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Investing Ideas Bumbling Bankers and a Foolish Fed
Investing Ideas Bumbling Bankers and a Foolish Fed 
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By Charles Delvalle I don’t believe that the dollar’s decline will cause a “Dark Age” to strike the heart of America. And I don’t think that we will ever need to carry around gold- or silver-backed currencies again (at least not in the U.S.). |
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| Bumbling Bankers and a Foolish Fed |
| Monday, 28 January 2008 | ||||||||
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Today, Sara Nunnally of Taipan Trader checks in from tempting and exotic Morocco. You won’t want to miss her dispatch. I hear the European jet set has already invaded the place, but flowers of opportunity are just beginning to bloom. Is the climate right to invest in Morocco? That’s what Sara intends to find out… Before that though, some quick follow-up thoughts on the events of last week. On Friday we talked about Jerome Kerviel, the rogue trader who rocked the markets last week. Mr. Kerviel’s employer, Societe Generale, blamed him for $7.2 billion worth of losses. But as it turns out, things aren’t so simple as that. The rogue trader’s losses were a mere €1.5 billion (US$2.2 billion) when the bad trades were found out. It was management’s frantic decision to dump the positions en masse that added $5 billion more to the tab. The New York Times reports, “Société Générale rushed to unwind those trades during Monday’s market plunge, and trading in those futures contracts soared to record levels. The bank’s abrupt reversal contributed to a decline that snowballed into an avalanche of sell orders around the world, some traders said. The ensuing turmoil helped prompt the Federal Reserve to orchestrate the surprise cut in interest rates announced Tuesday.” Funny, that. Who’d have thought a moody junior trader -- parked behind a sixth-floor desk in a nondescript corner of a French bank no less -- could force the hand of the Federal Reserve. Not Looking Good, Ben Word is that Ben Bernanke, the chairman of the Fed, was paying close attention to European markets over the MLK holiday. The plunge was a clear factor in his decision to slash rates three quarters of a point. The Fed’s emergency move, the biggest cut in a quarter century, now looks hasty and overzealous. By reacting so hastily, Bernanke gives the appearance of a marionette, jerked this way and that by equity movements.
Some justify the size and aggressiveness of the cut based on mounting recession fears. Nonetheless, that doesn’t take away from the impression that Wall Street is the Fed’s master. There’s also the question of how much ammunition the Fed has left. If they’re already cutting rates at this clip now, where do they go six or eight months from now? Back down to 1%? Further? And what does that do to the dollar? Ay, caramba! If emergency stimulus didn’t have a downside, there would be no reason to fret. After all, who doesn’t like it when stocks are going up? Why shouldn’t the Fed do what they can to keep the good times rolling? The problem is that excess stimulus (i.e., rolling out the printing presses) has a nasty downside called inflation. To understand why a rigged-to-rise market isn’t always worth the price, take a gander at Zimbabwe. In simple percentage terms, Zimbabwe had the best-performing stock market in the world last year… and an inflation rate above 14,000% to go with it. At that rate, you’re talking a wheelbarrow’s worth of paper currency just to buy a six-pack of beer. No thanks. Comex Gold Futures, Weekly So who or what are the long-term winners in this environment? First of all, hard assets that benefit from inflation. Second of all, economies and companies with sound balance sheets (i.e., not drowning in debt) who continue to enjoy inflation-adjusted growth. Precious metals and commodities thus have a double whammy in their favor. They are simultaneously a shelter from deteriorating paper currencies -- the euro will eventually crumble, too -- and a way to benefit from long-term emerging market trends. (Even gold, a safe haven asset with limited industrial uses, benefits from rising consumer demand in the developing world.) And now over to Sara in Casablanca. warm regards, JL Source : Taipan Daily This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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