Who said the following – “Some of our bankers have shown themselves either incompetent or dishonest in their handling of the people’s funds. They have used the money entrusted to them in speculation and unwise loans.”   George W. Bush? Hank Paulson? Ben Bernacke? Nope – it was Franklin D. Roosevelt on March 12, 1933!

I guess human nature doesn’t really change much. I wonder if someone will write a book on our era similar to “The Great Gatsby” and its look at Gilded Age society. Maybe the book will be titled “The Fabulous Fuld”?

Hear the Money Talk

The ‘best’ of America was on display this past week during the Congressional hearings which looked into the credit rating agencies. You could see the greed – credit agencies will rate anything AAA as long as they are well paid  to do it. You could practically hear the money talking. You could also easily see the stupidity on display – Congress.

Speaking of greed, there are the Wall Street sales people who are very highly compensated to sell the toxic waste that Wall Street produces all over the world. I think the term that was coined in 1930 by Time Magazine applies nicely to these people – banksters.

American Bankster

“American Gangster” is a 2007 crime film starring Denzel Washington and Russell Crowe. It’s also the title of an album by Jay-Z, inspired by the film. I suspect that Hollywood film makers will come out with a film someday called “American Bankster”, detailing the corruption on Wall Street and how it brought down the global economy.

Thanks to this new generation of Wall Street banksters, another shoe has dropped which is pushing the global economy closer to an economic black hole. The latest fraud which has come to light is that these banksters have sold hundreds of billions of dollars of exchange-rate derivatives throughout the world.

These banksters are such great sales people that they sold these derivatives to hundreds of companies around the world that didn’t actually need them. I guess high commissions makes people persuasive talkers. They sold these products to companies as “insurance” against currency movements. These products only “insured” a nice fat bonus check for the people that sold them.

The reason that emerging stock markets are tanking is that many emerging market companies were sucked into these derivatives. The banksters neglected to tell these companies about the fine details of the derivatives, such as the so-called knockout options. This has left many of these companies exposed to potentially devastating losses if the currency moves beyond a pre-set limit. In effect, Wall Street banksters have put companies’ balance sheets on to the casino. Guess what? Currency movements have now gone beyond the pre-set limits.

Don’t Forget the Hedge Funds

Last week saw never-seen-before movements in the currency markets, as massive hedge fund “carry trade” positions were being unwound.  Asraf Laidi, chief currency strategist at CMC Markets, said recently “The magnitude of such historical market moves in currencies could only be the result of imploding hedge funds leading to massive liquidations.” It is this hedge fund de-leveraging in the currency markets which has exacerbated the pain in the emerging markets and ignited the problems with the currency derivatives.

How stupid, or more succinctly, how greedy were these hedge fund managers? I must admit that I was wrong about the amount of leverage they were using. I thought it was about 20 or 30 to 1. It looks like it was much, much higher.

I saw an estimate this week that said about one-fourth of hedge funds would go out of business. I think the actual figure will be much closer to what happened to the 1930s investment companies. I believe most hedge funds will go the way of another dumb animal – the dodo bird.

King Kong Kudlow

With the “carry trade” unwinding, the US dollar and the Japanese yen have been the beneficiaries. The strengthening of the US dollar has led to a parade of nitwits appearing in the financial media. It’s sad to see these so-called professions make fools of themselves as they beat their chest, like King Kong, about the strength of the US dollar.

I usually find that these “pros” have never ventured beyond the borders of the United States and have no idea of what is going on in the world around them. These so-called professionals couldn’t find China or Brazil on a map even if you gave them a million dollars to do so.

I’ve also found that these “pros” are very short-term oriented. Many of them will look at a short-term chart of the past few months and pronounce that the trend will continue ad infinitum. They don’t look beyond their nose – they look ahead a day or a week or a month at most.

What a great way to run “long-term” money for people! How about looking 5-10 years down the road when making an investment decision? Does anyone in this country make long-term investments any more? Besides Warren Buffett, that is.

These dim bulbs, like CNBC’s Larry Kudlow, love to expound about how the US dollar is strong because the US economy is strong, safe, blah, blah, blah. What mush-headed thinking. Saying that Larry Kudlow is an economist tells you about the state of economic thought in this country and gives you a hint of why the country is struggling so much economically.

Hey Larry, do you understand that the strong US dollar has just kicked out the only remaining leg of strength in the US economy – exports? Do you understand, Larry, that US manufactured products are rapidly becoming uncompetitive? Everyone in the country can’t be a greeter at Walmart!

Oh that’s right, I almost forgot the CNBC mantra – we don’t need a manufacturing base here in the US. Let’s just myopically focus on tech. The tech bubble burst nearly a decade ago and yet CNBC still breathlessly awaits for each tech company’s earnings report.

That’s right, all we need is the latest version of the iPhone to solve all our economic problems. CNBC Breaking News – Steve Jobs has just sneezed! How is Mr. Job’s health? How will that sneeze affect Apple’s stock price?

I wanted to close this article on a light note – “What’s the difference between a Wall Street banker and a pigeon?” A pigeon can still put a deposit on a Ferrari! Don’t tell me – I know. I should keep my daytime job. I tell ya, I get no respect!

Regards,

Tony D’Altorio
Analyst, Oxbury Research