"'Things' Doesn't Cut It": NY Times

What's Goldman Up to NOW?

“Certainly, our industry is responsible for things. We’re a leader in our industry, and we participated in things that were clearly wrong and we have reasons to regret and apologize for.”

--Lloyd Blankfein, Goldman Sachs chairman and chief executive (Nov. 17, 2009)

It is widely and correctly understood that Wall Street, with Goldman as a leader and with regulators in thrall, helped to inflate and profited from a credit bubble that burst and cost tens of millions of Americans their jobs, incomes, savings and home equity. American taxpayers continue to stand behind the bailouts and other government interventions that have stabilized the financial system, including Goldman, enabling the firm to post blowout profits in 2009 and to set aside $16.7 billion for bonuses so far this year.

--"Goldman's Non- Apology"; The NY Times, house editorial (11/21/09)

The only question I have *right now is this:

If one of the most profitable investment plays at the moment is shorting (betting against) the U.S. dollar -- also known as the carry trade -- and Goldman is now making literally billions per quarter . . . is any of that money coming from shorting the dollar?

Would that really be any different than shorting mortgage-backed securities as it was busy selling trillions of them to investors (as Goldman did)?

It really does seem that what's good for Goldman is bad . . . very bad . . . for the rest of us -- and vice versa.

"Justice Delayed . . ."

Last thought on this for now:

Ohio's Attorney General just filed suit against the credit rating agencies (Standard & Poor's, Moody's, and Fitch) for misrating billions in mortgage-backed securities, costing Ohio retirees hundreds of millions.

The securities blew up starting more than three years ago.

Should it really take government attorneys (federal and state) until, say, 2015, to bring appropriate legal action against Wall Street's key players??

P.S.: Want to guess what Goldman Sachs' defense(s) would be, were it to be proven that it profited, big-time, from shorting the dollar?

Pick one (or more) of the following:

A. That that's perfectly legal to do (completely true).
B. It had a fiduciary duty to its shareholders to maximize profit.
C. Profits from the carry trade made it less dependent on Fed and Treasury guaranties and other support (that it otherwise denies benefiting from).
D. Goldman made much less shorting the dollar than many others.
E. The dollar's weakness isn't due to Goldman and others shorting it (also known as the "it's not my dog" defense).

I'm sure I could double this list if I actually thought hard about it . . .

*It was Wayne Gretsky who said: 'I don't skate to where the puck is . . . I skate to where it's going to be.'

Biggest U.S. Export? Bubbles

FIFO, LIFO & LILO

"Where is the money [created by the U.S.] going? Where the problem's going to be: Asia. You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals."

--Donald Tsang, Hong Kong executive; "A Dollar Warning From Asia," The Wall Street Journal (11/17/09)

Cheap U.S. money is stimulating the economy, all right.

It's just that the economies being stimulated the most . . . aren't in the U.S.

Rather, they're in places like China, India, and Brazil.

Like flood waters flowing over already saturated land, a tsunami of U.S. dollars is pouring into those economies because . . . that's where the growth is.

A dropping dollar makes this play even more profitable.

ABC's of the Carry Trade

Through the magic of something called "the carry trade," sophisticated investors can borrow depreciating dollars, make a higher return elsewhere, then essentially re-pay less than what they borrowed (that's what depreciation means).

Say it all at once: 'last one into the carry trade pool is a rotten egg!'

The only problem with that is . . . all the splashing.

The carry trade magnifies the downward pressure on the dollar, creating a vicious, bubble-inflating cycle.

Its balloon-inflating effects are most pronounced on the smaller, developing and emerging economies, where capital inflows can "move the dial" more than they would in a bigger economy.
Just think of it as the sovereign equivalent of the stock market, where "mega caps" like the U.S. and China typically are harder to move up -- or down -- than "small" and "micro-cap countries" like Malaysia or Peru.

Also inflating: many of the old bubbles, including worldwide stocks, gold, and other commodities such as oil and silver.

"FIFO and LIFO"

Who are the losers?

For starters, all the casualties of the old bubbles, including residential (and coming soon) commercial real estate, and before that, high tech stocks.

Next come all the risk-averse savers, whose money market yields and interest on savings have vanished.

Most at risk now?

Anyone who's last into any of the new bubbles.

Call them the Last-in-Last-Out's, or "LILO's" (vs. the more connected and favored FIFO's).