Here’s Why Investors Don’t Trust Anyone in Power

Rodney JohnsonDon’t lie, cheat, or steal. Those seem like pretty good rules to live by. Most of us learned these values as children. We watched our parents and, when we strayed from the straight and narrow, suffered through a variety of consequences. The message doesn’t get through to everyone, of course, so we still need prisons for criminals.

But there’s a group of people who exist in the gray area, that shadowy space between upstanding citizens and outright thieves.

They know the difference between right and wrong, which is clear from their pleas when they’re caught. But it’s all an act. Their intent is to mislead and betray. We only see their true colors after they’ve affected our lives.

So I’ve got a suggestion: shock collars. I don’t know how the technology would work – maybe you’d hook a lie detector up to some electrodes? – but the hope is that liars will get a jolt when they open their mouths, and the rest of us might be spared some pain.

We can start with the finance officials of Puerto Rico.

In March of 2014, the Commonwealth issued $3.5 billion worth of bonds. This was a month after Moody’s cut the Island’s credit rating to junk status. At that point, Puerto Rico had no feasible way to repay the debt, which means their financial officials knew the buyers would most likely get stiffed. But they issued the bonds anyway.

To top it off, the bonds are “general obligations” of the Commonwealth of Puerto Rico. By constitution (not law, mind you, but actually written in their constitution), bondholders are to be paid before anyone else. They’re supposed to get their money before the government pays rent, salaries, pensions, utilities, etc., which is supposed to make the bonds very secure.

And yet, in the first week of April, the Puerto Rican legislature passed a law allowing the governor to not make any bond payments. It doesn’t matter that the law’s unconstitutional. They passed it anyway.

What will bondholders do? Sue in Puerto Rican court? How would that work out?

Clearly, all of these people need shock collars.

Then there are bankers. This wonderful professional class brought us the financial crisis, insisting they had no idea that their junk-stuffed, asset-backed securities and unaccountable derivatives posed a financial risk. In response to the crisis, we got a lot of new regulations, including a requirement that long-term hedging contracts have triple the collateral required of short-term contracts.

That sounds reasonable. However, if banks must hold more collateral, then it reduces their investable capital. The obvious answer is to engage in fewer long-term hedging contracts, but bankers have a better solution.

They’ve set up long-term contracts so that they settle every day, even though they don’t expire for many years. This by-passes the collateral requirement, and jacks up the risk of the contract.

I think we could fit all of these people with shock collars.

And we can’t leave out central bankers. Remember the Greek bailouts, where the European Central Bank, the IMF, and the European Commission (the Troika) were going to guide Greece through a voluntary process where everyone got paid?

That was so 2010. By 2012, no one could keep up the lie. It was obvious that someone, somewhere was going to take a hit. So the Troika developed the terms Private Sector Involvement (PSI) and Official Sector Involvement (OSI) to separate investors who would be forced to take losses from those who would get all their money back.

If you were a run-of-the-mill guy that happened to own Greek bonds, you took a hit. If you were the German or French central bank, well, your maturity might be extended, but you’d get all your cash.

Or not.

Leaked phone records of a recent conversation between IMF bankers revealed their intent to push losses on the OSI. If only they can find a crisis big enough, maybe they could even get this group to voluntarily agree to the cuts.

It was obvious from the beginning that Greece would default, and there’s still more to go. They’re broke. It doesn’t matter if the IMF calls the process a restructuring, a workout, or whatever. If you bought their bonds, which are a promise to pay specific amounts on specific days, and they don’t make good, then they default. Period.

There’s a reason we as investors and consumers don’t trust anyone in power. They’ve proven repeatedly that for them, lying, cheating, and stealing are simply tools to use when convenient, not behaviors to avoid.

In such an environment, how does anyone invest with confidence? The saddening answer is that we don’t. We invest with trepidation, doing as much research as possible, and diligently watch what we own.

When Puerto Rico issued their bonds in March of 2014, I recorded a video imploring investors to stay away. It was clear to me and many others that Island officials were lying through their teeth. But not every instance is so obvious. Shock collars would really help.

The problem is where to draw the line.

Do we put shock collars on customer service representatives who ask: “Is there anything else I can help you with,” when they never solved your original problem? What about car dealerships and journalists?

And then there is the big category that I’ve completely avoided… politics. Unfortunately, if we put a shock collar on everyone in this category, I’m afraid the halls of government would be empty. I’m starting to wonder if that would be a bad thing.

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Rodney

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Categories: Bonds

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.