Investor Relations Magazine Speculator Column/DISCLOSURE & REGULATION

Trumps market fundamentalists risk repeat of

2008
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March 17, 2017 | By Ian Williams

Markets are efficient at sorting out goods prices, but less so at uncovering
snake oil in financial investments

Gary Cohn wants to overturn the US Department of Labors fiduciary rule that pension sellers
primary duty is to their customers. Cohn, formerly Goldman Sachs president but now US President
Trumps National Economic Council director, complained that it was like putting only healthy food on
the menu, because unhealthy food tastes good but you still shouldnt eat it because you might die
younger.

In fact, it is more like saying you should not put melamine in baby milk, or sell thalidomide to
expectant mothers. Indeed, the call from the industry to rescind the rule is like the burglars lobby
calling for a ban on locks. I suspect that Cohns words will epitomize this age the way Marie
Antoinettes recommendation of cake to the starving poor represented the French monarchy.

Within weeks, the Trump administration is building a bonfire of the regulations that were designed to
stop an action replay of 2008, and it is all the more worrying that so many nominees have gold on
their hands from the crash. Lobbyists had previously attenuated Dodd-Frank so much in drafting that
it was already the Maginot Line of financial regulation. But filling in the holes would be much more
effective than demolishing the partial defense it represents against the Barbarians looting at the
gaps, so it is disturbing how much enthusiasm Trump has for tearing down this wall, even as he
demands a new wall against the US neighbor and trading partner Mexico.

The market fundamentalists now in office consider it axiomatic that lead in gasoline, paint and water,
asbestos insulation, unrestrained pollution and BSE in beef notwithstanding, markets are better than
regulation and governments. In fact, that is murder by metaphor: when physicists studied how gases
expand, they derived laws based on aggregate results of individual gas molecules that bounce about
in what some happy scientist called the Drunkards Walk as they ricochet from their equivalent of
lamp post to street sign. Taken together, however, as energy levels rise, the random molecular
wobbles average out and the gas expands predictably. Fundamentalists make a metaphor into a
model and compare the behavior of molecules to humans, extrapolating that a host of individual
economic decisions will coalesce to form a predictable and benign hidden hand.

If you tried to parallel the expanding gas experiment with a square full of actual drunks, however, it
would not compute: people are not molecules. Some of them would pass out, some would make out,
some would fight it out and yet others would try to rob the more incapacitated. Investors act on
sentiment and prejudice, they listen to each other and they often make irrational decisions, or
make rational decisions based on alternative facts. Some are contrarian, although the history of the
markets suggests that most suffer from lemming syndrome and follow the crowd wherever it leads.
Markets can indeed be efficient at sorting out the prices of tangible goods, but are much less so at
evaluating the percentage proof of snake oil in financial investments.

We have expert evidence to reinforce our suspicions about the economic strategy. President
Trumps connection with casinos brings to mind the gambling inherent in investment strategies, but
those of us without chips to place can watch and learn from the experienced punters at play. So we
should draw lessons from the big bank executives who, the Wall Street Journal reported in January,
were dumping more of their own stocks after the election than at any time over the last 10 years.

The implication is that they knew the market would rise on Trumps inauguration because of animal
spirits, like a cobra charmed by the mantra of tax cuts and deregulation. But they were also sure
that stock prices would reflect the real economy and face a high risk of falling as soon as he began
actually administering.

So how can actual business flourish in an economy run by an administration of the impenitent wild
things who gave you 2008 and are now declaring tariff wars with every major trading partner, not to
mention getting close to declaring actual war on many others? In fact, while the presidential decrees
might augur a business collapse for us professional Cassandras, some boats will float high
regardless of the receding waters.

Look on the bright side: there will be plenty of opportunities for IROs who feel the feral spirits of the
age. There will be a lot of penny stocks to be pumped and dumped along with exotic financial
instruments reflecting the outburst of predatory ingenuity that awaits us.