Jim Bruce, a Hollywood assistant film editor by trade with movies like “The Incredible Hulk” and “X-Men: The Last Stand” on his resume, knew not a lick about investing when he opened an online TD Ameritrade account in 1998.
By 2005, he’d read up on market bubbles and was observing chaos in the housing market. His conclusion: a mortgage debacle was soon to come. He launched a financial newsletter to warn family and friends.
In 2007, he began shorting bank and builder stocks. With the money he made in the meltdown, and other funding, he wrote, produced and directed a documentary film: “Money for Nothing: Inside the Federal Reserve,” narrated by actor Liev Schreiber.
Bruce’s mission is to increase public awareness of the repercussions of the Fed’s policies, especially its role in creating the global financial crisis.
What Your Peers Are Reading
The critical doc features interviews with a dozen current and former Fed officials, including new chairwoman Janet Yellen; Paul Volcker, chairman from 1979 to ’87; and Alice Rivlin, vice chairwoman, 1996-1999. Also interviewed are leading economists and investors like Jeremy Grantham and Gary Shilling.
The film, which opened last September, continues to play in some theatres around the country. DVDs can be purchased through www.moneyfornothingthemovie.org
ThinkAdvisor talked with Bruce, 39, about the film in which he seeks to demystify, if not chastise, the Federal Reserve and by which to start a movement to hold it more accountable.
ThinkAdvisor: What’s in your portfolio?
Jim Bruce: I’m very defensive and once again, very interested in the short side. Recently, I bought some longer-term bonds because the irony of quantitative easing is that it may prove to be deflationary — just like the housing bubble was very deflationary because it created bad debt. In the short run, interest rates could fall as the stock market comes back to earth. So I’m eyeing the short side, interested in longer-term U.S. bonds and cash, with some gold and natural resources as a hedge. I’m not interested in the financial sector at these prices.
What sort of advice do you think financial advisors should be giving to clients nowadays?
That’s the fascinating part. People want to know what to do with their money. Fed policy has created a very difficult position for advisors and investors. It put a gun to people’s heads: You’d better take risks or you’re going to miss out. But now prices have risen to the point where you may miss out if you do take risks. So it’s a great time for buy-and-hold investors to take some risk off the table and diversify.
You definitely need to be prepared for the end of the current boom. Prices have been artificially propped up. Are you ready for a 20% or 30% decline in the stock market? On the fixed income side, there’s a possibility that long-term rates haven’t hit their low yet. Clients who only recently have been willing to take on more equity exposure are most vulnerable to a fall. It’s a good time to be cautious. What’s Ben Bernanke’s legacy after being Fed chairman for eight years? In 2009, he was Time Magazine’s “Person of the Year” — “the most powerful nerd on the planet.”
My concern is that his legacy will follow the trajectory of Alan Greenspan’s: He headed out a hero for sort of saving the day after the tech bubble and leaving the stock market higher. I’m worried that a year or two from now people will be rewriting Bernanke’s legacy.
What was Bernanke’s “tragic flaw” as Fed head?
He was an academic who had no background in financial markets. He didn’t understand them or the people who worked in that field.
What will happen in the wake of his leaving?
We have a dysfunctional system. We aren’t doing a good job of regulating, and we’re not letting banks go out of business. With endless 0% interest rates and QE, we’re getting closer and closer to what happened in Japan. We’re following in their footsteps by doing what they did, but all the while saying we didn’t want to be like them. They pumped money into a somewhat zombie system, where households aren’t in a position to take on a lot more debt and banks don’t really want to lend a lot.
Like Bernanke, new Fed chair Janet Yellen has an academic background. Will she tackle things differently from Bernanke?
She’s the same: very smart, very well versed in all the ideas of modern economics but has no background in banking or financial markets. So she looks at things from an academic perspective. She said that she doesn’t see any signs of trouble about stock valuations. I’m concerned! She’s not someone who’s going to be savvy and see risk in advance. Unfortunately, she will follow in that tradition of having an impeccable resume and theoretical perspective but not a thorough understanding of all the ramifications of the Fed’s own policies in trying to influence markets.
How would you sum up the state of the Federal Reserve right now?
The Fed has been playing a losing hand in a poker game since the late 90s, when they decided not to resist the tech bubble. They doubled down with the housing bubble. They’ve put all their chips on asset prices going up — but now what do they do? If asset prices soften and begin to turn, it’s going to be very hard for the Fed to live up to the promises it’s made. Its policies have created artificial demand, and that’s been sending a false signal to the economy. It doesn’t realize how the real world is going to operate under their policies. On what do you base that statement?
The housing bubble and the moves in prices were deliberate and desirable effects of Fed policy. They knew that holding interest rates at 1% was stimulating interest-rate-sensitive sections of finance and real estate. From 2004 to 2006, they knew things had gotten a bit out of hand but thought that markets would rationally see them slowly raising interest rates and people would move away from taking risk, that the banks would manage their balance sheets and could smoothly coordinate this move away from risky behavior. But the opposite happened — everyone levered more, took on more risk and went deeper into mortgage securitization.
Do you see what’s happening in today’s economy and markets as a repeat of what occurred soon before the final crisis?
Yes. Once again, the Fed, through great effort on Bernanke’s part, has got us back to a place where people are overpaying for risk, whether it’s stocks or overpriced higher yield bonds. There’s a lot of bad commercial real estate lending. In many areas, once again people are overpaying for houses. The Fed thinks of that as a good thing. But it’s hurting anybody that’s entering the market and keeping first-time buyers out. The Fed has brought us back to a place where it’s very risky for the individual investor. I worry about falling asset prices and the transition to Janet Yellen. Markets are already losing the psychological support of QE: “The Fed’s got my back.”
That’s lots of bad news!
Well, we’re doing the same thing but expecting different results. To the extent that the Fed learned a lesson from last time, they may have to learn it again. Lower interest rates and QE have pushed stock and housing prices up, and there is a very real risk that the same thing will happen. Prices will fall back to where they would have been otherwise, which could easily be enough to put us into a deep recession. What’s different now, though, is that there isn’t room to respond to a crisis in the same way they did before, when the government was running just a small deficit.
What’s your take on Bernanke’s famed predecessor, Alan Greenspan, Fed chairman from 1987-2006?
The hubris that came with Greenspan and carried forward and expanded by Bernanke brought the idea that the Fed can game the system a little. But I worry that we’ll realize, once again, that it can’t. Greenspan knew someone was going to take a hit, but he didn’t think it would be Citigroup; he thought it would be the people who bought Citigroup’s tranches. In theory, mortgaged-backed securities would enable risk to be disbursed and sold off to investors. But banks had a hard time selling and got stuck with them. So instead of spreading risk, securitization concentrated risk. Reality was certainly different from theory!