Financial, Real Estate, Stock Markets Trends and Current Affairs

Sell side brokers and fund of funds pushed tens of billions of assets
to Bernie Madoff, for a fee and maybe a commission or two. You know the
rest of that story. Funds of Funds charge 1% and 10% on top of hedge
funds 2% and 20% - to lose about 21%. Hmmm! The big name brand Wall
Street banks charge full commissions (about $10,000 to $50,000 per year
for accounts the size of the top quintile of my blog's reader's
accounts) and give you the privilege such a charge the opportunity to
lose between 29% and 41% of your capital! Hey, thanks fellas. With
friends like those, who needs enemies. Now, they are bulking up due to
their own investment missteps, and merging into super brokers. B of A
bought Merrill Lynch, and now Citibank is spinning off Smith Barney
into a JV with Morgan Stanley's brokers. Both of these merged entities
will have a sales force of over 22,000 sellers each. Wowza! That's a
lot of salespeople. Can any of them invest worth a damn, though? Now,
what exactly are they going to be selling? After all, to cut costs,
brokerages and sell side banks are reducing the size of their
analytical staff, which was already reduced significantly in the last
Wall Street cyclical downturn after Spitzer got in their ass about
conflicts of interest. Even without these head count and talent
reductions, investment performance stemming from this
salesperson/analyst model was horrendous, and that's about the nicest
way I can put it. We'll get to that point later, though.

The Rich have it rougher than many would be led to believe!

We have had around 2 years or so of rapid asset
depreciation, and after re-examining my notes and thoughts for the
umpteenth time, I am now more convinced than ever that the chances of
the US and much of the developed world and emerging markets going into
a depression is as least as great (and probably slightly greater) than
going into a protracted recession. Things are definitely not looking
up. This will hurt everybody, from the maid to the CEO to the hedge
fund manager to the gardener to the plumber. Believe it or not, I
believe it will hurt the upper classes even more, on both a relative
and absolute basis. Here's why:

1. The upper classes tend to invest
   much more, if not all of their wealth, as compared to the lower and
   middle classes, in financial and real assets. Their primary investment
   classes are exactly those that got hit the hardest over the last 2
   years, and are going to be those that will be getting hit further in
   the near future. These investment classes are:
   1. Residential Real
      Estate in the form of less liquid primary residences, vacation and 2nd
      homes - down 18 to 30% for the year depending on where its located;
   2. Commercial real estate direct owner ship, partnerships and in trust - all taking a big bath right now;
   3. Stock - down 36 to 40% for the year
   4. Fixed
      income securities of varying investment grades and maturities - taking
      a beating with grand canyon style spreads, particularly the more
      speculative stuff and the tax exempts which the wealthy rely upon for
      tax favored income
   5. Alternative asset funds, ex. hedge funds, private equity, buyout funds - down 21% + for the year;
   6. Art and collectibles - extremely illiquid now, with values plunging faster than VB+ can calculate in Excel;
2. The
   wealthy have ove extended themselves significantly with debt, many
   counting on historical investment returns to provide relief of debt
   service that probably isn't coming this year. Many have probably gotten
   too lax in relying on easier credit as well.
3. The
   primary compensation source of the higher end of the wealthy and upper
   classes is investment returns, and as investments nosedive and stock
   grants and options become worth less (or worthless), they will be
   forced to live off of their principal, which is akin to flirting with
   the unemployment line for the middle and working classes.
4. The
   lack of liquidity in so many markets means that even when they do
   attempt to access principal or sell of assets, they will probably
   receive greater haircuts than they thought they would, meaning the
   downward spiral accelerates.

Believe you me, there will be a significant amount of social mobility
occurring over the next few years, and most of that mobility will be
downward. I would say roughly a third of my blog's readers are high net
worth, and/or belonging to the upper classes (their is a distinct
difference, which we will get into in a moment). Here is a quick
rundown of the blog's demographics:

• 75% of the BoomBustBloggers are executives and professionals
• Over 35% of Reggie;s readers make over $100,000 per year, and over 1/4 make over $200,000 per year.
• 32% of Reggie's readers are millionaires.
• 18% are multimillionaires
• 5% have net worths over $10 million.
• 17% have investable assets over a million dollars
• 9% have currently investable assets over $2 million

Instead of using some academic study or 3rd party data, I've decided to use the demographics of BoomBustBlog.com
to outline the combined effects of the economic turmoil and the trash
that is being peddled as financial and investment advice - a
combination that is proving lethal to your net worth as you read this.
Now, let's make sure we are all on the same page when we discuss the
social classes and the wealthy. For those who feel you must get
offended when social class is discussed, I strongly suggest you stop
here and watch TV or otherwise get a solid dose of MSM, mind numbing
programming. For the rest of you who choose to continue reading, you
have just chosen the Blue Pill - prepare to be unplugged from the
Matrix!

Social Mobility: Unlike the Jefferson's, We're moving on down!

Social class is defined (on this blog) as the
amount of control one has over one's socio-economic environment. It is
much more than money, although money is a large component. For
instance, Barack Obama is in a higher class than Robert DeNiro or
Michael Jackson, although Robert DeNiro and Michael Jackson are most
likely wealthier (although that is quite debatable after taking into
consideration the value of Obama's campaign contribution list and
membership database from his social networking site!). Obama's higher
class stems from his ability to exert more control over his
socio-economic environment. The factors that this author uses to
determine class combine (with the associated weights) to create a
"socioeconomic index":

There is a handy dandy BoomBustBlog class
model (based loosely upon the Index of Status Charcteristics) available
for download for anyone interested in delving into this further. See boombustblog.com_social_class_model v.7.3 156.00 Kb.

As you can see, wealth is the largest
contributor to the class standing, and coincidentally it is the factor
that is the most at risk in this current economic climate. I believe
that there will be a significant entry into the upper middle class by
those who were once firmly entrenched into the upper classes! While
that may not seem like a big deal to many, it is damn big deal to those
who are moving down the ladder. This also means, that there will be
some space for others to move (relatively speaking) up the ladder. One
man's (or woman's) misfortune is another's opportunity. I believe this
blog can not only be used to insure and proof against downward mobility
for those in the upper strata, but can also be used by those in the
lower, middle and lower upper strata to rise upward a notch or even
two. Social Mobility is the name of the game in times of severe dislocation - times like we are experiencing now.

Now, in term of wealth (not social class and influence, just wealth) we
can split the upper strata into three different categories (there are
only two above because of the other factors that come into play when
social class or socioeconomic standing is taken into consideration).
There is the poor wealthy, those guys and girls that are just a hair's
breath from being pulled into the upper middle class strata due to
marginal wealth. This would be the $1m to $10m net worth crowd, who
rely on business profits, salary and investment returns for income. The
next would be the middle strata of the wealthy, hailing between $10 t0
$100 million in Net Worth, and then there is the upper strata wealthy
at above $100 million. Each of these three strata of wealth represent,
in my opinion, distinct behavior tranches in terms of discretionary
expenditures, investment, and politics and (what passes as, this is a
story for another post) philanthropic activities.

A trip to practically any decent sized yacht club or
recreational vehicle port reveals the relatively stark differences in
discretionary spending behavior. The first strata can be found in the
36 ft. to 68 ft. yacht docks (where a captain is optional, but not
mandatory and you really don't need a crew). The second strata can be
found 50 ft to 120 ft docks, where captains, crews and semi-custom
fiberglass boats abound. The third strata are almost exclusively in the
super yacht category, where the carrying cost alone for these
(basically waste of money) fully custom built hulls and vehicles are
about million a year to start with. You can also see the other social
economic strata as well, upper middle class in the 20 to 35 ft boats,
the middle and working class in the considerably smaller fishing boats
- as opposed to the ultra fast Viking and Hatteras deep sea fishers,
etc. It is an interesting and instructional study in social studies and
anthropolgy just walking along your local docks!Once you are aware of how these things break down, you will see many settings in a different light.

For
the purposes of this discussion, we will focus on the 30% or so of my
blog readers in the multi-million dollar range of net worth.

Click any graph to enlarge to printer quality and size!

reader_networth.png

The dark purples, deep greens and reds
are most likely the general demographic to get hit hardest.
Fortunately, those who follow this BoomBustBlog closely, either
personally or through their advisor, should have seen a net increase in
networth rather than a net decrease. This has hurt non-BoomBustBloggers
in this demographic tranche significantly, and will hurt them even
farther. At the same time, let's hope that the opinion and research
that I bring to the blog helps, because many will need it. Let's see
why.

industry_group.png

The hardest hit industries in this economic
downturn are represented by the largest pieces of the pie above:
finance, real estate, and insurance - followed by the commodity
volatility whipsawed agricultural industry - which will trickle down to
the professional services industry that serves all of those above:
lawyers, consultants and accountants (the verdict is still out on
doctors and the medical industry, although the industrial pharmas don't
seem to be doing very well). Basically, 75% of you are feeling it
harder then American industry in general.

image054.png

The relative small size of the firms and
companies, combined with the anecdotal knowledge that I have of the
subscribers confirm that many of you are entrepreneurs and/or small
business owner/stakeholders. These are the primary drivers of wealth in
our economy.

employer_size.png

Many of you are balance sheet heavy, in that
although your income is significantly higher than the US average and
median, the balance sheet seems to rule the day here.

readers_income.png

It is safe to assume that the higher wealth
tier of the blog readers generate most of their income from their
investments. This is what Morgan Stanley and Bank of America were
aiming for when they made their large acquisition attempts of Merrill
Lynch and Solomon Smith Barney. Just imagine, armies of 40,000
salespeople trying to access your capital, or sell you their high fee,
high commission, mediocre (to put it nicely) performing investment
products and services. The Fund of Funds industry is aiming at your
capital as well. Do they add Alpha? I know the Bernie Maddoff scandal
is a helluva black eye for the industry. Taking the median of the
investable capital tranche answers from my blog's questionaire, let's
assume the median investable asset level for the 7 to 8 digit crowd is
$8,125,000 - which I feel is about right. Remember, investable capital
is the money and securities that you have to give to someone to manage
or invest, as opposed to assets, equity or net worth.

readers_investable_assets.png

So, if you run the scenario of you putting
those assets with the big brokerages powerhouses forming, the hedge
funds, or the broad market, let's see what happens to the income of
those living off of their investment returns.

readers_potential_losses_from_brokers_and_funds.png

Now, for those of you who factored in a 10%
annual return to guage your spending and budget, I think those
expectations should be ratcheted down some in order to come in contact
with reality. For the sake of expediency though, we will use 10% of
principal as the burn rate through which you support your lifestyle.
This means that you will need to make 10% (pre-tax) per year in order
to avoid eating into your principal. At the median figure quoted above,
that gives the HNW BoomBustBlogger about $67,708 per month of income
and gains (at least it did last year). Look below to see how your
income will be effected after factoring in 2008 investment returns. For
many of you who did not match the performance of this blog, a
significant reduction in lifestyle expenses is in order, or the
expectation of 20% plus returns from this point on. If I am right about
the economy, the markets and the business environment, this year will
be much worse than last - thus those rosy expectations really need to
be dumbed down signficantly! See "BoomBustBlog Research Performance for 2008" for a full accounting of 2008 comparative investment performance and comparative performance since inception.

Now, let's take a look at the expenditures.

discretionary_spending.png

It is difficult to segregate the expenditures
of the higher net worth readers from the other tranches from this
dataset, but it is worth displaying nonetheless.

You are being BAMBOOZLED and HOODWINKED by the establishment!

Despite significant under-performance, the Wall
Street Marketing Machine still seems to keep investors, particularly
wealthy investors, plugged into the Matrix! They will pump the
quasi-reality of their wealth (mis)management even harder as they
attempt to dig themselves out of the economic earnings hole that they
have dug themselves into. Expect an unusually aggressive, and fee and
commission heavy, products push by your local broker sometime soon. As
disguised as it may be, you can bet your Aunt Mabel's dentures that it
will arrive in time for Q309 quarterly reporting. Buy into the Banks,
Brokers and Bullsh1t mantra at your own fiscal risk!

Consider yourself forewarned.