Bubble-hunting has become more art than science

With the usual gauges of frothiness out of action, behavioural signals are all investors have

Upon being sucked into investing during the South Sea Bubble, Sir Isaac Newton reflected that he could “calculate the motions of the heavenly bodies but not the madness of people”.

From tulip mania in 17th-century Amsterdam to railway fever in Victorian Britain, history is littered with tales of investors who lost their heads shortly before they lost their shirts, in the grip of mass delusions described by Alan Greenspan, a former chairman of the Federal Reserve, as “irrational exuberance”.

These delusions seem obvious with the cold clarity of hindsight. Spotting them in real time, however, is trickier—especially when the usual measures of frothiness are out of action. Wall Street types typically pore over price-to-earnings ratios, which compare a firm’s value with its profits, or free-cashflow measures, which look at the cash firms crank out after investment.

Warren Buffett targets firms with a high return on capital, which compares their profits with the size of their balance-sheets. But the covid-induced economic slump has caused earnings to sink even as the Fed and other policymakers have helped buoy share prices. The obvious gauges of frothiness are not much use.

This poses a problem for investors confronting the startling fact that the s&p 500, a share-price index of America’s biggest public companies, reached an all-time high on August 18th in the middle of perhaps the sharpest ever economic downturn. Without hard numbers to count on, they must interpret the market’s unusual behavioural signals in order to spot the froth.

One such sign is the mystifying moves in some stocks. On August 19th Apple became the first American company to touch a valuation of $2trn. Tesla, a carmaker that is undertaking a stock split at the end of August, has quadrupled in value so far this year. It is now worth $354bn, more than Ford, Toyota and Volkswagen combined.

Nikola, an electric-truck firm (that has yet to make any lorries), has tripled in value since May.

Even more perplexing was investors’ fondness for Hertz, a car-rental firm. Its share price rose tenfold after it declared bankruptcy (though this bubble has since popped).

Anecdotally at least, this frothiness seems linked to a second phenomenon: a zeal for retail investing. Take, for instance, the popularity of Robinhood, a trading platform, which has opened 3m accounts since the end of 2019, taking its users to 13m. Or consider “r/wallstreetbets”, a forum on Reddit, which encourages its readers to make “yolo” (you only live once) bets on short-dated speculative options (akin to lottery tickets) in order to earn “tendies” (short-term gains).

The number of subscribers to it has nearly doubled since January to over 1.4m, edging out its staid cousin, “r/investing”, which preaches the virtues of punting on diversified baskets of low-cost index funds.

That exuberance has been matched by a third behavioural oddity: companies’ enthusiasm for issuance. Dealogic, a data provider, finds that stock issuance in America has jumped by 85% year-on-year so far in 2020. Part of that may be a result of the pandemic; many companies have raised capital to build up war-chests. But issuance is also compelling in bubblier times, because it allows firms to capitalise on lofty valuations. Hertz tried to raise up to $1bn in new equity after it had filed for bankruptcy, before regulators intervened.

Moreover, after a hiatus in the first half of the year, tech firms are rushing to list. Special-purpose acquisition companies (spacs)—listed shell companies that then merge with private firms, offering a speedy, back-door route to going public—are all the rage. spacs were once a dirty word on Wall Street, thought fit only for firms unworthy of an initial public offering. But now they are in favour with firms and investors. They have raised $12bn so far this year, just shy of the amount raised in all of 2019.

What to do, in the face of all this enthusiasm? Other assets may start to seem more alluring. On August 14th Berkshire Hathaway, Mr Buffett’s investment firm, said that it had sold chunks of its stakes in banks and bought up shares in Barrick Gold, a mining company. But gold and other assets have also shot up in value this summer.

As markets rise further it may become even harder to resist joining the fray. Some investors may pile in, and exit with a profit. But even the most brilliant minds can be bamboozled. Sir Isaac spotted the bubble early and liquidated his holdings—only to be sucked back in at the very peak.

Is the Almighty Dollar Slipping?

Far from signaling its imminent demise as the main global reserve currency, the greenback's sharp depreciation is to be expected in the current macroeconomic context. The forces that could erode the dollar's hegemony remain slower-moving and farther off

Nouriel Roubini

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NEW YORK – The recent sharp depreciation of the US dollar has led to concerns that it may lose its role as the main global reserve currency. After all, in addition to the US Federal Reserve’s aggressive monetary easing – which threatens to debase the world’s key fiat currency even further – gold prices and inflation expectations have also been rising.

But, to paraphrase Mark Twain, reports of the dollar’s early demise are greatly exaggerated.

The greenback’s recent weakness is driven by shorter-term cyclical factors. In the long run, the situation is more complicated: the dollar has both strengths and weaknesses that may or may not undermine its global position over time.

Chief among the short-term negative factors is the Fed’s ultra-loose monetary policy. With the United States monetizing ever-larger budget deficits, the Fed’s approach looks more accommodative than that of most other major central banks.

The dollar tends to weaken during risk-on episodes, and vice versa. That is why its value peaked during the February-March panic over COVID-19, and then weakened from April onward as market sentiment recovered.

Moreover, the Fed’s activation of currency swap lines with other central banks eased the dollar illiquidity that had been pushing the exchange rate higher earlier in the crisis. Now, a flood of global dollars is putting downward pressure on the greenback.

Moreover, some developed countries (in Europe and elsewhere) and some emerging markets (such as China and others in Asia) are doing a much better job of containing COVID-19 than the United States is, implying that their economic recoveries may prove to be more resilient.

The public-health failures and related economic vulnerabilities in the US are thus further contributing to the dollar’s weakness.

It also bears repeating that before the pandemic, the dollar had appreciated by over 30% in nominal and real (inflation-adjusted) terms since 2011. Given the yawning US external deficit, and because interest rates are not high enough to finance it with capital inflows, a dollar depreciation was necessary to restore US trade competitiveness. And the US turn to protectionism signals that it prefers a weaker dollar to restore external competitiveness.

Even in the short run the dollar could strengthen again if – as the latest global growth data suggest – a V-shaped recovery stalls into an anemic U-shaped recovery, let alone a double dip, if the first pandemic wave is not controlled and a second wave kills the recovery before effective vaccines are found.

In the medium to long term, multiple factors could preserve the greenback’s global dominance.

The dollar will continue to benefit from a broad-based system of flexible exchange rates, limited capital controls, and deep, liquid bond markets. More to the point, there simply is no clear alternative currency that could serve as a broad unit of account, means of payment, and stable store of value.

Furthermore, despite its pandemic travails, the potential annual US growth rate, at around 2%, is higher than in most other advanced economies, where it is closer to 1%. The US economy also remains dynamic and competitive in many leading industries, such as technology, biotech, pharmaceuticals, health care, and advanced financial services, all of which will continue to attract capital inflows from abroad.

Any country vying for the US position would have to ask itself if it really wants to end up with a strong currency and the associated large current-account deficits that come with meeting the global demand for safe assets (government bonds).

This scenario seems rather unattractive for Europe, Japan, or China, where strong exports are central to economic growth. Under the current circumstances, the US is likely to maintain its “exorbitant privilege” as the issuer of safe long-term debt that private and public investors want in their portfolios.

The question, then, is what factors might undermine the dollar’s global position over time.

First, if the US keeps monetizing large budget deficits, thereby fueling large external deficits, a surge of inflation eventually could debase the dollar and weaken its attractiveness as a reserve currency. Given the current mix of US economic policies, this is a growing risk.

Another risk is the loss of US geopolitical hegemony, which is one of the main reasons why so many countries use the dollar in the first place. There is nothing new about the hegemon’s currency being the global reserve currency.

This was the case with Spain in the sixteenth century, the Dutch in the seventeenth century, France in the eighteenth century, and Great Britain in the nineteenth century. If the coming decades bring what many have already called the “Chinese century,” the dollar may well fade as the renminbi rises.

Weaponization of the dollar via trade, financial, and technology sanctions could hasten the transition. Even if American voters elect a new president in November, such policies are likely to continue, as the Cold War between the US and China is a long-term trend, and US strategic rivals (China and Russia) and allies alike are already diversifying away from dollar assets that can be sanctioned or seized.

At the same time, China has been introducing more flexibility to its own exchange rate, gradually relaxing some capital controls, and creating deeper debt markets. It has convinced more trade and investment partners to use the renminbi as a unit of account, means of payment, and store of value, including in foreign reserves.

It is building an alternative to the Western-led Society for Worldwide Interbank Financial Telecommunication (SWIFT) system, and working on a digital renminbi that eventually could be internationalized. And its own tech giants are creating huge e-commerce and digital-payments platforms (Alipay and WeChat Pay) that other countries could adopt in their own local currency.

So, while the dollar’s position is safe for now, it faces significant challenges in the years and decades ahead. True, neither China’s economic system (state capitalism with financial controls) nor its technocratic-authoritarian political regime has much appeal in the West.

But the Chinese model has already become quite attractive to many emerging markets and less democratic countries. Over time, as China’s economic, financial, technological, and geopolitical power expands, its currency may make inroads in many more parts of the world.

Nouriel Roubini, Professor of Economics at New York University's Stern School of Business and Chairman of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank. His website is NourielRoubini.com, and he is the host of NourielToday.com.

In Belarus, Russia Bides Its Time

Any move by the West will likely tip the scales in Moscow’s favor.

By: Ekaterina Zolotova

Let’s take stock of the situation in Belarus. Two weeks ago, Alexander Lukashenko was reelected president in what is widely considered a sham election. Violent protests began immediately thereafter, with laborers later striking and joining the fray, demanding Lukashenko's resignation. Opposition leader Svetlana Tikhanovskaya left Belarus for Lithuania as soon as the results were in and has since formed a coordination group for the transfer of political power.

Russia and China congratulated Lukashenko on his victory, while Poland, the Baltic states and other Western countries rejected it. The European Union said it does not recognize the election results and will impose sanctions on those involved in electoral fraud and voter suppression. The U.S. is considering similar measures.

Put simply, everyone is worried about Belarus, a strategically important country sandwiched between Russia and Europe that serves as an important transit zone and insulates Russian troops from American troops permanently stationed in Poland. A shakeup there could alter the balance of power in the region, but so far no one seems willing or able to put much at risk to resolve the conflict themselves.

Tipping the Scales

Which is not to say they have been doing nothing. Reportedly, Poland and Lithuania have been especially supportive of the Belarusian opposition. Poland’s interests in doing so are straightforward: geographical, historical and cultural proximity – in fact, what is now Belarus was once part of Poland – as well as a desire to become the dominant power in Eastern Europe and protect itself against Russia. Lithuania’s interests are similar; it’s trying to strengthen its role as a regional leader and become representative of the interests of the EU and NATO in the East. (It, too, remembers a time when it was a much larger power that controlled parts of Belarus.)

It’s little wonder that the two have long worked against the current Belarusian government, which tries to balance between Russia and the West but is much more beholden to Russia. So when they can, Belarus’ neighbors try to tip the scales in the West’s favor. Just before the presidential election in 2006, for example, Lithuania’s president warned that Belarus could attack the country, even as Belarusian intelligence announced the discovery of bases of political opponents allegedly intent on disrupting the election.

In the past, Minsk has also accused the Polish Embassy in Belarus of gathering information about the organization of ethnic Poles in Belarus and interfering in its affairs.

This year, Belarusian media reported that many of Lukashenko’s political opponents passed through Poland. It’s not proven that Poland and Lithuania did any of the things they have been accused of, but given their interests it’s plausible they did.

Yet, there’s only so much they can do, since they’re too weak to replace Russian influence in Belarus on their own. For that, they’d need the help of the EU, which they have tried to recruit to the effort by focusing on the threat of expanding Russia’s domain into their sphere of influence. (Many of the bloc's members, including Germany, value their bilateral ties with Russia too much to break things off.)

This time, though, they are trying to be recognized as mediators, which Brussels is unlikely to grant. If it doesn’t, they may be forced to turn to the U.S. for help. And though Lukashenko has certainly accused the U.S. of organizing some of the ongoing protests, Washington actually has no reason to provoke a conflict with Moscow. Its security interest is in the stability of Poland, so there’s no need for it to make a rash decision in Belarus.

Nothing New

The EU, meanwhile, has always been wary of Belarus, which it saw as a Russian stooge. But as with so many other issues, the EU was divided on Belarus.

The split is explained largely by geographic proximity: Western European countries didn’t have particularly close ties with Belarus or Russia and thus didn’t show much interest in what happens in Minsk. Eastern European countries never had that luxury.

Germany, for example, has fairly close economic and political ties with Russia and is interested in Belarus as a stable transit zone, so it will not fully support Poland and Lithuania in their campaign against Belarus. And with the coronavirus crisis, economic recession and Brexit, the European Union doesn't really want to spend its resources to fight for democracy in Belarus anyway.

Its decision not to recognize the election results and levy sanctions, too, is less remarkable than it sounds. It’s the only thing it can do to show it cares without spoiling relations with Russia.

Nor is it new; it did the same thing in 2006, when protests erupted after Lukashenko won the presidency. After the 2010 election, the president of the European Parliament said Lukashenko’s victory was illegitimate. In the 2015 elections, the European Union actually recognized Lukashenko as the head of Belarus but did not invite the elected leader to European talks.

The newest sanctions are not yet in place, but when they go live, they will be directed against people who have already been under sanctions and know how to develop the country and maintain bilateral trade relations. In short, so long as Lukashenko remains in power, the EU knows how to deal with Belarus and Russia.

Russia Keeps Calm

Belarus is Russia’s only remaining ally to the west, and it is in the Kremlin’s interests to keep it stable without directly intervening. It will if it must, but it likely won’t have to, since Lukashenko still has the support of the military.

And it probably doesn’t want to. The conflict is a unique chance to improve Russia's position in Europe, especially when the slowing Russian economy is in such need of new sales markets and support for gas projects. The EU chose Russia as the main mediator of this conflict - German Chancellor Angela Merkel and French President Emmanuel Macron discussed the situation in Belarus with Russian President Vladimir Putin rather than with Lukashenko.

The Kremlin still has an option to give Lukashenko an offer he can't refuse. But Russia is in no hurry to do it alone; it is in its interests to establish joint efforts with the EU, if they’re so inclined. Russia can even agree to new elections, but only if the EU promises the Kremlin that the Russian position in Belarus will not change.

And that’s the key point. Russia can’t afford to lose its important buffer zone, so it absolutely wants to keep Belarus pro-Russian, or at least neutral. But the Kremlin is keeping calm; the sanctions imposed on Belarus mean relations with the EU will degrade at least a little and Russia will reap the benefits. (For example, if Lithuania refuses to supply goods to Belarus through its ports, Belarus can always find a way out through Russian ports.)

The good news for Moscow is that Belarus understands its limits. It knows its small economic potential could theoretically be exploited by Western states, and if it left Russia’s orbit, and thus leaves the Eurasian Economic Union, it could lose about a quarter of its gross domestic product.

Protests in Belarus may continue, but the president still has all the levers he needs to suppress unrest. He also understands that no country wants to have a second unstable country in the region. Russia may gradually move from the role of an observer to the role of an active player, who will be sympathetic to both the tired Belarusian public and the worried EU, which may only increase Russian influence in Belarus.

Wall Street Is Looting the American Retirement System. The Trump Administration Is Helping

The Trump administration is opening up retirement funds to private equity — at workers’ expense


American flags are seen outside the New York Stock Exchange (NYSE) on July 20, 2020 at Wall Street in New York City. - Wall Street stocks were mixed early July, 20, 2020 as markets awaited congressional debate on another round of stimulus spending and major earnings releases later in the week. (Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE/AFP via Getty Images)
American flags are seen outside the New York Stock Exchange (NYSE) on July 20, 2020 at Wall Street in New York City. - Wall Street stocks were mixed early July, 20, 2020 as markets awaited congressional debate on another round of stimulus spending and major earnings releases later in the week. (Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE/AFP via Getty Images) / Johannes EISELE / AFP/Getty Images

The Trump administration is pushing dramatic changes to the American retirement system that will benefit Wall Street but push average citizens into plans that are riskier, less profitable, and loaded with high and hidden fees.

In the past two months, the Trump’s Labor Department has introduced two pending changes to deregulate vulturous private equity firms and multi-trillion dollar retirement managers like Vanguard, Fidelity, and BlackRock.

A third proposed change would restrict retirement investments with an underlying environmental, social, or governance mission — mainly to boost the struggling fossil-fuel industry.

If finalized, the result will be death by a thousand cuts to Americans’ diminished retirement nest egg, amounting to an all-out Wall Street looting of American retirement.

Pushing this through is Secretary of Labor Eugene Scalia — son of the late Supreme Court Justice Antonin Scalia — who for many years was one of Wall Street’s most prominent litigators, representing corporations like Chevron, Walmart, and Facebook, as well as over a dozen banks and financial firms during his tenure at Gibson, Dunn & Crutcher, a law firm with a robust corporate lobbying wing.

How Wall Street Works Over Workers

For the millennials and zoomers in the crowd, perhaps a quick review of the basics of retirement is helpful. “Retirement” refers to a period toward the end of a human life during which ordinary people could use money they’d saved and invested — combined with Social Security payments — to stop working but still live comfortably.

This used to be considered a core part of the American dream. But for reasons having very much to do with the growth of the financial sector, austerity budgets eroding the welfare state, and the decline of union membership (and having absolutely nothing to do with avocado toast), retirement as a concept has become more of a goal than a guarantee.

There are a few things still working in our favor, however, including federal rules aimed at making sure we get the most out of the money we save for retirement. The 1974 Employee Retirement Income Security Act (ERISA) gives the Labor Department control over all areas of retirement investing — including “defined contribution” plans like 401(k)s and “defined benefit” plans like union pensions.

Pensions are a retirement fund where employers guarantee a certain level of payout (a “defined benefit”) and agree to be on the hook for covering that payout, even if the pension fund’s investment returns can’t cover it. Also, financial professionals manage pensions, thus reducing the likelihood of retirees being confused or swindled by complex financial arrangements.

This even allows pensions to take on higher-risk products like private equity funds. But today, only 27.3 percent of retirees, shrinking with nationwide unionization rates, have a pension.

For everyone else, there is a 401(k), where workers and retirees pay in their “defined contribution” — and then get payouts from it based on how well the investments perform. An employer’s human resources department usually provides the retiree with a menu of 401(k) investment options, but few HR managers are financial professionals so their menu is rarely curated to the workers’ wants or needs. Originally, 401(k)s were meant to supplement pensions, but today, only 6.8 percent of retirees have both types of plans, and Social Security, as intended.

The federal government, and the Labor Department in particular, have a big role making sure these plans work the way they’re intended, and in (at least in theory) preventing people from getting swindled by investment managers. One of the main guardrails aspiring retirees have is what’s known as “fiduciary duty,” a rule that requires managers of both pensions and 401(k)s to provide the best possible service — here, meaning the best quality investments for the lowest possible cost — or face liability.

The fiduciary duty combined with workers being on the hook make the 401(k) sector a fertile breeding ground for high-stakes, multiparty lawsuits, where employers fight off accusations by workers and retirees of selecting low-performing and/or high-fee funds for their 401(k)s.

An employer may negligently choose a retirement investment manager because they were the most readily available, or they didn’t have the resources to find an optimal plan, or they were mistaken of a fund’s potential. Other times — as was alleged against the Massachusetts Institute of Technology’s retirement plan last year when the school received a $5 million donation from Fidelity Investments — the employer might have an incentive for choosing a certain fund.

For many years, one of the most prominent employer-side litigators was Eugene Scalia himself. “None of the prior secretaries of labor, either Democratic or Republican, have been people who have been on the firing line against workers and retirees,” said plaintiff’s attorney Jerome Schlichter, whose law firm pioneered retirement excessive-fee litigation. Schlichter directly butted heads with Scalia in an ongoing retirement fund suit right up until his secretarial appointment.

Andy Behar, CEO of As You Sow, a nonprofit that rates the financial sector for its ethical standards, said that Scalia’s three most recent DOL rulemakings suggest a personal vendetta.

“He’s couldn’t win as an attorney, so he’s changing the rules,” Behar said.

The Private-Equity Exposure

One of the Trump administration’s planned changes to retirement rules will open up 401(k) investments to high-risk, high-fee private equity funds. It’s a major break with past practices, but it wasn’t done through a formal rule process that would allow for scrutiny and public input.

Instead, in early June, the DOL sent a high-profile information letter to Pantheon Ventures, a private equity firm, codifying conditions, such as a 15 percent cap, for a 401(k) to invest in private equity. The letter formalized private equity’s entry into the 401(k) marketplace, creating a blueprint for copycats and sending shockwaves throughout both sectors.

Private equity is a type of hedge fund comprising private investors who buy privately held, struggling companies in order to rehabilitate or liquidate them, collecting extremely high fees and enriching shareholders either way. Direct investments in private equity and other types of hedge funds are typically restricted to high-net-worth individuals or institutions.

This is because high-net-worth individuals and large institutional investors have extra, discretionary money to handle private equity’s huge risks, long-term illiquidity, astronomical fees, and “capital calls,” investor fundraisers demanded at the drop of a hat. In other words, high-net-worth individuals and huge institutional investors can afford to burn that money if the investment goes south.

The average retirement investor, however, has always been considered uniquely reliant on their savings, which is why ERISA’s fiduciary duty requires a very conservative investment strategy. Considering private equity’s many risks and costs, the government, until now, and 401(k) plaintiffs’ attorneys have largely opposed it in retirement plans.

According to Wally Okby, a senior analyst at Aite Group, the pool of available capital from high-net-worth investors for private equity has recently dried up. And considering the shrinking state of pensions, private equity is chomping at the bit to enter the $8.9 trillion 401(k) marketplace. “They’re looking for cash anywhere they can get it,” Okby said. “Therefore, they go to 401(k)s, where investors typically don’t understand what they’re investing into.”

In an ensuing press release, Secretary Scalia said the Pantheon letter helps “level the playing field” for ordinary investors. Securities and Exchange Commission Chairman Jay Clayton also praised the letter as improving “investor choice.”

Investor advocates disagreed. “The use of private equity in retirement plans is fraught with peril. It was a vehicle that was created for wealthy, sophisticated investors, not for average people,” Schlichter said.

The letter is part of a broader private-equity lobbying, pressure campaign, and creation of complicated fund structures designed to prey on more of Americans’ hard-earned savings. Clayton and other lawmakers have made several moves to lower barriers for private fund access to Main Street investors. On July 28th, one senior SEC director at a conference openly solicited the financial-industry attendants on what SEC rules should be changed to open up working people’s money to hedge funds and private equity.

The letter also comes in light of a recent SEC warning that some retail fund managers have been receiving undisclosed kickbacks from private-equity investments.

The industry has supported the letter on the disputed belief that private-equity investments outperform the stock market at large. George Gerstein, an attorney for the financial industry and co-chief of fiduciary governance at Stradley Ronon, believes that increased private-equity exposure will increase performance of retirement plans, especially as a counterweight to other economic headwinds. But a recent study at Oxford University found that, after fees, top private-equity funds have performed no better for pension funds over 15 years than if the money were passively indexed to the stock market.

Further, private-equity disclosures lack any standard date or metrics, so its disclosed performance data is inherently misleading, Roper argued.

A 401(k) was designed to allow a worker to select different investments in the employer-provided menu to suite their wants and needs: shorter-term or longer-term growth funds, high or lower risk, smaller- or larger-sized company exposure. But in reality, workers overwhelmingly do not make any changes to their 401(k) investment lineup, Roper said. That means that even if private equity did disclose its risks, most people probably wouldn’t change anything. Plus, any disclosure could be found on the 40th page of dense legalese. “Maybe because the typical worker isn’t a financial analyst,” Roper understated.

Undoing the Fiduciary Duty

On June 29th, 2020, the Department of Labor unveiled its second major shift, a proposed update to the breadth and depth of the retirement professional’s fiduciary duty — money managers’ requirement to provide the best possible service or face liability.

The proposed rule would reduce the fiduciary duty to cover fewer transactions and parties, opening up enormous loopholes wherein a retirement professional has to uphold their fiduciary duty.

Shockingly, it would also allow any retirement professional to receive third-party payments for their recommendations, so long as they adhered to an undefined “best interest” standard and didn’t “materially” mislead investors. This part of the rule is perhaps akin to a doctor being allowed to take kickbacks in exchange for prescribing certain pharmaceuticals. Scalia said his rule expanded “investor choice.”

Once again, investor advocates disagreed. “[T]he proposal is designed to preserve financial firms’ ability to place their own interests ahead of their customers’ interests and profit unfairly at their expense,” argued a public letter co-signed by several investor advocate groups.

That Scalia is the one proposing the rule is, to many, an inverted justice. When Scalia was a Wall Street attorney, in one of his most notorious cases, he led litigation for Wall Street groups in successfully overturning an Obama DOL rule that enhanced the scope of a financial professional’s fiduciary duty to retirees.

Given Scalia’s role in the prior rulemaking, both Schlichter and Roper believe Scalia’s role in its replacement was conflicted, and that many believe he should have recused himself from fiduciary rulemaking. Gerstein disagreed with both assertions.

A spokesperson for the Department of Labor noted that Scalia sought advice from the DOL’s career ethics attorneys, who also consulted the U.S. Office of Government Ethics, and they determined that neither relevant ethics rules nor the Trump administration’s Ethics Pledge required his recusal from the rulemaking.

A Fossil-Fueled 401(k)

The investment world has recently been choosing to invest heavily in renewable energy, diverse workplaces, and companies with fair-labor practices. So-called environmental social governance (ESG) investing has become incredibly popular, with US SIF estimating that today one-quarter of all U.S. dollars invested have some form of an ESG mandate, an 18-fold increase between 1995 and 2018. Financial firms have been working doggedly to create new funds and products that meet customers’ growing demand.

And it’s popular not just because of some charitable spirit. Performance data shows that not only does ESG investing outperform traditional investments in a good economy, but it also loses less in a downturn, though there is some disagreement. Most ESG-sector growth has remained outside of retirement due to retirement’s need for perceived low-risk investments, but given ESG’s growth, it was inevitable that it would eventually enter retirement investing.

Or at least, it was inevitable, until mid-June, when the DOL unveiled its third monumental retirement rule proposal, this time from authority from a Trump executive order promoting fossil fuels. The Labor Department’s slash-and-burn rule will subject all ESG in retirement plans to the stigma of heightened scrutiny. While on its face, the rule clarifies what is already the law — that retirement investments must meet fiduciary-level scrutiny — it also forbids retirement plans from having investments that promote some “non-pecuniary” purpose, such as not destroying the planet, no matter retirees’ wishes.

“Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” Scalia said in a press release.

The consensus in the financial sector is that this rule will have a chilling effect on ESG and benefit the Trump-allied fossil-fuel sector.

“Basically the rule that they proposed is deeply internally conflicted. On the one hand, you have to make decisions on financial returns, and yet if you did that, you’d have to exclude fossil fuels,” Behar from As You Sow said. “Why is the DOL saying that fiduciaries should steer clear of less risk, steer clear of outperformance?”

Like the other regulatory shifts, the DOL is not acting alone. The SEC has scrutinized and criticized ESG, alongside the New York branch of the DOL and the White House itself. Despite this antagonism to ESG, European regulators, Democratic lawmakers, investor advocates, and even the investment industry itself support expanding and standardizing the ESG sector.

“The ESG rule is just straight political,” Roper said.

Foxes Guarding the Retirement Coop

Together, the Trump administration’s plans contribute to a remaking of a retirement system that gives financial firms new opportunities to cash in at the expense of greater risk to workers, while making it harder for us to use our money to build the kind of world we’d like to retire into.

The most perplexing aspect of these rules is their open contradictions. The Labor Department’s justifications for the private equity letter and the standard of conduct rule were to expand “investor choice.” While the rule on environmentally and socially conscious investing effectively shuts out investor choice. The rules allow a retiree to “choose” a high-risk, high-fee investment, or to “choose” a retirement adviser who gets a kickback for their imprudent recommendations. But retirees may not choose an investment that promotes the idea that cutting carbon emissions or increasing diversity are in and of themselves good investments.

“You could understand if they took a laissez faire approach to both.… or if they took a restrictive approach to both,” Roper said. “This is about picking winners and losers. And the losers are going to be retirement savers.”

“They just don’t like transparency; they want to put us in the most risky, nontransparent vehicles they can find,” Behar said. “I guess that kind of squares with this administration.”

Discouragingly, the rules seem likely to go forward. The private-equity letter effectively lets the horse out of the barn. And while the two formal rules haven’t been finalized, there’s little to stand in their way, as legal challenges seem unlikely after a related SEC decision was upheld in June.

In theory, individuals could sue their retirement-investment managers on a case-by-case basis if they felt the money was being mismanaged, but that’s no substitute for a system that works to protect them in the first place — something Scalia seems hell-bent on trying to dismantle.

Then again, Scalia’s only calling the shots so long as Trump is in the White House.…