Why You Shouldn't Trust Washington or Wall Street, Part 2

"Blind faith in your leaders, or in anything, will get you killed."

— Bruce Springsteen

In my previous article, I mentioned multiple examples of bad economic predictions by Wall Street and Washington "experts" from the Great Depression until now. My motivation for writing was not to muse about abstract historical trivia. The lifestyle and retirement of the majority of Americans is based upon trusting the financial experts of their day that all will go well with their Wall Street investments. As the article demonstrated, so often economic predictions have been entirely wrong, and multitudes of burned investors have had to pick up the pieces from failed stock investments and try to manage on what is left. In the past decade, many folks have had blind faith in stocks and have gotten hurt.

Here are a few questions I left unanswered: How could experts be so wrong in their predictions? Aren't they intelligent enough to see the real issues? Can you trust your favorite financial magazine or news show? What can the average investor do, if the top experts in our country often give disastrous advice? Should you throw darts at a stock chart, or simply leave all of your money in a money market fund?

Before I answer these important questions, it may help to know a bit about my personal background and experience. I spent nine years, from 2000-2009, as a financial advisor in my local community, working for probably the best-known brokerage firm in the country. There were many fine employees in that firm. However, we were part of Wall Street, and as Wall Street did, we did. I noticed that even in the worst of times, when it seemed the country was going to collapse, they were still promoting (in many cases, pushing) to keep our clients in Wall Street investments for a sizeable portion of their assets. In 2008, most of my clients couldn't handle the uncertainty, and with my guidance moved much of their money to cash, CDs and other safe alternatives.

I began to wonder why Wall Street continued to be bullish. After I stepped away and become an independent advisor in 2009, the obvious dawned on me. I didn't have to go to college to figure this one out. Why was Wall Street always bullish? Because that's what they sell! Let's face it — Wall Street firms are in the business of selling Wall Street investments.

Why are the bullish "experts" so often wrong? There are several reasons. Most people are hopeful and and truly want to see our economy flourish. There is also an inherent optimism about the United States, given our history as a prosperous nation. "Since we've had many decades of prosperity, why not now?" is a common sentiment. We also tend to forget times of struggle and remember and focus on the hope of good things to come. All of this can distort our analysis of economic data, just like a diehard sports fan may be optimistic about his team's chances for an upcoming season even though the data doesn't look too promising.

Another major factor for Wall Street analysts and Washington politicians is that their livelihood often depends on them being positive, hopeful and ultimately bullish. If you worked as an analyst for a bank or brokerage that makes its money selling Wall Street investments, don't you think you would feel a bit of pressure, whether subtle or overt, to tell the public they should keep investing? If the economic data was negative, how long could you tell the public to reduce or eliminate their Wall Street investments before management would knock on your door to "discuss" your advice?

Consider the case of David Rosenberg, who for many years, up until 2009, was the chief economist for a major Wall Street brokerage firm, and a respected voice on Wall Street. Mr. Rosenberg was very negative about the economy in 2007 and 2008 and warned that the housing and credit bubble that burst would take years to recover. Advisors and investors who listened to his advice reduced their stock holdings, and in many cases, converted all of their holdings to CDs and cash. Clients putting their assets in CDs and cash doesn't make money for Wall Street firms.

Well, Mr. Rosenberg left his firm in 2008, at about the same time as Rich Bernstein, also a very well known bearish market analyst left the same firm. Those hired to replace them were bullish. Hmmm … wouldn't that make you wonder? Two bearish analysts replaced by bullish ones! Could there be more going on behind the scenes than the public was told? About a year later, in a revealing statement in one of his daily economic commentaries, David Rosenberg said this: "… the way to preserve your job on Wall Street as a research analyst is to play it safe and tell people what they want to hear."

Wow! Dave confirmed what many suspected or already knew. It's difficult to impossible to be overly bearish as a spokesperson for a Wall Street firm and still keep your job. How then can the average Wall Street analyst, economist, or broker be truly objective in their predictions and advice, when their paycheck may be in jeopardy?

As far as Washington goes, it takes a courageous politician who cares more about standing for the truth than being re-elected to tell the public what they need to hear. Sometimes the truth hurts, but the truth is what we need to hear! My hat goes off to the David Rosenberg and Rich Bernsteins of the world who aren't afraid to tell it like it is.

"Now, wait a minute," some of you are thinking," Are you saying that everyone on Wall Street is a crook?" Of course not. But human nature being what it is (selfish and greedy), it is very difficult for a person in any business to truly do what is right for a client if that means a loss of income. Let's face it, you don't have people who are against smoking working as spokepersons for cigarette companies, or vegetarians for the local bacon manufacturer. Wall Street will continue to promote Wall Street products, and generally remain bullish no matter what the outlook, because that's their business. It's the same with most financial magazines. Look at their advertisers. They are almost always Wall Street firms. Can you really trust that the magazine is giving fully objective advice in all of their articles?

I believe in capitalism, and I don't begrudge anyone making an honest living, even a very lucrative honest living. But I have more confidence in accepting someone's advice if their paycheck is not wrapped up in me following their advice. If my mechanic tells me my brakes and engine are fine, and all I need is an oil change, I will trust him when he tells me I need an engine overhaul.

So, what's the average person supposed to do? Flee Wall Street, and head for the hills? Buy only bank CDs? Not at all. It may be prudent for the average investor to have some of their money in Wall Street investments. However, there are other non-Wall Street alternatives that Wall Street won't generally tell you about. They are conservative and have preserved investors' wealth for decades. Some have tax advantages you'll want to know about. I will detail some of them in my next article.

For now, don't have blind faith in either Wall Street or Washington. Look for objective advice from independent economists like David Rosenberg or those at universities, who do not have their job security tied into being bullish. There are ways for the average person to wade through the confusing world of personal finance and find solid and helpful advice.

For more exclusive content on wealth management, see:

Why You Shouldn't Trust Washington or Wall Street, Part 1

The Bears Come Out

Indexed Annuities: For the Best and Worst of Times