Sympathy for the Devil? Trouble in Paradise for the Bankers

Editor's Note: The following is a guest post from PeakProsperity.com.

In our recent report, Banks Are Evil, we pulled no punches in making the accusation that the financial system is the root cause of injustice in today's society.

It's a good blood-boiler. You should read it if you haven't already.

Its main premise is this:

In my opinion, it's long past time we be brutally honest about the banks. Their influence and reach has metastasized to the point where we now live under a captive system. From our retirement accounts, to our homes, to the laws we live under --- the banks control it all. And they run the system for their benefit, not ours.

While the banks spent much of the past century consolidating their power, the repeal of the Glass-Steagall Act in 1999 emboldened them to accelerate their efforts. Since then, the key trends in the financial industry have been to dismantle regulation and defang those responsible for enforcing it, to manipulate market prices (an ambition tremendously helped by the rise of high-frequency trading algorithms), and to push downside risk onto "muppets" and taxpayers.

Oh, and of course, this hasn't hurt either: having the ability to print up trillions in thin-air money and then get first-at-the-trough access to it. Don't forget, the Federal Reserve is made up of and run by --- drum roll, please --- the banks.

With their first-in-line access to this money tsunami, as well as their stranglehold on the financial system that it all runs through, the banks are like a parasite feasting from a gusher on the mother-lode artery.

It should come as little surprise that, with all this advantage they've amassed, the banks have enriched themselves and their cronies spectacularly. They have made themselves too big to fail, and too big to jail. Remember that their reckless greed caused the 2008 financial crisis, and yet, in 2009, not only did bankers avoid criminal prosecutions, not only did the banks receive hundreds of billions in government bailouts, but they paid themselves record bonuses?

And the bonanza continues unabated today. By being able to borrow capital for essentially free today from the Fed, the banks simply lever that money up and buy Treasurys. Voila! Risk-free profits. That giveaway has been going on for years.

Couple that with the banks' ability to push market prices around using their wide arsenal of unfair tactics -- frontrunning, HFT spoofing and quote stuffing, stop-running, insider knowledge, collusion, etc -- the list is long. James Howard Kunstler is dead on: we don't have a free market anymore. Instead, we have rackets, run by racketeers. The rest of us are simply suckers to be fleeced.

But all is not roses if you're a banker these days. Even within the evil machine, there is great disparity in how the plunder is being divided.

Bad Times For Bankers?

A guy I've known since childhood works on the 'sell side' (investment/commercial banking, stock brokers, market makers) and has been telling me how cutthroat things have become over the past few years. The pay structure and job security have deteriorated notably. And he says the same is true for many of his colleagues on the 'buy side' (hedge funds, asset managers, institutional investors), too.

Really?

Even with enjoying the "unabated bonanza" described above, even with the markets back partying at all time highs, things are getting worse for many bankers?

Yes.

And while I personally can't conjure any sense of empathy for these poor devils, it looks like things are going to get even harder for them.

So what's going on here?

Well, it's mostly a story of the banking system's plundering ways coming back to bite it.

Capital Is Fleeing From Active To Passive Funds

First off, by flooding world markets with over $12 Trillion since the Great Recession, the central banks have pretty much destroyed "alpha".

Alpha is the "excess return" that fund managers' fees are based on -- i.e., "you're paying more for a smart guy like me to 'beat the market'". But when a tsunami of liquidity rises all boats at once, it's that money flood (i.e. the central bank money printing) that drives valuations. And its influence is so much larger than any other factor that it's really the only factor that matters. Great and crappy companies alike rise in price -- the "fundamentals" that fund managers use in their analysis become useless.

Which is why 66% of large-cap active managers failed to top the S&P; 500 in 2016, and why 90% missed their benchmarks over the past 15-year period.

So it's no wonder that investment capital is fleeing from actively-managed funds to passively-managed ones. If the passive funds have much lower fees AND they perform better than the actively managed ones, why the heck shouldn't money flow into them?

Per CNBC:

A buoyant start to the stock market in 2017 couldn't stop investors from ditching actively managed funds.

The trickle away from stock pickers and toward indexes has turned into a flood, with more than half a trillion dollars heading into passive funds over the past 12 months, according to Morningstar.

Active management in total saw $13.6 billion in outflows for January, mitigated only by net inflows to bond funds, Morningstar said. U.S. equity saw $20.8 billion in outflows, bringing passive management closer to parity when it comes to domestic stock funds.

By contrast, passive management saw just shy of $77 billion in inflows. U.S. equity funds, which track broad indexes like the S&P; 500 and its sectors and subsectors, pulled in $30.6 billion for the month.

Overall, actively managed U.S. equity funds now hold $3.6 trillion in assets while their passive counterparts hold nearly $3.1 trillion. All classes of passive funds have seen inflows of $563 billion over the past year, while active funds have suffered $325.6 billion in outflows.

"The massive exodus from actively managed U.S.-equity funds continued in January," Alina Lamy, Morningstar's senior analyst for quantitative research, said in a statement. "The tidal wave is showing no signs of stopping, threatening all but a select few and making active investing a dangerous ocean to swim in."

The result of this is tremendous mounting pressure for active managers to reduce their fees. Lower fees being charged on shrunken fund pools obviously affords fewer asset managers, who in many cases are now working for less compensation.

Keep in mind, between just the ECB and the DOJ, nearly $200 Billion of additional liquidity has been -- and continues to be -- injected into world markets each month(!). So, as the above article says, don't expect the tidal wave of capital fleeing actively-managed funds to stop while the central banks' liquidity spigots are still flowing.

The White-Collar Cost Of Automation

Finance was one of the first industries to embrace the automation boom, given the obscene profits that could be made. In his book Flash Boys, Michael Lewis described how the arms race of high frequency algorithms literally changed the game in terms of how financial instruments are traded -- and made $billions upon $billions of unfair profits for the big banks that invested in the technology.

Well, many of the bankers who cheered the boost the machines gave to their annual bonuses aren't cheering so much now. You know what algo-driven markets don't need? Human traders.

Below is photo of the UBS trading floor from 8 years ago, contrasted with one from this year (source: Zero Hedge):

8 Years Ago

Now

Per the Wall Street Journal:

Technology is replacing people on trading floors and in the middle and back offices where trades are checked, confirmed and settled. Some of this is to give investors an edge in markets with computer-driven tools such as algorithmic and high-frequency trading.

But technology also means more work can be moved offshore or to cheaper locations. More reliable internet links with India, for example, mean people can work together on the same documents or files in real time.

The total number of people employed by all kinds of banking in the U.K. has fallen 22% from its precrisis peak in 2008, or by about 120,000 jobs, according to data from Britain’s statistics office.

Here's another stark example:

Goldman Had 600 Cash Equity Traders In 2000; It Now Has 2

For the dramatic impact of technology, and specifically trade automation from algo, quant and robotic trading on today's capital markets, look no further than Goldman's cash equities trading floor at the firm's headquarters which, according to the MIT Tech Review, employed 600 traders its height back in 2000, buying and selling stocks for Goldman's institutional client clients. Today there are just two equity traders left.

As warned of in our earlier article Automating Ourselves To Unemployment, jobs lost to automation don't come back. More than that, the technology itself lowers the cost structure, ultimately lowering industry profits as other competitors invest in similar tech and the margins are competed down:

Structural changes to the equities business over the last several years, such as the rise of electronic trading, have knocked off around $15 billion from the equities fee pool, according to a report from Morgan Stanley and management consulting firm Oliver Wyman.

Electronic trading has dramatically increased trading volumes, while making the cost of trading much cheaper.

Oliver Wyman partner Christian Edelmann, who co-authored the report, does not see those revenues coming back. "Once the equities model has become technology driven, that's not going to change," he said.

A Cultural Shift To Cost-Cutting

And the jobs cuts aren't just related to technology. As profit margins are squeezed, players in the financial industry are looking for any and all reasons to cut costs.

A current victim of this trend is equity research. For decades, sell side firms like the investment banks offered their clients "expert analysis" from their research departments. Historically, that was bundled into the bank's overall fee it charged its clients.

But now, increasingly cost-conscious clients are demanding to know how much that research is costing them. Especially since almost all of that research doesn't even get read. A recent Reuters article showed that of the 40,000 research reports produced every week by the world's top 15 global investment banks, less than 1 percent are actually read by investors.

It's long been a poorly-kept secret that the research departments were a dependable vehicle for investment banks to bilk their clients for unnecessary profit. Now it looks like that ruse is over. And billions in revenue per year along with it:

Banks have already been trimming their research budgets. Spending on research at the top investment banks fell by just over half to $4 billion in 2016 from $8.2 billion in 2008, according to Frost Consulting.

An industry long known for its "Wolf of Wall Street" culture of excess is now counting its pennies. That's a very significant perception shift.

A Sign Of The End

What's important about all this is not sympathy for the poor bankers who have to accept lower wages or a pink slip. Consciously or unwittingly, they've been foot soldiers for a cabal that's done the greatest evil towards global human rights and prosperity over the past century. Personally, I'll happily take a front row seat, open up a bag of popcorn, and delight in the schadenfreude of watching that industry collapse on itself.

What is important is what all this tells us about where we are in this story. We are now getting close to the end.

For decades and decades, more and more sharks found their way into the financial industry. And for decades and decades, there was plenty of prey for them all to feast and fatten on.

But now we're at the point where there's much less to prey on. So the biggest sharks are now turning on the smaller ones. Those at the top of the industry are trying to preserve their share of the pie -- and if they have to do so by cannibalizing those below them on the org chart, so be it.

It has now become a shark vs shark world.

That's important.

This is happening, mind you, at a time when the banks are in their 8th straight year of enjoying practically-free money from the world's central banks, which is essentially a great wealth transfer from the public's coffers. And at a time when financial assets have been re-inflated to all-time highs.

If things have reached this cutthroat a state when Wall Street is booming, imagine how much more gruesome this "eating their young" dynamic can/will become during a market downturn.

We're at the point where those at the apex of power are becoming increasingly desperate to maintain their unfair advantage. And as the economic pie refuses to grow due to the twin overload of too much debt and declining net energy, these apex predators will turn on each other -- first to maintain their spoils, and then simply to survive.

Things will get nasty in a hurry during that stage, as we warned about in our recent report: Positioning Yourself For The Crash.

While you still can, you want to make sure the bulk of your investment capital is positioned for safety, and you want to make your lifestyle as resilient as possible so that, no matter what jarring developments the future may bring, you and the ones you love are least impacted by them.

From the moment the 33-year-old Thomas Jefferson arrived at the Continental Congress in Philadelphia in 1776, he was on the radical side. That caused John Adams to like him immediately. Then the Congress stuck Jefferson and Adams together on the five-man committee to write a formal statement justifying a break with Great Britain, and their mutual admiration society began.

Jefferson thought Adams should write the Declaration. But Adams protested, saying, “It can't come from me because I'm obnoxious and disliked." Adams reasoned that Jefferson was not obnoxious or disliked, therefore he should write it. Plus, he flattered Jefferson, by telling him he was a great writer. It was a master class in passing the buck.

So, over the next 17 days, Jefferson holed up in his room, applying his lawyer skills to the ideas of the Enlightenment. He borrowed freely from existing documents like the Virginia Declaration of Rights. He later wrote that “he was not striving for originality of principle or sentiment." Instead, he hoped his words served as “an expression of the American mind."

It's safe to say he achieved his goal.

The five-man committee changed about 25 percent of Jefferson's first draft of the Declaration before submitting it to Congress. Then, Congress altered about one-fifth of that draft. But most of the final Declaration's words are Jefferson's, including the most famous passage — the Preamble — which Congress left intact. The result is nothing less than America's mission statement, the words that ultimately bind the nation together. And words that we desperately need to rediscover because of our boiling partisan rage.

The Declaration is brilliant in structure and purpose. It was designed for multiple audiences: the King of Great Britain, the colonists, and the world. And it was designed for multiple purposes: rallying the troops, gaining foreign allies, and announcing the creation of a new country.

The Declaration is structured in five sections: the Introduction, Preamble, the Body composed of two parts, and the Conclusion. It's basically the most genius breakup letter ever written.

In the Introduction, step 1 is the notificationI think we need to break up. And to be fair, I feel I owe you an explanation...

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another…

The Continental Congress felt they were entitled by “the Laws of Nature and of Nature's God" to “dissolve the political bands," but they needed to prove the legitimacy of their cause. They were defying the world's most powerful nation and needed to motivate foreign allies to join the effort. So, they set their struggle within the entire “Course of human events." They're saying, this is no petty political spat — this is a major event in world history.

Step 2 is declaring what you believe in, your standardsHere's what I'm looking for in a healthy relationship...

This is the most famous part of the Declaration; the part school children recite — the Preamble:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

That's as much as many Americans know of the Declaration. But the Preamble is the DNA of our nation, and it really needs to be taken as a whole:

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

The Preamble takes us through a logical progression: All men are created equal; God gives all humans certain inherent rights that cannot be denied; these include the rights to life, liberty, and the pursuit of happiness; to protect those rights, we have governments set up; but when a government fails to protect our inherent rights, people have the right to change or replace it.

Government is only there to protect the rights of mankind. They don't have any power unless we give it to them. That was an extraordinarily radical concept then and we're drifting away from it now.

The Preamble is the justification for revolution. But note how they don't mention Great Britain yet. And again, note how they frame it within a universal context. These are fundamental principles, not just squabbling between neighbors. These are the principles that make the Declaration just as relevant today. It's not just a dusty parchment that applied in 1776.

Step 3 is laying out your caseHere's why things didn't work out between us. It's not me, it's you...

This is Part 1 of the Body of the Declaration. It's the section where Jefferson gets to flex his lawyer muscles by listing 27 grievances against the British crown. This is the specific proof of their right to rebellion:

He has obstructed the administration of justice...

For imposing taxes on us without our consent...

For suspending our own legislatures...

For quartering large bodies of armed troops among us...

Again, Congress presented these “causes which impel them to separation" in universal terms to appeal to an international audience. It's like they were saying, by joining our fight you'll be joining mankind's overall fight against tyranny.

Step 4 is demonstrating the actions you took I really tried to make this relationship work, and here's how...

This is Part 2 of the Body. It explains how the colonists attempted to plead their case directly to the British people, only to have the door slammed in their face:

In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury...

They too have been deaf to the voice of justice... We must, therefore... hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.

This basically wrapped up America's argument for independence — we haven't been treated justly, we tried to talk to you about it, but since you refuse to listen and things are only getting worse, we're done here.

Step 5 is stating your intent — So, I think it's best if we go our separate ways. And my decision is final...

This is the powerful Conclusion. If people know any part of the Declaration besides the Preamble, this is it:

...that all political connection between them and the State of Great Britain, is and ought to be totally dissolved...

They left no room for doubt. The relationship was over, and America was going to reboot, on its own, with all the rights of an independent nation.

And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

The message was clear — this was no pitchfork mob. These were serious men who had carefully thought through the issues before taking action. They were putting everything on the line for this cause.

The Declaration of Independence is a landmark in the history of democracy because it was the first formal statement of a people announcing their right to choose their own government. That seems so obvious to us now, but in 1776 it was radical and unprecedented.

In 1825, Jefferson wrote that the purpose of the Declaration was “not to find out new principles, or new arguments, never before thought of… but to place before mankind the common sense of the subject, in terms so plain and firm… to justify ourselves in the independent stand we are compelled to take."

You're not going to do better than the Declaration of Independence. Sure, it worked as a means of breaking away from Great Britain, but its genius is that its principles of equality, inherent rights, and self-government work for all time — as long as we actually know and pursue those principles.

On June 7, 1776, the Second Continental Congress met in Philadelphia at the Pennsylvania State House, better known today as Independence Hall. Virginia delegate Richard Henry Lee introduced a motion calling for the colonies' independence. The “Lee Resolution" was short and sweet:

Resolved, That these United Colonies are, and of right ought to be, free and independent States, that they are absolved from all allegiance to the British Crown, and that all political connection between them and the State of Great Britain is, and ought to be, totally dissolved.

Intense debate followed, and the Congress voted 7 to 5 (with New York abstaining) to postpone a vote on Lee's Resolution. They called a recess for three weeks. In the meantime, the delegates felt they needed to explain what they were doing in writing. So, before the recess, they appointed a five-man committee to come up with a formal statement justifying a break with Great Britain. They appointed two men from New England — Roger Sherman and John Adams; two from the middle colonies — Robert Livingston and Benjamin Franklin; and one Southerner — Thomas Jefferson. The responsibility for writing what would become the Declaration of Independence fell to Jefferson.

In the rotunda of the National Archives building in Washington, D.C., there are three original documents on permanent display: the Constitution, the Bill of Rights, and the Declaration of Independence. These are the three pillars of the United States, yet America barely seems to know them anymore. We need to get reacquainted — quickly.

In a letter to his friend John Adams in 1816, Jefferson wrote: “I like the dreams of the future, better than the history of the past."

America used to be a forward-looking nation of dreamers. We still are in spots, but the national attitude that we hear broadcast loudest across media is not looking toward the future with optimism and hope. In late 2017, a national poll found 59% of Americans think we are currently at the “lowest point in our nation's history that they can remember."

America spends far too much time looking to the past for blame and excuse. And let's be honest, even the Right is often more concerned with “owning the left" than helping point anyone toward the practical principles of the Declaration of Independence. America has clearly lost touch with who we are as a nation. We have a national identity crisis.

The Declaration of Independence is America's thesis statement, and without it America doesn't exist.

It is urgent that we get reacquainted with the Declaration of Independence because postmodernism would have us believe that we've evolved beyond the America of our founding documents, and thus they're irrelevant to the present and the future. But the Declaration of Independence is America's thesis statement, and without it America doesn't exist.

Today, much of the nation is so addicted to partisan indignation that "day-to-day" indignation isn't enough to feed the addiction. So, we're reaching into America's past to help us get our fix. In 2016, Democrats in the Louisiana state legislature tabled a bill that would have required fourth through sixth graders to recite the opening lines of the Declaration. They didn't table it because they thought it would be too difficult or too patriotic. They tabled it because the requirement would include the phrase “all men are created equal" and the progressives in the Louisiana legislature didn't want the children to have to recite a lie. Representative Barbara Norton said, “One thing that I do know is, all men are not created equal. When I think back in 1776, July the fourth, African Americans were slaves. And for you to bring a bill to request that our children will recite the Declaration, I think it's a little bit unfair to us. To ask our children to recite something that's not the truth. And for you to ask those children to repeat the Declaration stating that all men's are free. I think that's unfair."

Remarkable — an elected representative saying it wouldn't be fair for students to have to recite the Declaration because “all men are not created equal." Another Louisiana Democrat explained that the government born out of the Declaration “was used against races of people." I guess they missed that part in school where they might have learned that the same government later made slavery illegal and amended the Constitution to guarantee all men equal protection under the law. The 13th, 14th, and 15th Amendments were an admission of guilt by the nation regarding slavery, and an effort to right the wrongs.

Yet, the progressive logic goes something like this: many of the men who signed the Declaration of Independence, including Thomas Jefferson who wrote it, owned slaves; slavery is evil; therefore, the Declaration of Independence is not valid because it was created by evil slave owners.

It's a sad reality that the left has a very hard time appreciating the universal merits of the Declaration of Independence because they're so hung up on the long-dead issue of slavery. And just to be clear — because people love to take things out of context — of course slavery was horrible. Yes, it is a total stain on our history. But defending the Declaration of Independence is not an effort to excuse any aspect of slavery.

Okay then, people might say, how could the Founders approve the phrase “All men are created equal," when many of them owned slaves? How did they miss that?

They didn't miss it. In fact, Thomas Jefferson included an anti-slavery passage in his first draft of the Declaration. The paragraph blasted King George for condoning slavery and preventing the American Colonies from passing legislation to ban slavery:

He has waged cruel war against human nature itself, violating its most sacred rights to life and liberty in the persons of a distant people who never offended him, captivating and carrying them into slavery in another hemisphere... Determined to keep open a market where men should be bought and sold, he has prostituted his negative for suppressing every legislative attempt to prohibit or to restrain this execrable commerce.

We don't say “execrable" that much anymore. It means, utterly detestable, abominable, abhorrent — basically very bad.

Jefferson was upset when Georgia and North Carolina threw up the biggest resistance to that paragraph. Ultimately, those two states twisted Congress' arm to delete the paragraph.

Still, how could a man calling the slave trade “execrable" be a slaveowner himself? No doubt about it, Jefferson was a flawed human being. He even had slaves from his estate in Virginia attending him while he was in Philadelphia, in the very apartment where he was writing the Declaration.

Many of the Southern Founders deeply believed in the principles of the Declaration yet couldn't bring themselves to upend the basis of their livelihood. By 1806, Virginia law made it more difficult for slave owners to free their slaves, especially if the owner had significant debts as Jefferson did.

At the same time, the Founders were not idiots. They understood the ramifications of signing on to the principles described so eloquently in the Declaration. They understood that logically, slavery would eventually have to be abolished in America because it was unjust, and the words they were committing to paper said as much. Remember, John Adams was on the committee of five that worked on the Declaration and he later said that the Revolution would never be complete until the slaves were free.

Also, the same generation that signed the Declaration started the process of abolition by banning the importation of slaves in 1807. Jefferson was President at the time and he urged Congress to pass the law.

America has an obvious road map that, as a nation, we're not consulting often enough.

The Declaration took a major step toward crippling the institution of slavery. It made the argument for the first time about the fundamental rights of all humans which completely undermined slavery. Planting the seeds to end slavery is not nearly commendable enough for leftist critics, but you can't discount the fact that the seeds were planted. It's like they started an expiration clock for slavery by approving the Declaration. Everything that happened almost a century later to end slavery, and then a century after that with the Civil Rights movement, flowed from the principles voiced in the Declaration.

Ironically for a movement that calls itself progressive, it is obsessed with retrying and judging the past over and over. Progressives consider this a better use of time than actually putting past abuses in the rearview and striving not to be defined by ancestral failures.

It can be very constructive to look to the past, but not when it's used to flog each other in the present. Examining history is useful in providing a road map for the future. And America has an obvious road map that, as a nation, we're not consulting often enough. But it's right there, the original, under glass. The ink is fading, but the words won't die — as long as we continue to discuss them.

'Good Morning Texas' gives exclusive preview of Mercury One museum

Screen shot from Good Morning Texas

Mercury One is holding a special exhibition over the 4th of July weekend, using hundreds of artifacts, documents and augmented reality experiences to showcase the history of slavery — including slavery today — and a path forward. Good Morning Texas reporter Paige McCoy Smith went through the exhibit for an exclusive preview with Mercury One's chief operating officer Michael Little on Tuesday.

Watch the video below to see the full preview.

Click here to purchase tickets to the museum (running from July 4 - 7).

Over the weekend, journalist Andy Ngo and several other apparent right-leaning people were brutally beaten by masked-gangs of Antifa protesters in Portland, Oregon. Short for "antifascist," Antifa claims to be fighting for social justice and tolerance — by forcibly and violently silencing anyone with opposing opinions. Ngo, who was kicked, punched, and sprayed with an unknown substance, is currently still in the hospital with a "brain bleed" as a result of the savage attack. Watch the video to get the details from Glenn.