Weekly Reflection for April 23, 2021

Market Update

This week the market took on on a game of tug of war. The S&P 500 started the week near its all-time high, at a level of 4,178. The S&P started to give up gains during Monday and Tuesday trading sessions but by the close of market on Wednesday, the S&P had recovered, closing around 4,173.

Although Thursday’s session began to look promising with a positive uptick due mainly to jobless claims reaching the lowest level since the pandemic started, it did not last. Midday the market began selling off again, due to reports of increased COVID cases globally as economies began to reopen. India reported on Thursday the world’s highest one day increase in new cases and the situation there is dire, reminiscent of the virus' early toll in the U.S.

There were also been rumblings about the Biden Administration's proposed tax increase plan, which was leaked yesterday. The full details are expected next week and in the meantime, the market has treated this information subjectively as the President’s plan is still in early stages of being rolled out.

The bond market has also shown some signs of stabilizing as the 10-year Treasury yield pulled back from the March level of 1.75% to a yield of 1.56%. The consensus is still optimistic for the overall market but fear of increased virus cases and Biden's tax plan have created a little more uncertainty for investors.

Flash Crash in Bitcoin

Bitcoin has hit a rough patch, mere days after hitting an all time high of $64,829 on April 14th. Last Saturday evening, April 17th, the crypto currency experienced a sort of flash crash, losing over 13% in under an hour before the slide halted. The drop was triggered by a Twitter rumor that the US officials were going to charge several financial institutions in a crack down on crypto money laundering. Many people immediately commented that they found the tweet to be suspicious. Enough still felt it was legitimate and the selloff wiped out some $300 billion in value.

Selling pressure continued on Thursday after news about the Biden Administration's proposed hikes made investors nervous about higher capital gains taxes. The whole market swooned, as mentioned above. Bitcoin's big move down on tax news makes plenty of sense. It is not unusual to see sudden sales in assets with huge recent gains such as Bitcoin, which is still, after this recent drop, up some 70% year-to-date.

Overall, Bitcoin and the prices of other crypto currency are much more susceptible to rumors, threats of taxation and regulation and worries about fraud, than other investments. The volatility is a trademark of this asset class and probably will continue to be even as it continues to gain acceptance in corporate America.

Made Off

Bernie Madoff died last week in prison, 10 years into his 150-year sentence for outrageous fraud, executed while posing as an elite investment advisor while stealing billions from clients over two decades. His lawyers had been unsuccessful in getting a judge to allow a compassionate release as his health steadily declined in 2019.

Madoff stole $17 billion from thousands of people, making his scheme possibly the largest in history but also the most alluring to the public when the details emerged. Using his self-named investment firm as a front, Madoff lured in prominent citizens and notable figures in business, entertainment and the arts. Other investment advisors entrusted him with their money, as did banks, foundations and non-profits. It was his arrogant nature, ironically, that was a big draw. Madoff was known to present as a very particular and finicky businessman and prospective clients felt they needed to impress him in order to be accepted. He told investors to keep quiet about their relationship and was dismissive when asked for details on his complicated investing strategy.

The stock market’s steep decline in the fall of 2008 started the unraveling of his theft. He could no longer keep up with the deception, which involved manipulating financial statements to make it appear that a client had bought and sold a stock at just the right times, creating perfect performance results. It was easy to do as Madoff’s firm was both the advisor and the brokerage firm holding the assets. (Generally clients will assign an investment advisor limited trading authorization while holding their assets at a third-party separate firm that verifies and reports on transactions such as TD Ameritrade, Fidelity or Goldman Sachs, for example.)

While Madoff was reportedly contrite in confessing to his sons and wife in December 2008, he was arrogant towards the public and his victims, who understandably could never find any compassion or understanding for him. During his subsequent jailhouse interviews, Madoff victim blamed saying “they were greedy” and suggesting that his clients should have known it was too good to be true.

The lessons for those on the sideline are many. Trust but verify. Ask your advisor questions when you do not understand and keep on asking until you do. Steer away from anyone who demands secrecy in a situation if it does not make sense. Ask for second opinions and discuss financial questions with trusted others.

Unfortunately, his jailing solved nothing, his clients recovered only some of their original investments, and his death does little to console those who were victims of his massive crime.