The Everyman Economist

Who’s kidding who? Are we really to believe that a 31 year old Everyman trader with roots in the back office of the second largest bank in France is a ”rogue” culprit in a $7.1 billion trading loss?

Having traded myself for more than 25 years and having been in charge of hundreds of traders and their activities in both a British and French bank, I can tell you with authority that if the above is true, there aren’t enough people you can terminate for incompetence. And if the above isn’t true, terminations should be accompanied by prosecutions.

For starters, there has been overwhelming scrutiny over the past few years related to risk management at all financial institutions. A trader can hardly breathe without someone questioning the source of his oxygen. But apparently at one French bank, one lonely Everyman was able to put together a patchwork of transactions that quietly hid his journey into infamy. Furthermore, anyone who has ever traded in the financial markets will tell you that a $7.1 billion loss is just plain inconceivable. Some of the best traders in the history of Wall St folklore were known to have made or lost in the hundreds of millions on a specific trading move. I can think of only one trader, perhaps the best ever, who bet against the British Pound and profited by something more than $1 billion. But to lose more than $7 billion on a single trading foray is beyond human comprehension. And to have it go undiscovered is an absurdity wrapped in baloney.

No financial institution anywhere on our planet should be allowed to escape such lunacy. From the heirarchy on down, any person who is in some way responsible for the institution’s management of risk and/or trading activities, should be sent packing. There is no other way to convey the simple message in this type of debacle that it will NEVER happen again. The consequences must be consistent with the deed and that requires a housecleaning of historic proportions. If we were all French Everymen, we should demand no less.  

Since the late 1960’s, I’ve made my way through at least 6 business cycles. In Everyman English, and to paraphrase Charles Dickens, a business cycle is the period between “the best of times and the worst of times,” economically speaking. Now who among us doesn’t know that life has its ups and downs? Nobody lives an entire life of either sheer pleasure or abject misery and the same can be said of the US Economy. This truth is so inevitable that we can track the history of business cycles all the way back to the 1800’s. Since we know that these cycles are going to occur, like it or not, it is most important to determine the catalysts that can either end or begin a cycle. But darn if we just can’t seem to get the hang of it.

In the 1980’s the US Economy was riding high. The President and Congress mortgaged the future and built up a deficit that helped create a spectacular binge which would inevitably crumble. That happened late in the decade with the collapse of the “junk bond” market and the resulting S&L crisis, the catalysts that ended the Reagan business cycle.

In the 1990’s the US Economy was riding high. The President and Congress set the stage for the healthiest economy this country had seen since the end of WWII. It was so healthy, in fact, that it gave birth to a technology frenzied “boom” that by the end of the decade resembled the Industrial Revolution of the turn of the previous century. And then kerflooey! Too much borrowing, too much partying and too much optimism gave way to a busted Clinton business cycle. And we’ve been recovering ever since.

We’re now in a new decade and a new century and only 7 years later, here we go again. After the President and Congress mortgaged the future, built up a historic deficit, and dragged us out of the depths of technology despair, we were riding high. Perhaps many of us learned from our esteemed leaders that the more you borrow, the better off you will be. But that is exactly what brings us to our current situation. The housing boom, stoked by over-speculation, easy money and irresponsible borrowing, is the newest culprit behind a busted Bush business cycle.

So what have we learned? Not much I’m afraid. The inevitability of business cycles is here to stay because we just can’t seem to get enough of a good thing, even if we kill it in the process. And what are we going to do about it now? If I read correctly, we’re going to give Everyman a check for at least $250 and maybe as much as $800. Now I’ll take free money just like the next Everyman, but I’m using it to pay one of my credit card bills (uh, guilty). And I hope you will too.             

What is up with Gold and Silver? Prices!!! They are through the roof. What started several years ago way down at $250 an ounce for Gold and $4 an ounce for Silver is now a runaway train, with prices recently topping $900 and $16 respectively. And many analysts are predicting even higher prices in the months ahead. So what’s fueling this raging bull market in precious metals and will it continue?

It’s no surprise that the US twin deficits, creeping inflation, record oil and gasoline prices, weak dollar and declining stature abroad are all at the heart of the surge in the bright and shiny stuff. They’re a great place to park at least some of your money when all of the above fundamentals are looking so doomy and gloomy. Since there’s little on the immediate horizon to change things, my bet is you haven’t seen the highest prices yet and when a bull market is raging, either ride the bull or get out of its way, lest you get gored, and I don’t mean Al.

Most recently, the newest catalyst in the picture is actually and perversely a weaker US economy. You see the worse the economy gets, the more aggressive the Fed will be in lowering interest rates, as evidenced by Chairman Bernanke’s comments last week that the Fed is prepared to do whatever it takes to help the ailing economy. When a Fed Chairman makes these remarks while inflation is beginning to rear its ugly head, that equals sensational news for Gold and Silver prices. And that’s why you’ve seen the most recent push over $900 and $16 in these favorite metals. Throw in the institutional demand from ETF’s (we’ll save that discussion for another time) and you have an all out barn burner.

It’s hard to say where this will all stop and if it will stop anytime soon, so you may as well get on board and ride the bull. Or at least buy some Gold and Silver Eagle bullion coins and tuck them away for a rainy day.  

Right now, Everyman has the same question. Where is the economy headed? If history is our guide, the economy is in for some stormy weather. BUT, we live in a world where history is turned on its head Everday and the Everyman benefits. Places like India and China are important to us and the global marketplace is our friend, so when one area suffers, other areas pick up the slack. Or at least that’s the way it’s been going for quite a while. Will things stay that way, or are we already in the early stages of a downturn that might cost some of us our jobs and our ability to spend freely?

Sadly to say, I see rough seas ahead. We all know about the housing situation and I’m sorry to say that things are going to get worse before they get better. Lower interest rates might cushion the problem, but lower rates won’t solve the problem. However, lower prices will, but that’s going to hurt many of us. And this time around the demographics are generally not in our favor. You see most of the Everyman population is now comprised of “baby-boomers” who occupy the top of a triangle. For many years these boomers formed the base of the triangle and they propelled borrowing, spending and high living standards. Now that these boomers have aged and are at the top of the triangle, the base of the triangle is now comprised of a much smaller group of sons and daughters that cannot possibly propel the same economic conditions. As a result, the triangle is upside down and that is not a good situation. Unless mommy and daddy are financing their kids’ home purchases and life style, the young folks are going to need more money or lower prices to buy homes. But even then the supply of properties will far outnumber the demand. It’s not a pretty picture and it will take a number of years to work through this mess.

And then there’s the US financial system which is taking it on the chin daily. We’ve never seen so many Billions lost by individual banks and financial services companies and that will have a major impact on credit and jobs. Whether we call what lies ahead a recession or not, doesn’t really matter. As is often said, the only difference between a poor economy and a recession is that in a poor economy our friends lose their jobs, but in a recession we lose our jobs. So tighten your belts and prepare for a rough ride. We’ve seen it before and most Everyman will weather the storm. But make no mistake about it, there are rough seas ahead.

The Federal Reserve Bank is the most powerful force behind the US economy. The Fed is primarily the “lender of last resort” to the US banking system and pretends to control inflation, which is more a psychological reality than a practical one. On a daily basis, however, the Fed does much more. It orchestrates the nation’s monetary policy and therefore manipulates the amount of money in America, as well as the growth rate of the bundles of all that money. However, don’t confuse that last tidbit with controlling inflation because it’s an imperfect relationship at best.

The Fed is actually a group of regional Federal Reserve Banks and their leaderships who meet periodically to discuss, debate and vote on how it will conduct monetary policy in the immediate future. Most of the time the votes simply maintain the status quo, but every so often they rock the boat. For example, since ending their quest to raise interest rates last year, the Fed is now engaged in a policy of lowering interest rates in response to a deepening credit crisis brought on by overzealous mortgage lenders and worsened by creative bankers who devised products that ultimately became worthless. By the way, that’s the reason you’re reading about losses in the billions - that’s billions with a “B” - at many major financial institutions. As you might imagine, it’s quite a task for a governmental body to reverse these problems, but the Fed is busy as a bee attempting to pollinate the dying flowers with small doses of lower interest rates. I’d like to say “so far, so good,” but I have to “say so far, no good.”

So how does the Fed actually do all this cool stuff every day of the Everyman’s work week? For starters, the Fed controls the Fed Funds rate, which is the rate at which banks lend to one another. In addition, the Fed controls the Discount Rate, another bank lending rate, as well as Bank Reserve Requirements, which are the monetary reserves that banks are required to maintain against their balance sheets. Finally, the Fed conducts daily operations in the money markets known as “Repos” and “Reverse Repos” which help to fine tune all of the the above. If it’s starting to get confusing, it is, so let’s hold up on any more techno-bull.

And that folks brings us to the “Power of the Fed” which is actually the “Power of the Head of the Fed.” That’s because no matter what the Fed finally does with interest rates, it’s the Paul Volckers, the Alan Greenspans and the Ben Bernankes that are truly making the decisions. These men set the tone and for the most part, the group plays follow the leader. And remember folks, these are not elected officials. These are appointed officials, approved by Congress (whoop-de-do), who make the most important financial decisions in America. Let’s hope they’re all good at it. Time will tell.

One day, sooner or later, Everyman will be buying, selling, trading or investing in a market. There are numerous reasons an Everyman might have for this activity, but there is one secret to all markets that I am going to share with you now. It may sound simple, but it is truly the underlying secret that propels markets. Everymarket is the embodiment of a mass psychology, or simply put, Everymarket reflects what the greatest number of Everymen are thinking during a period of time.

Understanding a market’s psychology is the basis for money-making decisions in that market. For example, oil prices have been on the rise and recently surpassed $100 a barrel. Market psychology has reflected strong demand, lower oil supplies, rising global tensions and so on. This mass psychology has propelled oil to an all-time high and could send it even higher in the days and weeks ahead.  Once we understand the mass psychology behind this market, we need to look ahead at potential changes in the landscape that could impact the current psychology. Are there numbers soon to be released on oil stockpiles and what are the expectations? Are the tensions in specific oil producing countries getting better or worse and will these tensions impact oil shipments? Once we determine the factors that could create a shift in market psychology, we are then positioned to catch a major move in the market. In addition, even if we see stability in the factors that drove oil to this new price level, at some point the existing mass psychology will be “built into the market” and the market will require a “real” catalyst to move it higher. Without that catalyst, the market will fall, perhaps dramatically, with unfullfilled expectations.

From time to time, market psychology will be built on strong fundamental factors that will not be reversed easily. This is especially true of raging bull or bear markets. However, most markets fall into a neutral category and generally stay within price ranges. This is where you get the most out of subtle shifts in mass pychology, as you can buy and sell at various support and resistance levels on a regular basis. So remember, market psychology is Everyman’s first step to the best money-making decisions. 

This is my first blog entry so let’s be bold. First, Happy New Year to Everyone from the Everyman Economist. Second, the US dollar is not such a bad boy after all. Okay, it’s been sinking like a stone for several years, but that’s the result of economic policies that mortgaged the future to pay for the present. I love Ronald Reagan just like the next guy, but let’s face it folks, the collective deficits in both the Reagan and Bush administrations created a big heap of financial manure. Sure the economy chugged along, but if YOU borrowed tons of funds to spend on fluff and stuff and YOU didn’t give a hoot about paying it back, YOU would also be living it up big time. Guess what? That’s all about to change and the major beneficiary is going to be the US dollar. Of course that depends on some major changes in the White House and Congress, but my bet is this - enough is enough and YOU and I are going to throw the bums out. And make no mistake about it, the fish stinks from the head. Congress may be limp and asleep at the switch, but it’s very difficult for one political party to beat another when the leader is on the other side. So forget the disapproval ratings, the White House and Congress are going to the Democrats and that means the US dollar will only go in one direction - UP, UP, UP!

So why is the dollar going up you ask? For the opposite reason it went down, I answer. The US current account deficit and the trade deficit have both been out of control. If you compare the numbers with previous administrations, things look pretty darn scary. We’ve accumulated more red ink in the last 8 years than we amassed in the entire previous history of America. But just like things turned around in the roaring 1990’s, despite ”voodoo economics” and “deficits as far as the eyes could see,” it will turn around again during the next Democrat administration. And that’s not because the Dems are so much smarter, it’s simply because they didn’t drink the Kool-Aid. In fact, they actually believe that our twin deficits are bad, which is apparently lost on the Republicans. Say what you will about the Clinton dalliances, but the economic landscape during the Clinton administration was nothing short of miraculous. The economy grew, Americans prospered and the deficit was replaced by a surplus. What a novel experience, the country had money in the bank, not loans. And we’re likely in for the same in the not too distant future. So take off your mud boots and get ready for a shift. It won’t be immediate and things can always get worse before they get better, but if we change direction in the next election, the US dollar is in for a major recovery. And what does that mean for Everyman? Stay tuned.

Many major companies and financial institutions spend big bucks on Economists who advise management, employees and clients on Everyday financial issues. And now it’s your turn! No, not the big bucks part of it, IT’S FREE! I’m the Everyman Economist and I’ll be giving you the insider lowdown in plain English on what makes the financial world go round. Stick with me and you’ll learn about the markets, the economy, investing and all the other good stuff that can put money in your pocket, not the other way around. So turn off your cell phone and forget those goofy TV talking heads. Give the Everyman Economist your time and attention and I’ll show you the money trail.