Americans Stuck Between a Rock and a Hard Place

In Greek mythology, there were two monsters that lived on either side of a narrow channel – Scylla and Charybdis. Sailors who attempted to avoid one of the monsters were then subject to attack by the other monster. This myth is probably the origin of the saying “between a rock and a hard place”.

This Greek myth can be applied to how many Americans must feel today. They are caught between one monster – Scylla (Washington) and the second monster Charybdis (Wall Street). People familiar with the myth will recall that Scylla was a hideous multi-headed monster, which definitely reminds me of government in general and Congress in particular.

The other monster Charybdis had such a monstrous wide mouth that, when opened, it would create whirlpools which would suck down ships and everything else into its gaping maw. The analogy to Wall Street is very obvious. Wall Street, with its wide, hungry, greedy mouth sucks down investors' and taxpayers' capital. That capital is never to be seen again.

This past week saw the monster called Congress in action, or should I say inaction. The elitists in the US Senate gave their best impression of Marie Antoinette with their “let them eat cars” attitude towards the auto companies.

I am no fan of bailouts, but the amount of money for the auto bailout is minuscule in comparison to the ever growing bailout of the financial industry. And I think it would be nice to see Americans actually manufacturing things in this country instead of being paper pushers and Walmart (WMT) greeters.

Mad(e)off with the Money

We also saw this past week saw another great example of the Wall Street whirlpool monster in action. Former Nasdaq chairman and Wall Street bigwig, Bernie Madoff, was arrested this week for fraud. It was the biggest fraud found so far on Wall Street – at least $50 billion was sucked into the whirlpool.

The good news is that Mr. Madoff did admit to senior employees, including his sons, that his operations were “all just one big lie” and “basically a giant Ponzi scheme”. The truth will set you free, Bernie! Well, maybe not free, but it is good for whatever soul you have left, Mr. Madoff. My only question is when are all the other casino operators, such as hedge funds, on Wall Street going to fess up?

I continue to firmly believe that hedge funds will go down the same path that their predecessors - the investment trusts - did in the 1930s and become extinct. Their business models are so eerily similar with regard to the heavy use of leverage to pump up returns, the compensation models for fund management, their extreme secretiveness, and the sheer greed of the people who invested in them.

From the Goldman Sachs Trading Corp. of the 1930s to today's hedge funds, it is amazing how nothing stupefies people like money. As long as big “returns” are being made, people tend to look the other way and ignore all the warning signs. This trait is the fuel behind all bubbles and is why scams such as Mr. Madoff's go on for so long without being detected. I guess that human nature really doesn't change.

How Do We Get Rid of Cockroaches?

Speaking of things that change little, cockroaches have survived on our planet for hundreds of millions of years and are extremely hard to exterminate. Apparently, the Wall Street variety of cockroach is also hard to exterminate.

I guess as long as there is food (money) around, there will be hard to get rid of Wall Street cockroaches. Look at John Thain. He speeds the Blundering Herd at Merrill Lynch towards a certain doom with his inept management only to be saved at the last second by Bank of America. Mr. Thain believes that such so-called leadership “deserves” to be rewarded with a $10 million bonus!

I also heard this week that another Wall Street cockroach is re-surfacing. Dick “there's a reason I'm not called Richard” Fuld, former head of Lehman Brothers, is looking to set-up a boutique advisory firm.

Where's the bug spray?

The Good Ship HMS Treasuries

Something else that is timeless is how people will project recent market actions infinitely into the future. In last week's article, I wrote about the good ship HMS Treasuries and its similarity to the HMS Titanic. Both ships were considered to be ultra-safe and unsinkable.

This past week saw the pirates of Wall Street continue to load their remaining booty onto the HMS Treasuries because of their fear of the non-existent bogeyman - deflation. We actually saw the yield on 3-month T-bills briefly go negative.

These so-called professional money managers were paying Uncle Sam to hold their money! Why would anyone pay these “money managers” fees to “manage” their money for them is beyond me!

In last week's article, I also compared these Wall Street “professionals” to children gathered around a campfire, frightening each other with tales of ghosts. Although instead of ghosts, these “professional” money managers are scaring each other with ghastly tales of deflation.

I continue to maintain that deflation is a myth. The US government needs inflation so it can pay off its debts in dollars worth much less, rather than in dollars worth more because of deflation. That is why the Fed is creating trillions of dollars of Monopoly money out of thin air. So unless I see economic conditions similar to the 1930s, I maintain that inflation is the risk, not deflation.

I also wanted to offer my sincerest apologizes to any children I may have offended with last week's article. Obviously most children out there are much smarter than Wall Street money managers. I would love to see some of the Wall Street “geniuses” appear on the FOX TV show - “Are You Smarter Than a 5th Grader?”! I think we all know how that would turn out.

M'm M'm Good?

The flashing warning lights for the Treasuries and US dollar markets are becoming more numerous. Yet, the Wall Street “geniuses” continue to ignore them. The long-term downward trend in the value of the US dollar may have resumed this past week.

Japan is the second largest holder of US Treasuries, next to China. Large Japanese institutional investors are now publicly questioning the wisdom of investing in US Treasuries. After all, thanks to the Fed, US rates are similar to Japan - near zero. Why take the currency risk?

Another bright flashing warning light is rather interesting. The risk of a default on its debt by the US is now higher than the risk of a default by Campbell Soup (CPB)! M'm M'm good?

The pirates of Wall Street seem to be so afraid of the imaginary monster of deflation, that they are blindly steering their ship right toward to the very real monster of inflation. Much as in the Greek myth, the ship HMS Treasuries seems destined to disappear into the whirlpool. Just make sure your capital is not on that ship.

Disclosure: No positions.

Comments

[Asbytec]

I love your play on "Mad(e)off"...I used it recently...and independently. LOL

Yea, the regulators weren't really asleep at the wheel, they just averted their eyes. Hey, after all, when a financial economy makes money, well...that's what it's supposed to do, right?

I wonder if it's too late to start my own Ponzi scheme? In euros...

2008 Dec 17 09:09 AM

[BUGGS]

MR DALTORIO, THANK YOU FOR THIS VERY HONEST AND HIGHLY ENLIGHTENING ARTICLE!! I'M PLEASED TO FINALLY REALIZE THERE IS SOMEONE OTHER THAN MYSELF WELLING TO CALL A SPADE A SPADE!!!!! HOWEVER, YOUR ANALOGY OF THE WALL STREET PRO-FESSIONALS BEING GATHERED AROUND A CAMPFIRE "LIKE CHILDREN" ISN'T QUITE APPROPRIATE. LET'S CALL THEM WHAT REALLY APPLIES IN THIS CASE. "PROFESSIONAL CRIMINALS!!!!!

2008 Dec 17 01:39 PM