Recently, I saw a chart by PCW that suggested research budgets are down roughly 50% since 2009 when the Dow Jones industrial average was 7000. (I guess my old business at AFCO was doing good relatively and I should feel proud.)
Today the DJIA is roughly 3x that level and while intuition tells us Wall Street should be doing great, that is not the reality. A combination of regulatory relief for ETF’s, electronic trading, flash traders and the too big to regulate has crushed competition. Big banks fund the hedge funds and are the gatekeepers of mutual funds so the system is rigged to limit competition for the commission dollar. The middle of the market has suffered the worst owing to bank control over hedge funds. Gone are the days where Bankers, Traders, Brokers and Analysts can venture out with good ideas and make industries great again. It is a system in which the elites and their regulatory minions benefit the oligarch, the system today is far from free and egalitarian, we know that.
Sure Trump and Congress talk a good game but like in the case of Healthcare and Taxes, Congress is paralyzed by ego, partisanship, and political dogma’s designed to support the Robber Barron’s of today. The Democrat and the Republican seeming have zero interest in representing constituents. If you do not fund million dollar PACS you are a Communist trouble maker or a Fascist so says the media. I would also argue the PACS are not really interested in their constituents otherwise they would seek common ground, solve problems and not resurrect 100-year-old political fights on FOX and CNN. This how the status quo is preserved in the age of the billion dollar hippie.
We also read everywhere hedge funds are supposedly on top of the value chain, they are in the business of generating Alpha. Well hedge funds are underperforming the S&P 500. Sometimes investors should expect Hedge Fund and active manager under performance but not for years at a time. Secular under performance speaks to failure of market structure integrity. They say hedge funds are having a good year they are up 7% versus the S&P 500’s 12%. The performance is sad signpost and says there needs to be change, a portfolio holding T bills and the S&P 500 index can be doing better with less risk. As a group they may not be on the efficient portfolios frontier, therefore sound economic theory says they should not exist never the less manage $3 trillion in assets.
While operating pressures and regulatory pressure may have limited spending on research and high value services this dichotomy in the market reminds me of Auto Ad spending in 2009. There was a recession in 2009 and the Big Auto Companies did not spend on Advertising and R&D except for Volkswagen. 2 out of the Big 3 filed for bankruptcy by 2010. Industry Unit sales were down roughly 45% from the peak at 9 million versus 17 million today. In 2009 about 3 million more cars were scrapped, crushed and sent to China then were sold in the US. Pulling back on R&D and Advertising hurt virtually every Auto Company except Volkswagen, they gained market share. VW held gains even today despite selling EPA Cheating global warming engines. Research is a lot like Advertising managers know some of it works and they have a hard time quantifying the benefit on a case by case basis.
I suggest to Wall Street now is not the time to act like GM and listen to the consultants but now is the time to be like Volkswagen and invest in the integrity of your portfolios and fight to make Wall Street Great Again.
PS. If do not like my views let’s talk, or prove me wrong but do not call me names we need a country of grown ups.
Ten X Research 