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TRUST ME; I'M AN EXPERT
By John Newsome on 6th August 2009


Experts; where would we be without them? A lot better off is our guess. We're not talking here about real experts like doctors, dentists, pilots or plumbers; individuals that deliver worthwhile services. No; we refer to those experts that make a lucrative living despite being persistently wrong. The investment industry is full of them but so is big business, the City and government.


Last summer, Alistair Darling expected the UK to escape recession and believed the economy was in better shape than many to weather the storm. As if; there was more chance of him filling out his expenses claims properly. Not that long ago TV property presenter, Kirstie Allsopp, promised to eat her hat if UK house prices crashed; who knows, she's possibly still chewing. She also had the gall to take a swipe at the chap behind the website, Housepricecrash, and described the site as "sick". No, Kirsty, it's not sick - just correct.


Chief bubblemeister and former Federal Reserve Chairman, Alan Greenspan, commented recently that the seeds of a recovery in US house prices were becoming visible. Yet two years previously he predicted that a nationwide (US) decline in house prices was most unlikely and that "we do not expect significant spillovers from the subprime market to the rest of the economy or the financial system". Mmmm ....... now, we all make mistakes but this man was the world's most powerful central banker.


A slew of companies have been forced to raise fresh equity capital this year and plenty more will follow. In short, their balance sheets were debt laden, the result of expensive acquisitions or the fashion for returning cash to shareholders. The idea behind the latter was that debt conferred an "efficient" balance sheet. Who was behind such appalling advice? Why, the major investment banks. And, having charged companies through the nose to do something so incredibly stupid, who is now advising them to do the complete opposite? Of course, the very same investment banks (well, those still in existence). They helped create balance sheets so efficient that their clients needed a rescue infusion of capital to stay in business.


Bernie Madoff's credentials ensured a steady stream of new business for his organisation. He deliberately cultivated an aloof image in order to project the exclusivity of his firm. He wouldn't just accept any client, though. He turned away plenty which meant those that were admitted felt honoured. Apparently, residents of Palm Beach would beg him to take their trust funds which, ironically, is exactly what he did although not quite in the manner they intended.


Back in the mainstream investment industry, most asset managers will be praying the market doesn't weaken. Many of them will need to justify their heavily overweight equity positions and the blizzard of contract notes that regularly jam their clients' letterboxes; lousy investment performance is so often the bedfellow of frenetic trading. The great economist, J K Galbraith said "Economics is extremely useful as a form of employment for economists." With apologies to him, we opine that investment is extremely useful as a form of employment for all too many investment advisers.


John Newsome can be contacted on:
01423 705123


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