ben Bernanke of the Federal Reserve and Tim Geithner of the Treasury Department.  We've documented how Dr. Bernanke had NO IDEA how the banking system that he was supposed to be supervising was on the verge of imploding.  Instead of being replaced when his term ended, he was given a second term by President Obama.

Even worse is the promotion of Tim Geithner from New York Fed President to Treasury Secretary.  The New York Fed is responsible for supervising all of the banks in its district.  As the name implies, that includes Wall Street banks.  Given the financial collapse of 2008, it is safe to say that Tim Geithner, a career regulator, had no idea what was happening in the financial system.  His punishment?  A promotion.

What else can we do?

I realize that the President, Fed, Treasury Department, and Wall Street banks are in a tough spot.  I'm not sure that there is anything that could be done to fix the problems we have without causing some pain.  In America today we have gotten to a point where we avoid pain at all costs even if it means pain for future generations.  That would make any decisions that are made to fix this mess widely unpopular. 

We shouldn't expect the people that had no idea the market was going to collapse to warn us when it is going to collapse again.

We shouldn't expect the executives at the banks that got us into this mess to have any idea of how to prevent it from happening again or how to fix our problems.

We shouldn't expect the same people in charge before the collapse to be able to actually fix it.

People often ask me what would it take for me to be optimistic about the economy and the market.  The answer is simple -- show me that the people that caused this mess are going to be punished, not rewarded.  Replace all of the people (both the bank executives and the government officials) that failed to prevent the collapse.  Finally, put in real reforms, regardless of short-term consequences, that gets rid of the toxic debt (not at the cost of future generations) and gives us a strong base to build on.

We'd rather deal with each issue individually

Unfortunately, the solutions proposed thus far both in the U.S. since 2007 and now in Europe since 2010 only deal with the immediate problem.  There are no long-term solutions out there that have been proposed.  This is a balance sheet recession and the only way to fix the balance sheet is to remove debt, not add more of it.

Yesterday I pointed out all the news that didn't really matter in the big picture.  The market continued that theme throughout the day as it rallied first on news that Russia is in talks to purchase troubled European debt, followed by rumors that Brazil is considering doing the same.  Today the European markets have rallied off of some big losses (along with the S&P futures) following news that the French president told his cabinet they would do "everything possible" to save Greece.  Of course, we already knew that most of Europe has chosen to go down with the ship.

What else would you expect when you have the same people in charge that landed you in the hospital?  The more they focus on the short-term, the bigger the pain will be when they are forced to deal with the long-term issues.

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