The conscience of a mutual-fund manager

“Upon reflection it doesn’t take long to realize that we were living for more than two decades in the Age of Decadence. This decadence was so prevalent that everyone from the government down to the regular citizen was an accomplice. During this period we saw America continually make the wrong decisions, lose its industrial might, damage its national balance sheet, and erode the reserve status of its currency.”

This could have passed for a stump speech by an aspiring politician sharpening his/her rhetorical skills for November. Instead it comes from the opening paragraph to the annual report for a mutual fund. The private Swiss bank Julius Baer is more likely to make the headlines these days because its role in shutting down the controversial Wikileaks website than any flourish with prose. Yet a quick peek at the report covering the period ending 10/31/07 reveals a different side of the culture.

Mutual fund reports and statements are invariably written in a dry, legalistic language designed with only one purpose in mind: minimizing liability to the company from a litigation-happy client who is looking for a scapegoat to blame after losing their shirt on trading straddle options on the Zimbabwe stock exchange. Disclaimers about past performance not being an indication of future results are everywhere, as are doom-and-gloom, danger-Will-Robinson caveat abouts the risks of non-diversification, short-term fluctations, exposure to emerging markets and the health hazards of consuming trans-fats. At least one section of the Julius-Baer report is a far cry from this content-free boilerplate:

“We also created structural imbalances and excesses in our economy that led to one bubble then another—the least painful way to contain one bubble is to create another; hence postponing the day of reckoning. In this period, we made useless financiers fly-by-night billionaires, destroyed most American’s living standards by depressing their wages and sinking the dollar against most currencies known to man—with few exceptions such as the Zimbabwe dollar. ”

Such moral outrage and indignation against incompetent fiscal policy and income inequity can’t be a very common sentiment in the financial sector. Penned by Rudolph-Riad Younes, long-time manager for the successful International Equity Fund, ticker symbol BJBIX, now closed to new investors, these words carry a strange sense of gravity more appropriate to an oped column than an announcement of financial results. (Full disclosure: this blogger owns shares in the fund.) It only gets better as Younes takes aim at other sacred cows:

“The Fed has shirked many of its responsibilities: by allowing asset bubbles to form unfettered; by maintaining ultra-lax monetary policies; by neglecting its regulatory oversight authority; and, by succumbing easily to the faintest political pressure. […]
The rampant decadence at the top trickled, as expected, all the way to the bottom resulting in two major bubbles while laying the foundation for future ones.” 

What follows are brief retrospectives on the tech bubble and the more recent housing bubble. One of the most interesting arguments is in the section labelled “The Cardinal Sin: Believing in Santa Claus.” Here he argues that a good deal of the problem originated with the Federal government revising its inflation measure to a completely different benchmark which made the figures come out significantly lower, very conveniently thank you– the equivalent of tampering with the speedometer as a way to speed up the car. A dangerous implication is that “true” inflation rates driving economic forces stand at 4-6% above stated numbers.

Finally throwing in a simple metaphor to emphasize the folly in case it was lost on the reader:

“In short, the government (the parents) invented Santa Claus in order to cheer up pensioners and laborers (the children) who were worried about their parent’s ability to pay for their entitlements (gifts). The whole family was happy with Santa Claus. The children were happy with the yearly gifts and parents were satisfied that their children were buying the fairly tale and able to rein in spending. But as in real life, it is a blessing only when children believe in Santa Claus and a tragedy when parents do!” 

No happy endings here though. The report concludes with predictions of more decadence and bubbles. Great reading overall.


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