The whole world seems to have traveled back in time. We once again have pirates sailing the seven seas and grabbing ships that are worth fortunes – $100 million worth of oil to be exact. The U.S. Navy which once fought the pirates of the Barbary Coast may soon engage the pirates of the Somali coast.

The financial world also seems to have traveled back in time, specifically to the 1930s. Fearful financial institutions are basically liquidating all assets around the globe and putting them into the US bond market. The bond market has now, in effect, priced in a depression and a deflation that will last in the United States for the next decade.

Yet, as the walls of the American economic system come tumbling down around them, the Laurel and Hardy of US economic policy – Bailout Ben and Handout Hank – continue to try to pull the TARP over everyone’s eyes. Recall that Laurel and Hardy were two dim but eternally optimistic men.

In their Congressional testimony this past week, Stan and Ollie stated that their policy actions to ease the credit crisis were bearing fruit. That is laughable! Do they even look at the financial markets? They neglected to tell Congress that the fruits of their actions were rotten!

FDR, Fear, and Obama

Pity poor President-elect Obama. The last time the US elected a new president at a time when the stock market had fallen more than 50 per cent was when Franklin Delano Roosevelt was elected President in 1932. In his first inaugural address, President Roosevelt uttered the famous line – “We have nothing to fear but fear itself.”

Fear is indeed something to be feared, along with greed. Fear and greed are opposite sides of the same coin of powerful human emotions. From an investment standpoint, dangerous bubbles are formed by both greed and fear. And when bubbles burst, it is always messy. We are currently witnessing the mess caused by the greed involved in the credit bubble of the last 10 years or so.

Who knows what the consequences will be of the current growing bubble in Treasuries that is being caused by fear. I suspect that when that bubble bursts and the leveraged purchases of US Treasuries turn into massive losses, the financial institutions who bought Treasuries at a yield of zero per cent will go the way of the dinosaur.

Going back to FDR, in that same famous first inaugural address, using a biblical analogy, FDR said the following “The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.” Unfortunately right now the “money changers” are still sitting in their high, cushy, well-paid seats of power and are still in complete control of the American “temple”.

Hear the Money Talk

“Money Talks” is the title of a song from the Aussie hard rockers AC DC’s album “The Razor’s Edge”. Let us hope it will not be a song that is played often in a new Obama administration. Will a President Obama force the Wall Street “money changers” to flee? Will a President Obama battle the big money interests, ala a President Andrew Jackson?

President-elect Obama is off to a most inauspicious start. His appointment of New York Fed chief, Tim Geithner, as the new Treasury secretary tells me that unfortunately it will be business as usual for Wall Street. As head of the New York Fed, Mr. Geithner was in a key oversight position with regards to Wall Street. Yet, either through his stupidity, or perhaps duplicity, he turned a blind eye toward all of the shenanigans which were occurring on Wall Street.

I had heard from my Wall Street contacts that the bigwigs on Wall Street were heavy contributors to the Obama campaign. I guess they were right – now Wall Street has just the patsy they want in as the next Treasury secretary. Can you hear the money talk? 

Wyatt Earp or Barney Fife?

What is needed from a new Treasury secretary is for that person to do for Wall Street what Wyatt Earp did for Dodge City, Kansas. What is needed a strong-willed, hard-nosed person to not only go after the crooks, but to also use all forms of government “persuasion” possible on the bankers, to twist their arms, and tell them to LEND!

The bankers are driving the US economy toward a replay of the Great Depression of the 1930s. I am not a big fan of sequels, so I am not looking forward to seeing Great Depression II. The bankers are not lending money to anyone, not even the strongest, most viable corporations. Economic activity is quickly entering an “Ice Age”. If necessary, bankers must be told to LEND or face nationalization and the loss of their cushy multi-million dollar jobs.

There are historical precedents for appointing such a strong-willed person into a position of authority. Look at FDR’s appointment of Joe Kennedy as the head of the Securities and Exchange Commission. Upon being asked about that appointment and why he named a “crook” to head the SEC, FDR famously said, “It takes one to catch one!” Kennedy’s reforming work at the SEC ended up earning praise from all sides of the political aisle.

Will Tim Geithner be the strong-willed, tough sheriff of Wall Street and the US economy? Or at the very least, a Joe Kennedy? I strongly doubt it. Based on his history, I think that the odds of that are slim and none. And slim has just left town!

When I think of Tim Geithner, what comes to mind are images of the inept, bumbling deputy sheriff of Mayberry, North Carolina – Barney Fife. What this country needs now is a Wyatt Earp, not a Barney Fife. A pity that Don Knotts, who portrayed Barney Fife, is now deceased. He probably would have been a better choice for Treasury secretary.

Regards,

Tony D’Altorio
Analyst, Oxbury Research