This is an enjoyable time of the year. It’s when families gather together to share a wonderful holiday meal and exchange presents. After all, who does not love to tear the wrapping off their presents to see what’s inside? It is really fun to see the excitement of small children as they open their presents.

This type of excitement was on display this past week as little Ben Bernanke unwrapped his present. It brought a tear to my eye as I saw the sheer joy on little Ben’s face as he gazed at his present – a shiny, brand-new helicopter! Little Ben screamed “Mommy, mommy, look at my new helicopter! Now I can dump all the money I want out of my new helicopter and make everyone happy”!

Yes, this was the week that the Federal Reserve entered uncharted territory and in effect lowered interest rates to zero. This event had been predicted in my prior Absolute Zero article and by others here at Oxbury Publishing.

I’m sure this action by the Federal Reserve was wildly cheered in the executive suites of firms such as Citibank and Bank of America. Speaking of those two shining examples of American “extreme” capitalism, there was an interesting tidbit about them in the Financial Times.

The Financial Times cited one recent estimate which looked at those two firms’ total leverage ratios. The total leverage ratio looked at both firms’ on-book and off-book assets and exposure and divided that figure by tangible equity. The leverage ratios were an outlandish 88:1 for Citibank and 134:1 for Bank of America. Is it any wonder that our financial system is in such dire straits?

Wall Street Children

The children, otherwise known as money managers, on Wall Street were also unwrapping their presents this past week. It was amazing to see the children’s reaction to the hot new Wall Street board game, Lose Your Clients’ Money.

What glee! What excitement! “Look mommy, I invested billions of dollars of clients’ money into Treasury bills at a negative rate of interest! I wanted the money to be “safe” because that bedtime story I read, Grisly Tales of Deflation, really scared me”!

Yes, the numbskulls on Wall Street continue to miss the very obvious fact that the so-called liquidity trap is quickly turning into a liquidity flood. Did they not see Ben Bernanke gassing up his shiny new helicopter? Did they not notice that Ben’s new helicopter was armed with Hellfire missiles which he fired on the dam, unleashing a flood of liquidity?

It’s a basic economic fact that in a fiat money system central banks can easily create an infinite quantity of money at no cost. So central bankers can reduce the value of the money they are creating in effect to zero, if they wish. In other words, in a fiat money system such as we have curing the much-feared deflation disease is child’s play. Yet, the Wall Street children cannot seem to grasp this. Why is this?

Mommy, I’m Scared!

As I’ve stated in prior articles, I firmly believe that our financial system is plagued by a lack of independent thinking and this lack of independent Wall Street thinkers has played a major role in the current financial crisis.

I believe this is especially pertinent in today’s society. People are exposed to Wall Street group think through media outlets such as CNBC and they also become “infected”. Therefore many individual investors also do not think for themselves and their thoughts simply line up with Wall Street’s thoughts. That’s why so many people have bought fully into the deflation myth.

The Bernie Madoff Ponzi scheme is just the latest example of how willing Wall Street money managers are to invest in something that their peers appear happy with, without doing the necessary due diligence themselves. This “herd” behavior again highlights the lack of independent thought on Wall Street.

This “herd” behavior also explains why Wall Street money managers are currently piling into Treasuries, even at negative interest rates. If “all” of the money managers are in the same investments, they are safe. That is, their cushy jobs are safe.

The money managers can simply say “But mommy, everyone else was doing it too, so you can’t blame me for the huge losses”. If Wall Street money managers dare have an independent thought and they are wrong, they soon lose their cushy jobs. Most Wall Street people will simply not risk it.

So the Wall Street money managers’ jobs are safe but the same cannot be said for their clients’ money. I want to emphasize again to investors that the number one priority for Wall Street money managers is job preservation. Preservation of clients’ capital is well down on the list. Therefore it is of utmost importance that investors get input from independent sources such as Oxbury Publishing. 

My own experience is a real life example. In my final year of twenty years at a brokerage firm, I got into lots of trouble with the new managers they had hired. Why? I was told that I was “wasting” far too much time meeting with clients and helping the clients set up investment plans to meet the clients’ financial goals!

They wanted me to spend more time bringing assets in the door. I asked – “What about when the assets are in the door, what then?” Management’s reply – “Once the assets are here, who cares? Most people are too lazy to transfer their account”! Needless to say, I moved on shortly thereafter.

Twas the Night Before…..

I wanted to leave everyone with some holiday cheer – a poem. My apologies to the original author which most people believe was Clement Clarke Moore.

Twas the night before Christmas, when all through Wall Street
Not a creature was stirring, not even a rat called Dick Fuld;
The stockings were hung by the chimney with care,
In hopes that Santa Ben with sacks full of money would soon be there;
The bankers were nestled all snug in their beds,
While visions of perks and bonuses danced in their heads;
When out on the lawn there arose such a clatter,
The bankers sprang from their beds to see what was the matter.
When, what to their wandering eyes should appear,
But a miniature limo with eight cylinders under the hood,
With a bald-headed, bearded driver, so lively and quick,
The bankers knew in a moment it must be Santa Ben.
Down the chimney came Santa Ben with a bound.
A bundle of money he had flung on his back,
And he looked like a peddler just opening his pack.
He spoke not a word, but went straight to his work,
And filled all the stockings with billions of dollars;
And giving a nod, up the chimney he rose;
He sprang to his limo, and away he flew.
As he drove out of sight, he was heard to exclaim,
“Happy Holidays to all, and to all a good night”!

Happy Holidays Everyone,

Tony D’Altorio
Analyst, Oxbury Research