Why you should not invest in Financials

I have learnt some very expensive lessons about financials and here are some reasons for not holding financials:

Financials are the big banks that control the Fed and they can get cheap very very cheap money from the Fed. This is capital at no costs to the big banks. They can then take a no-brain er jump by lending cheap money at high interest rates to borrowers like sub prime mortgagors and draw a fantastic profit result to boost up their balance sheet and share value.

While they can play this profit game, their officers and executives can get huge bonuses and cheap share options, etc. Shareholders are happy to support such compensation because they think the bank is earning great profits and their share value will go up and up.

If anything goes wrong as in the case of the US housing and credit crises that began more than a year ago, the worst that may happen to those officers and executives would be resignation with golden compensations. Only a few unfortunate ones may face some sort of prosecutions and very often such cases are unsuccessful actions. Most ridiculous of all, after their resignations, the big banks will pay another huge compensation package to get some new expensive executives to fill their vacancies. See the process of drilling blood from the bank's money is unending and the clever shareholders can just sit and watch. Some even feel happy when they see new expensive executives replacing the old ones.

The true victims at all times are the clever shareholders and borrowers. For example, investors in Bear Stearns ended up with a $2 share value in March when the bail out was first announced. Borrowers are of course always the victims. They are the clever ones who shoulder all the liabilities and only bankruptcy can save them. So ultimately, it is the economy as a whole that will pay the price. The big banks, their officers and executives can still enjoy big lunches, huge bonuses and cheap share options, etc.

Walking around the town and you would hear how most clever investors worship these guys from these big banks. They don't seem to care even though their shares in these big banks have fallen by more than 50% in less than a year. That is the magic spell of Wall Street over clever investors. Some cleverer investors even admire these big banks in paying huge compensations to the guys who are part of the players of the sub prime mortgage and credit crises because these big banks are rich enough to pay such huge compensations (not to shareholders). So you see how clever many investors in financials are and how clever Wall Street is.

Think about what will happen to these big banks and financials in the next couple of years. I am quite sure that they will continue to inflate asset bubbles, speculate stocks and bonds, top up oil and commodities prices, take more gigantic leverages, undertake limitless risks, etc. Why? They can hardly think of any other better ways to build up a fantastic profit result and balance sheet again.

More aggressive credit expansions and risks will be undertaken not only in US but also in the rest of the world especially in developing and emerging markets. The easiest expansion will be credit card expansion and you may soon see another financial crisis when credit card defaults increase.

Crisis will follow crisis and bubble will follow bubble. That will govern the financial scene of our world for the rest of this 21st century. Every time the winners will be the big banks, their officers and executives and of course, the big landlords too. How about the ruling administrations? You think they have anything to lose? NO! It is the poor economy that will pay the price at the end. The worst that may happen to the people in the administrations may be resignation and public criticism. Well, if Ben goes away today, it is you who will still bear high inflation and pay high fuel and food prices, etc. It is poor guys like you and me who will be poorer everyday. Neither the Fed nor Ben will lose a single cent!

So you should now carefully think about how we are being cheated every time when we vote to support Wall Street and the Fed. There is no chance that the Fed would do anything like raising interest to curb inflation. If the Fed dares to do that, the ruling elite will be very unhappy and I am sure somebody will be fired.