Only three years ago, the first currency exchange traded fund (ETF) was introduced, enabling investors to trade the Euro without having to buy and sell the currency directly. Since then, currency ETFs have exploded in number and scope, such that there are now at least 38 such funds, with more being added every month. Rydex and Powershares are the market leaders, with a combined market share of 80% and nearly $5 Billion in invested capital. There are now funds covering all of the major currencies, and several emerging market currencies, as well as funds tailored for specific purposes and strategies. Given the nature of currency trading (there are necessarily always winners and losers), the current bear market has driven a surge in the popularity of currency ETFs. Also given that the average retail investor is relatively uninterested in 100:1 leverage and 24/7 trading, currency ETFs already represent a viable alternative to direct forex investing. In this guide, I will outline comprehensively how these ETFs can be use to achieve a variety of different investing, trading, and hedging strategies.

Overview of Strategies

Generally speaking, there are several strategies that forex traders can choose to employ. First, there is momentum trading, in which traders attempt to gauge the immediate direction of a currency (or currencies), based primarily on technical analysis. The flip side can be called valuation trading, in which investors make forecasts based on fundamental factors, such as macroeconomic conditions and monetary policy. Then there is the carry trade strategy, in which low-yielding currencies are sold in favor of higher-yielding alternatives, with the goal of earning a spread based on the interest rate differential. Currencies, and their ETF counterparts, can also be used for hedging purposes when investing in stocks and bonds, in order to offset the conversion risk that arises from investing in companies that do business and/or issue securities overseas. Finally, there is currency arbitrage, in which traders aim to exploit short term pricing inefficiencies, in accordance with the rule of triangle arbitrage. WIth the exception of the latter, which has largely become the province of banks and institutions, there are multiple ETF options that can be utilized for each of these strategies.

ETF Versus ETN

There is a subtle, but important distinction within the realm of currency ETFs that should first be understood: Funds versus Notes. [For the purpose of this article, both types of securities will be referred to as "ETFs"]. According to Investopedia, "the difference between ETNs and ETFs comes down to credit risk vs. tracking risk. Because ETNs possess credit risk, if [the issuer] goes bankrupt, the investor may not receive the return he or she was promised. An ETF, on the other hand, has virtually no credit risk, but there is tracking risk involved with holding an ETF. In other words, there is a possibility that the ETF’s returns will differ from its underlying index." Since the inception of the credit crisis, this distinction has take on a new significance, since there is now a very real possibility that ETN issuers could fall into bankruptcy, in which case the ETNs they underwrite would become nearly worthless. Investors have duly noted this possibility, and "the market appears to have spoken against the ETN format for currency investing…ETF providers account for 91% of all currency assets, and the ETNs account for 9%."

Saving Versus Speculation

The ETN/ETF dilemma also captures the notion that there is an inherent element of risk built into investing in currencies. As one analyst noted,"Currency ETFs have two very different risk profiles. On one hand, they closely resemble savings accounts; the ETFs hold cash and invest it with banks to get interest. So when measured in the appropriate foreign currency, your shares are unlikely to gain or lose much value…[However,] If you’re measuring performance in U.S. dollars, floating exchange rates add a speculative flavor to currency ETFs." Moreover, due to their special structure and management fees, these ETFs pay a lower interest rate than one would earn from a savings account, without the safety feature of FDIC insurance. Explains another analyst, "each deposit account will pay slightly less than the currency overnight interest rate. On top of being paid less than normal deposit rate, you get the added indignity of paying…fund expenses." At the same time, it seems reasonable to think of currency investment as the equivalent of investing in a growth stock, where the dividend ratio (i.e. interest rate) is low, but the potential upside from appreciation is high. As with any asset class, it is important to evaluate currency ETFs within the context of one’s personal investment strategy. Those with low risk tolerance for example, would be wise to avoid leveraged currency funds, opting instead for a less volatile ETF, perhaps one that is connected to a basket of major currencies.

Individual Currencies Versus Bulk Currencies

Investors wishing to make momentum or valuation bets in currencies can choose between ETFs that track individual currencies and ETFs that track multiple currencies. Currently there are funds for the US Dollar, Euro, British Pound, Australian Dollar, New Zealand Dollar, Swiss Franc, Canadian Dollar, Japanese Yen, Mexican Peso, Brazilian Real, Swedish Krona, Chinese Yuan, Indian Rupee, Russian Ruble, and South African Rand, spread across six different issuers. With the most popular currencies, namely the Dollar and the Euro, investors can choose between multiple issuers. Some of these funds contain built-in leverage and/or mimic a "short" investment, for investors wishing to bet against a particular currency. Both Powershares and MarketVectors, for example, offer leveraged funds that short the Euro. Also, given that every ETF simultaneously represents a bet for one currency as well as a bet against another currency, investors can bet on the decline of one currency by simply buying the ETF for a counterpart currency.

Of course, one might argue that investing in individual currencies is akin to investing in individual stocks, and hence too risky. Accordingly, investors seeking exposure to the forex markets without limiting themselves to one currency pair can choose between several bundled currency options. There are first the PowerShares DB US Dollar Bullish Fund (UUP) and Bearish Fund (UDN), which are designed "to replicate the performance of being long or short [respectively] the US Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc." Then, there is the Barclays Global Emerging Markets Strategy ETN (JEM), comprised of 15 equally weighted currencies. Barclays recently also recently introduced the Emerging Market Asia Fund (AYT), by breaking out "the five Asian currencies from the fifteen that make up JEM and added China, India, and Malaysia. This created a regional bundle of currencies that covers Eastern Asia from South Korea in the north to Indonesia and India in the south." WisdomTree, meanwhile, offers the Emerging Currency Fund (CEW), "designed to provide exposure to money market rates in emerging market countries. A basket of 8 to 12 currencies is selected for the Fund on an annual basis, and the Fund’s assets are invested in equal portions to achieve exposure to these currencies." Of course, in this case, diversification doesn’t necessarily imply less risk, as the credit crisis has not been kind to emerging market currencies, neither individually nor as a group.

Carry Trade Strategy

While the monetary and currency instability generated by the credit crisis has largely destroyed the viability of the carry trade, investors wishing to take their chances anyway with this strategy will no doubt find it easy to use ETFs. Most single-currency ETFs pay interest at a rate that is reflective of interest rate levels offered in that country, thereby enabling investors to theoretically benefit from the (comparatively) tight monetary policy in countries such as Brazil and New Zealand, simply by owning their respective ETFs. In the words of one analyst, "this is as straightforward a comparison as you will find between on-line trading platforms and exchange traded products. The major difference, of course, is that with the on-line trading platform, you can use leverage to enhance earnings or exacerbate losses." Investors can likewise play the unwinding of the carry trade by selling short higher-yielding currencies, in favor of "safer" alternatives such as Dollar and Yen ETFs.

The Barclay’s iPath Optimized Currency Carry Exchange Traded Note (ICI) is another option. This note is linked to an index "designed to reflect the total return of an ‘Intelligent Carry Strategy’ which…seeks to capture the returns that are potentially available from a strategy of investing in high-yielding currencies with the exposure financed by borrowings in low-yielding currencies." In such a way, investors gain access to an optimized portfolio of high-yielding currencies without the hassle and transaction costs of buying them individually, as well as the inherent volatility and arbitrariness of trying to self-balance one’s portfolio.

The PowerShares DB G10 Currency Harvest Fund (DBV) employs a strategy that is similar in approach but different in rationale. "The strategyis to go long the three highest-yielding [G10] currencies leveraged 2-1 and to short the three lowest-yielding currencies with no leverage. The idea is that higher-yielding currencies attract capital at the expense of the lower yielders." In other words, rather than try to earn carry (interest rate spread), the fund instead seeks returns from the appreciation often observed in higher-yielding currencies. "The fund tracks the DB G10 Currency Futures Harvest Index, which follows the interest rates of these currencies and boasts an outstanding track record — it has logged strong performance and low volatility." At the same time, this analyst points out that in focusing on currencies that are alreadybacked by high interest rates, DBV may miss out on the appreciation that results from gradual, but steady interest rate hikes, especially if started from a low base.

Hedging Gold Exposure

Currency ETFs can also be used to hedge exposure to gold prices, which have historically risen and fallen inversely with the Dollar. Accordingly, those wishing to protect themselves against a potential bubble in gold could purchase an ETF that tracks the Dollar; "Some allocation of money against gold’s momentum and in favor of the a dollar’s short-term rise may be prudent, and…you can delve into euro holdings for a loose tandem with gold prices." On the flip side, investors who are worried about a broad loss of confidence affecting all currencies (stemming from monetary and economic stability), could purchase ETFs that track commodities or precious metals.

Hedging Stock Market Exposure

Finally, currency ETFs represent a simple and effective way to hedge against declines in stock prices. Where companies and entire economies are especially dependent on exports (namely Japan and South Korea), currency appreciation can have a severe effect on economic growth. Fortunately, "currency ETFs can be used against ‘currency-induced economic distress’…adding the Yen Shares to a portfolio would neutralize (at least to a certain extent) weakness in Japanese stocks." In addition, investing in overseas companies (whether directly in foreign stocks or through American Depository Receipts [ADRs] issued in the US) carries exchange rate risk, because the investments must ultimately be converted back into Dollars. "When investors are holding a broad range of foreign stocks through broad-based ETFs like the iShares MSCI EAFE Index…their portfolio values are negatively affected by these increases in the value of the dollar against the foreign countries they are invested in." Buying shares in a Dollar-based ETF provides for a natural hedge, and "an investor may be able to offset the negative effect of the currency exchange."

Conclusion

With the inevitable addition of new funds to fill in the gaps, it is safe to say that class of currency ETFs will soon be so comprehensive as to enable the implementation of any kind of currency investing/trading strategy. Excepting only the relatively obscure (and it may not be long before ETFs that track such currencies are introduced), investors also have access to almost of the currencies that are available to those that trade forex directly through brokers. Given the downturn in almost every other asset class, currency ETFs will certainly remain popular for the immediate future.

History of the Fed

Without boring too deep into the history of the Federal Reserve, suffice it to say that it differs from a normal Central Bank in that its first priority is not necessarily to guard against inflation. In fact, the Fed was created in order to facilitate -rather than counter- inflation, albeit in moderation. "Under the Fed’s enlightened stewardship, the currency would become ‘expansive’. Accordion-fashion, the number of dollars in circulation would expand or contract according to the needs of commerce and agriculture." To this day, the Fed’s mandate remains slightly murky; it is charged both with maintaining full employment and with managing inflation. Not only do these aims often conflict, but also the Fed’s notions of inflation are often dubious. For example, its approach to measuring inflation rests on consumer prices, rather than on the money supply. Two years ago, it even went so far as to stop publishing data on M3, which most experts reckon is the "most-inclusive measure of the growth of the U.S. money supply." While the Fed argued ostensibly that such data was no longer relevant, some commentators believe its true motive was to downplay the risks that its easy monetary policy would contribute to long-term inflation. Meanwhile, the Fed has also refrained from utilizing even an informal inflation target. This contrasts with the European Central Bank, which uses 2% as an approximate guide.

Ben Bernanke, current Chairman of the Fed, is known for his especial complacency with regard to inflation. In fact, he earned the nickname "Helicopter Ben" by joking that if need be, Dollars could be dropped from helicopters in order to stimulate the economy. Bernanke has received backing in this view from prominent academics, including advisers to current president Barack Obama and former President George W. Bush. Greg Mankiw, one such advisor, recently asserted: "In particular, the overall level of prices a decade hence should be about 30 percent higher than the price level today…[and] the stance of monetary policy sufficiently accommodative to achieve that degree of inflation over the coming decade."

Asset markets have ‘thrived’ under such a loose approach to monetary policy, with stocks, bonds, and commodities rising to record highs before collapsing spectacularly in late 2008. The sole protest could be found in the forex market, which is perhaps the most sensitive to changes in interest rates and inflation. In fact, the Euro’s steady divergence from the Dollar mirrors the contrasting approaches to monetary policy practiced by the Fed and the ECB, as well as the apparent indifference of the Bush administration towards fiscal responsibility. The Euro "soared against the greenback as the U.S. Federal Reserve made its historic mistake of flooding the world with dollars earlier this decade…[and] has climbed sharply again since Mr. Bernanke cut rates virtually to zero last month and signaled his new policy would be "quantitative easing" — i.e., printing as much money as it takes to revive the U.S. economy."

The Fed’s "Liquidity Program"

The Fed’s response to the credit crisis has been to flood the markets with "liquidity," through a combination of direct and indirect methods. The Fed began by attempting to stimulate lending indirectly by steadily lowering the interest rates that it charges member banks on overnight loans, not stopping until its benchmark Federal Funds Rate hovered slightly above 0.0%. As commercial banks failed to take the hint and continued to hoard cash, the Fed felt compelled to insert itself more directly into the markets, initially "announcing a program to buy $100 billion in the direct obligations of housing related government sponsored enterprises (GSEs) — Fannie Mae, Freddie Mac and the Federal Home Loan banks — and $500 billion in mortgage-based securities backed by Fannie Mae, Freddie Mac and Ginnie Mae." This was quickly followed by repurchase programs, lending facilities, investments in money market funds, and option agreements, all of which were designed to supplement its "traditional open market operations and securities lending to primary dealers." The Fed’s efforts also worked to ease the liquidity shortage in credit markets abroad by entering into swap agreements with several foreign Central Banks suffering from acute Dollar shortages.

The end result was that "In just a few short months, the central bank has effectively become a substitute for banks and other lenders, especially in the commercial paper market and others that remain frozen to certain economic transactions. The Fed also stands ready to buy mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans." The only problem is that the Fed’s financial resources aren’t adequate to support such activity, necessitating steep leverage. In fact, "the flagship branch of the 12-bank system, the Federal Reserve Bank of New York, shows assets of $1.3 trillion and capital of just $12.2 billion. Its leverage ratio, a mere 0.9%, is less than one-third of that prescribed for banks in the private sector." Only the brave are willing to ponder what would happen if any of these "investments" go sour.

Market Response

As previously stated, securities markets have reacted positively to the Fed’s policy prescription, since some of the liquidity will no doubt be used for asset speculation. Few economists share this sense of buoyancy, however: "The 2008 shock is so big that it cannot be shrugged off by households, like the 2001 downturn. With their wealth depleted, households will save: as a precaution in hard times, to make up for losses and try to regain their desired wealth path." This increase in savings will not only negatively impact GDP, but could ignite a self-fulfilling deflationary spiral. The Fed is terrified of this possibility, because deflation and a lack of confidence in the Dollar would quickly reinforce each other, causing "the flow of money to speed up as individuals become desperate to exchange cash for real goods as fast as possible, producing hyperinflation."

The Role of the US Treasury

The US Treasury Department, often acting on behalf of the US Federal Government, is also playing an increasingly prominent role in the policy response to the credit crisis. The previous six months have witnessed the poorly-managed $700 Billion TARP program, direct bailouts for failing companies in the automotive and banking sectors, as well as the far-reaching Obama economic stimulus plan, currently pegged at $825 Billion. Setting the substance of these programs aside, let’s instead focus on the fiscal impact. The federal government is now projecting a 2009 budget deficit of $1.2 Trillion, shattering the 2008 record of $455 Billion. The result is a (conservativative) estimate by the Congressional Budget Office that US government borrowings will increase by $3 Trillion over the next decade, which is not surprising given that the bailout could end up costing over $4 Trillion.

Unfortunately, "with the experience of the last eight years, the international financial community does not have too much faith in the ability of the United States government to act with appropriate discipline," and may not be easily convinced to absorb this increase in debt. While still considered a low possibility by most analysts, speculation is in fact mounting that the US will default on part of its debt. In addition, Timothy Geithner, recently appointed Secretary of the Treasury, crassly provoked China- previously the most reliable purchaser of US Treasury securities- by calling attention to its dubious currency policy. In short, it is becoming ever-more likely that the the Treasury Department will be forced to turn to the Fed, which in turn will be forced to "monetize" the debt by literally printing the required currency necessary to make up the shortfall. This will spur inflation, and "increases the likelihood that foreigners will not only stop buying Treasuries, but that they will sell the ones they have, and will dump US dollar holdings out of a concern of dollar devaluation by the part of the Federal Reserve." One editorialist offered a pithy summary of this dilemma: "If the Fed is going to create boatloads of depreciating, non-yielding dollar bills, who will absorb them?"

The World’s Reserve Currency?

The scariest prospect of all is that the Dollar will no longer function as the world’s reserve currency. In recent years, the Euro has steadily increased its share of Central Banks’ foreign exchange reserves, although it is still dwarfed by the Dollar. Since 2003, China has cut the portion of Dollars from 70% of its total forex reserves to 45%. In addition, several Middle East countries recently made headlines by announcing plans to abandon their respective currency pegs to the Dollar, because such was becoming increasingly costly, especially from the standpoint of opportunity cost. In other words, the Fed’s interest rate reductions have turned investing in short-term US securities into a losing proposition. The forex markets encapsulated this sentiment: "A day after the Federal Reserve adopted a near zero-interest rate policy to stimulate the economy, the Euro jumped as much as 4 cents against the Dollar, the largest single-day move since the euro’s birth in 1999." Even ignoring yield, investors realize that they are being burned on the risk end of the equation as well, given both the dubious nature of the assets newly guaranteed by the US government, as well as the fact that a bubble appears to be forming in the market for government bonds. Ironically, if the Fed is successful in stimulating investor risk appetite, it could prompt a rapid flight away from low-yielding Treasuries. "Any exodus now could spark selling across the board. Foreign debt holders would likely repatriate their funds immediately to reduce the risk of being last to convert."

Conclusions

In conclusion, we must accept that in the words of one commentator, "Washington’s policymakers have little choice as they aim to prevent America’s economy tipping into depression. But they need to be aware of the risks to the dollar. Zero interest rates, a contracting economy, a still large current account deficit and suspicious foreign investors are a potent combination that could lead to a rout of the currency." Ultimately, the Fed and the US Treasury must bear in mind that their policies hinge on a crucial assumption: that there is only a limited link between money supply growth and inflation. If this turns out to be false, any US economic recovery would certainly be followed by tremendous inflation, in which case the implications for the Dollar are clear.

The first bump in the road came in the form of a tainted products scandal, which led to the recall of dozens of items, including toys, medicines, and most recently, dairy products. Then came the credit crisis, which exploded in the US and quickly spread to the rest of the world. While the implications for China are not entirely clear (for reasons that will be discussed below), it seems almost certain that the economy will take a hit. In which case, it probably won’t be possible to disentangle the (negative) economic impact associated with the Olympics from the general economic downturn, but I don’t imagine this is of much concern to investors, anyway. Given the rising prominence of China within the framework of the global economy, analysts are watching with baited breath to see if and how China can avoid a dreaded economic downturn.

Falling Exports

The structure of China’s economy is such that exports (and investment in fixed assets to produce those exports) represent the most important component of GDP- as much as 40%, according to one estimate. Unfortunately, as a result of the worldwide economic downturn, global private consumption is "expected to rise by 2-4 per cent this year. That compares with an 11 per cent jump in 2007, and contrasts sharply with the boom in personal spending this decade." The effect on the Chinese economy has been, and will continue to be devastating. In November, overall exports fell for the first time in seven years, and declined by a whopping 6.1% with its most important trade partner, the US. One analyst noted: "Many analysts had anticipated that the monthly trade figures would show China’s export machine slowing along with the global economy, but few had expected it to slip into reverse."

The decline of exports has already begun to ripple down through the economy. By no coincidence, Chinese industrial output is also growing at the slowest pace in seven years. In fact, "with five back-to-back purchasing index readings signaling contraction, ‘the manufacturing sector, which accounts for 43 percent of the Chinese economy, is close to technical recession." Meanwhile, China’s codependent trade partner, Hong Kong, has witnessed its benchmark purchasing managers’ index fall to the lowest level since the 2003 SARS outbreak.

Factory Closures

"A sharp deceleration in industrial activity is being amplified by stock build up…many steel factories and other factories may just as well close down because they have enough inventories to provide customers without producing anything." In other words, the next link in the economic chain, the factories themselves, is beginning to buckle. The numbers are staggering; China’s Pearl River Delta manufacturing base has already seen 7,000 factories close in the first nine months of 2008. As if the economic recession wasn’t punishment enough, Chinese factories must cope with an increasingly harsh business environment, since "raw materials cost more, labor and environmental laws have grown stricter, exporters are getting fewer tax breaks, and a string of product recalls have raised questions about Chinese quality." Economists estimate that altogether, 100,000 factories will close in China in 2008. The actual number could be even higher, due to the unreliability of Chinese statistics and the opacity of Chinese bankruptcy laws. Factories that remain open will be forced to consolidate their operations with those of rival companies, and/or retool in response to a decline in business. In short, millions of workers are becoming redundant. The official employment statistics show that 6.7 million workers have already lost their jobs. Given that the economic boom of the last decade drove over 130 million migrant workers to cities in search of work, the level of joblessness could climb quickly.

At this point, it seems that only Chinese government economists are delusional enough to believe the economy will continue to expand by the 10%+ rate that has characterized its growth for the last 30 years. Private-sector economists are much less optimistic; Goldman Sachs, for example, forecasts 2009 GDP growth of only 6%. In the words of one economist: "It is not a recession, but it will feel like one to the average citizen and will feel like a depression to the 100 million or so migrant workers, many of whom are out of a job and stranded far from home."

Slowing Inflation

Price stability represents perhaps the sole bright spot in this morass of bad news. Thanks to precipitous declines in oil and energy prices, as well as fruitful initiatives aimed at boosting domestic food production, consumer inflation has retreated from dangerous highs. According to a Reuters poll, "The consumer price index, is expected to have risen 3.0 percent from a year earlier, a marked reduction from a near 12-year high in February of 8.7 percent." The decline in producer prices has been equally dramatic. Economists caution, however, that this is a double-edged sword: "Gargantuan consumer of commodities that it is, China benefits from material costs deflation in a way that slower growing developed economies don’t. But deflation in China would become a problem…[since] consumers who expect prices to carry on falling are more likely to keep hold of their cash."

Weakened Financial Sector

The collapse in real estate prices that is at the heart of the global credit crisis has not spared China. National statistics are difficult to come by, but anecdotal reports paint an unambiguous picture. Shenzhen, previously the country’s hottest property market, has witnessed sharp declines in prices, with developers offering deep discounts on new projects. In Beijing, "the number of residential properties sold during the [October] weeklong national-day holiday…was down by 72% compared with the holiday in 2007." Publicly-traded shares of Chinese real estate companies have declined proportionately, due to bleak projections for the immediate future. The government has been slow to react, unsure whether it should appease aspiring homeowners, or tread cautiously in order to minimize the detrimental impact of a decline in construction on economic growth. Ultimately, "18 cities, including Hangzhou and Shanghai, have introduced measures to prop up the market. These include cuts in transaction taxes and even subsidies for homebuyers." Unfortunately, counters one analyst, "The government’s latest real estate policies aimed at boosting home purchases won’t change peoples’ expectations that property prices will fall further."

A prolonged period of declines in prices for real estate and other assets wouldn’t take long to find its way into the country’s still fragile financial sector. Only a few years ago, the Central government attempted to head off an inevitable crisis as a result of non-performing loans, by injecting hundreds of billions of dollars directly into banks with the most unstable balance sheets. Unfortunately, the last few years have witnessed a flurry of new politically-motivated (and probably unprofitable) lending activity, which could become painfully exposed as a result of the slowing economy and then exacerbated by new loans that will be required to fund the government’s recently announced stimulus plan (to be discussed below). One analyst warns: "Chinese banks are likely counting large amounts of questionable loans as good assets on their books. No one knows the extent of the problems in these financial institutions, but the central government’s statistics showing single-digit nonperforming-loan ratios have a too-good-to-be-true quality to them." This pessimistic outlook is shared by another analyst, who estimates the NPL ratio at 20-40% of GDP.

Sagging Stock Market

All of the bad news (and then some) has already been priced into Chinese share prices, which have retreated sharply after rising 500% over a two-year period. Despite a whopping 50% decline in 2008 alone and valuations that some analyst would consider attractive, it could be a long time before prices recover. The government’s response has been contradictory: on the one hand, it has offered incentives to investors (in the form of lower margin rates and taxes) as well as attempting to prop up the market by purchasing shares directly. On the other hand, it is requiring companies to pay out higher proportions of net income to shareholders in the form of dividends, which could come at the expense of new factories and spending on R&D. Despite the grim outlook, one analyst remains optimistic that "just as the big fall in our [US] share market was led by the Shanghai index so the current rise has also been led by Shanghai."

Will the Chinese RMB Appreciate?

The Chinese RMB remains the wild card in an environment where virtually all prices and indicators are trending downward. In a related article, I noted that in late 2008, "investors had made significant bets that China would reverse its official policy of RMB appreciation. Futures prices indicated that investors collectively expected the currency to depreciate over 7% against the Dollar over the next year, as part of a comprehensive Chinese policy to boost the faltering economy. Since then, however, the RMB recorded its biggest one-day rise since the currency peg was abandoned three years ago, and investors subsequently scaled back their bets. While it’s unclear what caused the sudden change in sentiment, there are a few factors which probably contributed. First is Treasury Secretary Henry Paulson’s recent visit to China, in which he encouraged China to continue to permit the the Yuan to appreciate. In addition, high-ranking Chinese economic policy-makers have indicated that market forces will increasingly determine the valuation of the Yuan. Finally, there is the recent election of Barack Obama, a long-standing critic of what he believes to be the undervalued RMB."

The issue of China’s currency has important macroeconomic implications because of the pile of foreign exchange reserves maintained by its Central Bank. These reserves, currently estimated at $1.9 Trillion, recently fell for the first time in seven years. Despite the insistence of some economists that the nature of China’s economy is such that it will continue to purchase US government bonds, statistics and common sense suggest that this is very much in doubt, due to lower Chinese tax revenues and plans for higher domestic spending; "All the key drivers of China’s Treasury purchases are disappearing; there’s a waning appetite for dollars and a waning appetite for Treasuries." This will affect the US by making it more difficult for the Obama administration to finance its own economic stimulus plans, as well as increasing long-term interest rates at every level of borrowing, from institutions down to individual homeowners.

Government Stimulus and Economic Restructuring

Naturally, the government of China is not sitting by idly as the economy flounders. It recently "announced a four trillion yuan ($586 billion) stimulus package, the largest in the country’s history….the two-year spending initiative will inject funds into ten sectors, including health care, education, low-income housing, environmental protection, schemes to promote technological innovation, and transport and other infrastructure projects." This will be supplemented by tax cuts and monetary policy initiatives, as well as specific plans (discussed above) aimed at combating sagging property and equity markets. In addition, local governments will chip in 20 Trillion yuan of their own to fund smaller-scale projects. While skeptics note that the true amount will probably be substantially less (since some of plan will no doubt overlap with spending already earmarked in the budget), the consensus opinion is that it is a most welcome measure. The only concern, remarkably, is whether it will be enough to stimulate an economy that is increasingly sprawling and complex. Accordingly, both the Premier of China as well as independent analysts have suggested that another stimulus plan could be unveiled as soon as early 2009.

The stimulus plan must be implemented as part of a broader structural change in China’s economy, whereby growth comes not from exports but from domestic consumption. China’s citizens are among the notorious savers in the world, due both to cultural factors and to a gradual elimination of state social programs, such that education, health care, and retirement costs are increasingly born by individuals. Fortunately, "there is significant room for a more rapid expansion of consumption; China’s household consumption-to-GDP ratio (35.4 percent in 2007) is one of the lowest in the world, the country’s fiscal situation is strong and the economy is only lightly leveraged." The only thing preventing domestic Chinese companies from devoting more attention to the domestic Chinese market is ironically the government, itself. The official economic strategy remains focused around exports, which are promoted through import substitution, tax incentives, and a cheap currency. If anything, the government has become more steadfast in recent months, halting the appreciation of the RMB and increasing tax rebates for export-oriented companies.

If not for its obstinacy and sheer misguidedness, the Chinese government is well poised to implement such a shift. "Previous prudence has left plenty of room for a stimulus: the budget surplus stands at 1-2% of GDP (depending on how you measure it) and total public-sector debt at less than 20% of GDP, one of the smallest of any large economy." In addition, the absence of democracy means the government can act swiftly and efficiently when carrying out policy, without having to worry about normal checks and balances that would inhibit such a process in an industrialized country. Finally, China’s growing middle class has proven not only willing, but eager to become more avid consumers, as retail sales continue to rise by a steady clip despite the economic downturn. In short, while the next couple years will probably see diminished growth, responsible planning could mitigate the painful transition by rewarding China in the period that follows.

1. Korean Won: While its acceptance by the Continuous Linked Settlement Bank would suggest that it has become a major currency, the Korean Won remains relatively obscure, hidden from view by its more prominent cousins in Asia: the Japanese Yen and Chinese Yuan. In the wake of the credit crisis, however, the Korean Won has increasingly found itself in the spotlight. Since July, it has declined more than 50% against the USD. The Bank of Korea responded by warning bearish traders, and has threatened to deploy part of its stockpile of foreign exchange reserves (estimated at $250 Billion) to prop of the currency. This is more than mildly ironic, considering only last year, the Central Bank suggested that forex intervention would be required to depress the rising Won. In any event, with the exception of a couple slight reprieves, the Won’s downward spiral has continued unimpeded. At this point, it’s unclear what it will take to restore confidence in the battered currency. Perhaps, if the Central Bank made good on its promise to defend the Won and flexed its muscles a bit, market bears would be pursuaded to leave the currency alone.
2. Mexican Peso: There are many parallels between the Mexican Peso and the Korean Won. Not even one year ago, the Mexican economic boom had turned the Peso into a respectable currency, such that CLS began settling trades denominated in Pesos. The future was bright, as one analyst remarked in June 2008: "A decade of fiscal discipline, political stability and export diversification is also likely to help the Mexican peso in the near term." No one could have predicted the train wreck that began shortly thereafter and wrought a 30% decline in the currency in a matter of weeks. As for the future, the picture remains nuanced. On the one hand, the Peso is caught in a downward spiral that is grounded in financial, rather than economic factors. To explain, over the last few years, investors and corporations (including many based in Mexico) engaged in risky derivatives transactions under the assumption that the Peso would continue rising indefinitely. The souring and subsequent unwinding of such trades has left the Peso in a "short-squeeze", from which it is having trouble escaping. On the other hand, investor confidence can’t possibly ebb much further, and even minor positive developments are probably sufficient to send the Peso skyward. Of course, investors should also remember that the US government stepped in on behalf of the Peso the last time it collapsed.
3. Indian Rupee: Next is the Indian Rupee, which recently breached the important psychological milestone of 50 per Dollar and touched an all-time low in the process. A collapse in Indian equity prices, combined with runaway inflation have caused a self-fulfilling panic among foreign investors, who are now moving capital out of India as quickly as they once brought it in. The Central Bank has responded dutifully by raising interest rates and buying Rupees on the spot market, but these measures merely slowed- rather than halted- the currency’s precipitous decline. Ignoring the credit crisis (admittedly a dubious supposition), the prognosis for the Rupee is quite good. The Central Bank has all but scuttled the fixed exchange rate regime and appears open to allowing it to rise, should the markets support such a move. As the Indian economy continues to play catch-up with China, perhaps the Rupee could even compete with the Chinese RMB as a regional reserve currency.
4. Iceland Krona: Prior to the credit crisis, analysts had praised Iceland for deregulating its banking sector and restructuring its economy around financial services. Foreign savers opened accounts in Icelandic banks in order to take advantage of stratospheric interest rates, and investors rushed headlong into Iceland’s stock market to take advantage of lofty valuation levels. The result was a currency that was the most overvalued in the world in 2007, according to at least one measure. Since then, the Krona has lost more than half its value, the benchmark stock market index has declined a whopping 93%, its debt has been downgraded, the Central Bank has raised interest rates to 18%, and all of Iceland’s major banks have filed for bankruptcy and/or been nationalized by the state. Some of Iceland’s Scandinavian neighbors have helped shore up its financial position; it is also in talks with the International Monetary Fund to secure a loan. While the government’s current financial condition remains surprisingly robust, the looming downturn in the economy could force it into bankruptcy, which would certainly wreck additional havoc on the Krona.
5. Vietnam Dong: The Vietnam Dong occupies a unique position on this list, as one of the few emerging market currencies not to have been crushed by the credit crisis. In fact, pressure began to build above the Dong because of price instability, rather than credit concerns. As inflation touched 25% in early 2008, the Central Bank was forced to allow the currency to depreciate, in order to correct the gap that had formed between government rates and black market rates. Since the onset of the credit crisis, the Dong has hardly budged, perhaps because the Vietnamese monetary situation has stabilized now that food and energy prices have subsided. In addition, the currency remains immune from sudden swings, since the government forbids investors to trade the currency for speculative purposes. Having already fallen 30% against the Dollar over the last decade, as part of a "managed devaluation" program, the Dong could be considered fairly valued. Moreover, the country is poised to continue growing at a steady clip due attractive (low) wage levels relative to its neighbor to the north, China.
6. Brazilian Real: The Brazilian Real, as well other Brazilian securities, could previously count themselves among the principal beneficiaries of the credit expansion of the last few years. Hedge funds and other yield-hungry investors poured billions of dollars into the Brazilian economy, doubling the value of the Real in only three years. Since the onset of the credit crisis, the currency has given back half of these gains, as those same investors liquidate their investments and return the proceeds to the US. The Real has also been battered by regional economic concerns; some analysts are speculating that neighboring Argentina will default on its sovereign debt for the second time in a decade. Meanwhile, Brazilian businesses have been caught in the same trap as their Mexican counterparts, having complacently speculated in derivatives transactions under the assumption that the currency would rise further. The Central Bank is not sitting by idly, however, having recently injected $50 Billion from its foreign exchange reserves directly into forex markets. Unfortunately, steadfastly strong economic fundamentals and generous interest rates are no match for investor psychology.
7. Israeli Shekel: While its small population makes it unlikely that Israel will ever be included in the same category as the BRIC (Brazil, Russia, India, China) powerhouses, it’s economy is nonetheless worthy of admiration. It boasts the most billionaires per capita, as well as a vibrant technology sector. A robust stock market and the repatriation of capital previously held abroad ignited a multi-year run up in the value of the Shekel, culminating with its official designation as a CLS currency. Unfortunately, the currency’s lofty valuation may have belied economic fundamentals, and a slowdown in exports left the whole economy off balance. When the global economy regains its footing, however, Israel and its Shekel are well-positioned to benefit. The venture capital sector remains strong, and could help foster a new generation of alternative energy and biotech success stories.
8. Thai Bhat: Much like Vietnam, the credit crisis has left Thailand relatively unscathed. Unfortunately, this has more than been offset by political instability. Since the ousting of Thailand’s erstwhile Prime Minister, Thaksin Shiniwatra, the country has been embroiled in a nearly continuous state of protest and riots. The protests have culminated in the seizure of Bangkok International Airport, and the new Prime Minister seems to finally have take the hint to resign. Nonetheless, foreign investors remain concerned, and have begun to gradually pull capital from the country. Those who have opted to keep their capital in Thailand are hedging their bets by purchasing insurance against the risk of the country defaulting on its national debt. Regardless, Thailand remains one of the few economic bright spots in Southeast Asia, and economists are predicting healthy growth in 2008-2009.
9. Russian Ruble: The Russian Ruble has been devastated by the credit crisis; it has lost 25% of its value in the last six months, and one analyst projects it will fall an additional 25% over the next year. As a result, the country’s Prime Minister has quietly stopped talking about turning the Ruble into a regional reserve currency. Compared to other currencies, the Ruble is especially vulnerable because it is being pummeled on two fronts: the flight from emerging markets and the decline in energy prices. As the price of oil falls back to multi-year lows, Russia may find itself in dire straits. It has already spent a significant portion of its foreign exchange reserves trying to slow the decline, and will have to deploy a potentially greater chunk in the near-term in order to further ease the Ruble’s decline. According to one commentator, "If the price of oil and the stock market continue to decline in tandem, the Central Bank will no doubt find it increasingly difficult to defend the currency, and a massive devaluation would inevitably follow. The Central Bank has already hiked rates; it is running out of options.
10. South African Rand: Inflation and Risk-aversion- these two trends have combined to drive a dagger right through the heart of the South African Rand. Viewed by some as a proxy for the economic condition of all of sub-Saharan Africa, the Rand has taken a beating over the last year, falling to a seven-year low. Previously, the Rand had been one of the prime beneficiaries of the carry trade, as foreign investors took advantage of a booming stock market and 12% benchmark interest rate by pouring cash into South Africa. The fall in commodity prices and the subsequent spike in risk aversion has triggered capital flight. The current account deficit has surged to 7% of GDP, leading most analysts to predict that the Rand will decline further in the short-term.

Whether you run an ebusiness or a small coffee shop, chances are you have felt the sting of our staggering economy.  If your are still fortunate enough to have kept generating revenue, there are still some things you can do to get an even bigger share of the market.

Evaluate Your Business

Take a good hard look and the state of your business.  Chances are there are things you can do to improve upon your current situation.  Are there any unnecessary expenditures that can be eliminated?  Cost cutting measure, like researching vendors and alternate sources for products can help lighten your load.  Whatever you do, be honest and realistic with yourself when evaluating your business.  It can be an eye-opening experience.

Get Organized

If you have extra time on your hands, start reorganizing files, taking inventory, and finding ways to trim the fat.  Streamlining your business and your daily practices can help identify problem areas and help you to find solutions as well.  Take advantage of your down time to ensure that you are well-prepared to meet the demands of your customers when business starts to pick up again.

Get to Know Your Customers

Put yourself out there and get to know your customers.  If you are out of touch with your client base, you business is most definitely suffering.  Find out what they need by surveying them, publishing a blog or newsletter, and asking for regular feedback.  People really appreciate being asked for feedback, especially if they feel you are going to use it to make their experience with your business better.  Unsatisfied customers can quickly be turned into satisfied customers through communication.  If they feel their comments are falling on deaf ears, they will turn to your competition.  

Improve Your Service

Doing all of these things is great, but the clincher is that you must apply what you have learned about your business and make the necessary adjustments.  Improving service will ultimately improve satisfaction, which will generate not only repeat business, but new business as well.  You must do everything you can to achieve this goal.  The importance of customer loyalty cannot be understated, so start working on improving your customer service and relations right away.

What does this really mean for the average American?  Will this bailout really help to stimulate the economy like they are saying it will?  If you have any doubts (which you should), then read on and see why you should be skeptical of this newly passed plan to give us an “economic boost.”

Bank Executives’ Salaries Will Be Cut

According to the parameters of the bailout, bank executives will have caps on their salaries as long as the government is an investor in their institution.  This is evidently a preemptive major to ensure that CEOs don’t continue to make risky investments in an attempt to make massive bonuses.  However, no one seems to be questioning the fact that many of these executives and CEOs made hundreds of millions of dollars—even when their banks were going under.  How is it possible that we are bailing out people who make more money than most people make in their entire lives while families are losing their homes?

Taxpayer Burden

Ultimately, what it all comes down to is that the average American citizen will end up paying for the mistakes of the rich and greedy folks in the credit and banking industries.  The same people who lost their homes to these institutions will help nurse them back to health financially for generations to come.

New Loan Incentives

The government has once again offered banks incentives for boosting the housing market.  Am I missing something here?  I feel like Bill Murray in Groundhog Day—isn’t this exactly what got us into this mess in the first place?  Encouraging banks to start lending again when they mismanaged and plundered the middle-class coffers the first time around sounds like they’re being given permission to beat up the sick kid when he’s only halfway recovered.

Job Market Worsening

Even with all this money being put back into the economy (starting at the very top, mind you), the job market is flailing around, with no recovery in sight thus far.  Although gas prices have temporarily plunged and minimum wage recently rose to $6.55 an hour, the average working American can barely afford to make ends meet.  As their credit continues to get worse, the banks’ future appears to be brighter than ever.  Is anybody willing to bail out the average Joe?

Accordingly, John McCain and Barak Obama have seized upon the publicity surrounding the economic storm as an opportunity to advance their respective platforms. Due to their propensity to speak in sound bites, however, it is difficult to distill their actual positions. Allow me to translate…

1. Credit Crunch and Government Intervention: Within the arena of economic policy, of utmost importance is how the two candidates plan to resolve the ongoing credit crisis. Thus far, both have shied away from taking controversial positions and/or offering sweeping prescriptions. Instead, they have intoned populist sentiments by criticizing Wall Street and absolving American workers and homeowners of their collective responsibility. With regard to the bailout plan, both candidates have announced tentative support. Senator Mccain favors "an approach that would proactively resolve troubled financial institutions, enforce discipline on management and shareholders, and minimize the burden on the taxpayer." This seems to represent a slight reversal from an earlier proclamation, in which he argued that "The Federal Reserve should get back to its core business of responsibly managing our money supply and inflation. It needs to get out of the business of bailouts." Senator McCain is also working hard to overcome both a recent gaffe in which he claimed the economy is "fundamentally sound" as well as the belief among voters that the Republican party is responsible for the current crisis. Accordingly, he has (unsuccessfully) attempted to take on a leadership role in the government negotiations. Senator Obama, meanwhile, indicated that "We have to make sure that whatever plan our government comes up with works not just for Wall Street, but for Main Street." He has proposed an additional economic stimulus as well as increased regulation. [This will be explained in greater detail below]. Unfortunately, the Senate wasn’t consulted when the executive branch decided to save Bear Stearns, scuttle Lehman Brothers, and save AIG, so it’s impossible to know how either candidate would have voted if pressed for a decision. With regard to the government takeover of Fannie Mae and Freddie Mac (profiled in a related feature), both candidates again combined tentative support with fulminations about greed and corruption.
2. How to Resolve the Financial Crisis: An excellent point-by-point comparison of the candidates’ respective plans to right the economy can be found here. To summarize, Mr. McCain would begin by firing Christopher Cox, Chairman of the SEC, despite its minimal role in the credit crisis. Next, he would move to prosecute corporate executives alleged to have willfully misled the public. As for the government’s role, he has proposed the creation of a unique government organization that would henceforth be charged with managing the "toxic" mortgage assets at the heart of the crisis. However, unlike Treasury Secretary Paulson’s plan, Mr. McCain would focus on troubled homeowners rather than the banks that lent to them. According to his chief economic advisor, "By starting with the homeowner and working up, you accomplish some of the [same] objectives of the financial-stabilization plans that we’ve seen come out of Congress." This would be followed by increased financial regulation (backtracking from an earlier position) and tax cuts to stimulate the economy. The cornerstone of Obama’s plan, meanwhile, is another economic stimulus package, perhaps to the tune of $150 Billion. In addition, some families would be eligible for tax rebates and penalty-free withdrawals from retirement accounts. Of course, there would also be an obligatory increase in financial regulation: "He’s talked about strengthening capital requirements on mortgage securities and derivatives, rigorously managing liquidity risk, and investigating ratings agencies and their potential conflicts of interest with companies they rate." Unfortunately, most commentators reckon that both candidates’ economic prescriptions are too watered-down to be effective. In all likelihood, we will have to wait until after the election for a plan that is both substantive and comprehensive.
3. Economic Policy: Setting aside the credit crisis for a moment, let’s examine how both candidates plan to manage the economy once it regains its footing. To quote from an earlier article I wrote, "With his emphasis on consumer and worker rights, as well as in maximizing employment and wages instead of efficiency, Barack Obama is set to become the rule of his Party, rather than the exception. At the same time, his fair-trade brand of protectionism and his threats to limit unfair competition from abroad could reverse the trade deficit." In addition, Mr. Obama aims to attack the economic malaise by focusing on more "peripheral" economic issues, such as healthcare and energy. By reducing these burdens for middle-class Americans (combined with a tax cut), his aim is clearly to free up cash for consumption and investment in other sectors of the economy, namely in manufacturing and green technology. With regard to trade policy, Obama "favors trade agreements only when they raise labor and environmental standards with our trading partners." McCain, meanwhile, is vehemently pro-trade, and hasn’t offered any indication that he would reverse the course of trade liberalization that the country (and the world) has embarked on over the last decade. Otherwise, his economic policy (as well as his knowledge of economics) is admittedly thin, and is focused around comprehensive tax cuts and vague promises of matching cuts in spending. Unfortunately, he has yet to explain the mathematics of such a policy, leading one commentator to call it "one of the most fiscally irresponsible plans we’ve seen by a presidential candidate in a long time."
4. Tax Policy: Thus far, I’ve spoken generally about both candidates’ proposed tax policies; let’s now drill into specifics. On paper, Senator McCain’s plan to cut taxes dwarfs that of his rival. He would begin by increasing the tax-deductibility of investment losses and lower the tax rate on capital gains to 7.5%, compared to a slight increase (though only for the wealthy) under Obama’s plan. Regarding income taxes, Mr. McCain would make all of President Bush’s tax cuts permanent, while Obama would raise taxes on the wealthy and lower them for everyone else. (A detailed comparison of their income tax plans can be found here.) The same holds true for estate taxes and corporate tax rates. Senator Obama would also reform the way in which private equity funds are taxed, by closing the so-called carried-interest loophole and subjecting the partners of such funds to normal tax treatment. The candidates have managed to agree on at least one aspect of tax policy: dividends. Swayed by the idea that lower taxes on dividends promote investment, Obama has quietly accepted one of the cornerstones of Republican tax policy. As for the fiscal impact of their respective tax policies: "Their specific non-health tax proposals would reduce tax revenues by $3.6 trillion (McCain) and $2.7 trillion (Obama) over the next 10 years, or approximately 10 and 7 percent of the revenues scheduled for collection under current law, respectively." So much for reducing the deficit.
5. Role of Government/Regulation: In the words of one columnist: "The mega question — what is the role of the U.S. government in the nation’s economy? — isn’t just on the table, but at the center of the table." In this aspect, Mr. Obama probably has Mr. McCain beat, if only by virtue of his party affiliation. As hard as he tries, Mr. McCain simply cannot escape the fact that most Americans blame President Bush and the Republican party for the current economic crisis. While Senator Obama’s track record in this department is basically non-existent, he has nonetheless laid out a comprehensive plan to increase regulation and prevent this crisis from repeating it itself in the future." First, he said, any financial institution that can borrow from the government should be subject to stricter government oversight. Second, he would strengthen capital requirements and demand better disclosure of risks and obligations that firms hide off their balance sheets. Third, he would streamline regulatory agencies. Fourth, he would regulate institutions for what they do, not what they are. Fifth, he would crack down on market manipulation. And sixth, he would establish a process to identify systemic risks before they explode." McCain, meanwhile, has moved to distance himself from yet another dubious comment he uttered in September ("Im always for less regulation.") and has instead taken to echoing Obama’s insistence that Wall Street be subjected to greater government oversight. Aside from singling out the exorbitant compensation of CEOs, however, he has been scant on details. At the same time, McCain has pledged to vastly shrink the size of the government: "He wants to fundamentally alter the government’s role in the economy by deeply cutting non-defense spending, from discretionary programs to entitlements." Given the economic crisis and predictions of lower tax revenues, perhaps now might not be the most prudent time to push such an agenda.
6. Attitude towards Speculation/Risk Taking: Both candidates have railed against the greed of Wall Street executives, as well as those pesky "speculators" who they accuse of fomenting the real estate bubble. According to Senator McCain, the "foundation of our economy…has been put at risk by the greed and mismanagement of Wall Street and Washington." Such incantations largely ring hollow, however, since it was recently revealed that at least 83 financial industry lobbyists double as advisors to his campaign. Obama was probably the earlier of the two to hone in on speculators, specifically within the context of the run-up in food and commodity prices that preceded the credit crisis. "Mr. Obama proposed preventing traders of American crude oil from routing transactions through offshore markets to evade American limits…and he called on the Federal Trade Commission and the Department of Justice to investigate market manipulation and oil futures." Given that the deleveraging of the last few months has also coincided with lower oil prices, Obama may be onto something.
7. Corporate Friendliness: Generally speaking, both candidates have tried to convince voters of their skepticism towards big business, which is ironic considering that large corporations have been very generous in funding both campaigns. "Individuals associated with Merrill Lynch, which [recently] sold itself to Bank of America…have given his presidential campaign nearly $300,000, making them Mr. McCain’s largest contributor, collectively." Meanwhile, Obama has raised over $2 Million from individuals associated with hedge funds and private equity funds, despite his pledge to increase their collective tax burden. It looks like Mr. McCain will at least partially return the favor, given both his pledge to lower corporate tax rates and his recent appointment of former HP and eBAy executives as advisors to his campaign. With Mr. Obama, however, the return on investment is likely to be smaller, leading some commentators to quip that Wall Street workers would be better off investing in subprime mortgages than contributing to his campaign.

    

   As a trader, what your are no doubt ultimately concerned with is how the election will affect capital markets. While predicting such (especially given the current atmosphere) with any shred of accuracy is nearly impossible, that won’t stop me from trying.

   In a nutshell, the credit crisis has engendered the complete destruction of investor confidence. According to one expert, "The world capital markets are like a house of cards because of a lack of investor confidence, which in turn is caused by a lack of transparency. Sour mortgages weren’t the problem so much as the fact that no one, here or abroad, knew how much toxic stuff was on their books because it had been securitized into obscure financial instruments." The best (and perhaps the only) way to restore confidence is to create a sprawling global financial agreement that comprises all countries and all securities. Unfortunately, neither of the candidates seems to be even remotely cognizant of the need for such an agreement.

   If and when capital markets do resume normal functioning, it seems unlikely that assets will appreciate at the frenetic pace that characterized the last two decades. Both candidates have repeatedly castigated "speculators," first for their role in fomenting the rise in oil prices, and most recently for their role in the financial crisis. In addition, the election of Senator Obama would result in higher taxes and greater oversight of hedge funds and private equity firms, both of which could crimp stock prices. Meanwhile, bond markets and forex markets will probably suffer regardless of who’s elected, as both candidates are generally regarded as fiscally irresponsible. "The deficit for the 2008 fiscal year, which ended Sept. 30, was $455 billion, or 3.2 percent of total economic output. Analysts say it could reach $1 trillion in 2009, or more than 7 percent of projected economic output…So far, both Mr. McCain and Mr. Obama have insisted they do not have to have to scale back their pre-crisis platforms." Both Treasury prices and the US Dollar could suffer if the government can’t find an efficient way to finance the growing national debt. In short, it’s going to be a bumpy ride regardless of what happens on election day.

In this article, the pros and cons, as well as the likelihood and feasibility, of returning to the gold standard will be set aside. Suffice it to say, the process of re-instituting the gold standard would be complex and difficult, and perhaps economically painful. In addition, while it is a deeply partisan issue, it is not currently under consideration by either major political party. However, the continued deterioration of global capital markets in the wake of the credit crisis, as well as the continued decline in the USD, could put the idea back on the table. Already, it is a cornerstone of Presidential candidate Ron Paul’s economic policy platform, and has been endorsed by such venerable economists as Alan Greenspan. Nevertheless, the focus below will be limited to the implications of a gold standard, in the event that it is implemented.

I should point out that there are many different forms that a gold standard could assume. Unfortunately, the precise mechanics of said gold standard also fall outside the scope of our discussion. For the sake of simplicity, the analysis will be based on a gold standard in which all paper currency is theoretically backed by gold.

1. Macroeconomic Stability: One of the chief arguments for a return to the gold standard is its theoretical link to price stability. Skeptics are probably wondering why price stability should be an economic priority, since inflation has remained low for over a decade now. Advocates of the gold standard would retort that this decade was largely an aberration in modern economic history, and the low rate of inflation was largely a product of globalization, rather than sound monetary policy. In the end, goes the old adage, "you can’t fool the markets." Inflation is surging, and not just in the US. Well the factors underlying this bout of inflation are nuanced, it can be closely connected to an erosion of confidence surrounding the Dollar, which have driven natural resource exporters and food producers to raise their prices in Dollar terms, merely so that they remain constant in local currency terms. Since inflation is ultimately a product of changes in the supply/demand of money, a return to the gold standard should alleviate inflation by limiting the government’s ability to print money. Governments would only be able to print money in proportion to their gold reserves. Thus, prices for certain goods and services would fluctuate only in accordance with supply and demand, rather than in response to monetary policy. "Under a gold standard, price changes due to such shifts in the quantity of money would be relatively minor and easy to anticipate, and the purchasing power per unit of gold would be more stable than under an unpredictable paper currency standard." It should be noted however, that a Central Bank must choose between managing either the currency (prices) or the economy. Think of the predicaments facing countries that currently peg their currencies to the Dollar, namely China. Such countries are often forced to keep interest rates unnaturally low, in order to prevent upward pressure on their currencies. The inevitable result of this kind of policy is inflation. Similarly, it has been argued that the gold standard contributed to the Great Depression, as Central Banks were constrained in their ability to expand the money supply in order to raise demand and employment.
2. Change in the Structure of Government: Those who favor the gold standard for political reasons often argue that such would force governments to balance their budgets. Under the current fiat money system, in contrast, a government can essentially spend as much as it wishes, knowing that it can simply borrow its shortfall. In this way, governments are able to avoid raising taxes directly. Congressman Ron Paul observes wryly: "Printing money to pay the bills was a lot more popular than taxing or restraining unnecessary spending." Instead, citizens are taxed indirectly, in the form of inflation. Under a gold standard, governments could not print money to cover a budgetary shortfall. Furthermore, since an across-the board tax increase in such a situation would amount to political suicide, it would probably be cajoled into cutting spending. This view is corroborated by former Federal Reserve Chairman Alan Greenspan: "With unlimited dollar conversion into gold, the ability to issue dollar claims would be severely limited. Obviously if you cannot finance federal deficits, you cannot create them." The structure of the government would also change. First, the $300 Billion+ of interest that the Federal government pays on its national debt would be reduced and eventually eliminated, creating opportunities to shift spending in other areas. Second, spending on defense and military would shrink. To quote Congressman Paul again, "Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system." In other words, the US is forced to pursue an aggressive foreign policy in order to protect the Dollar. In turn, the strong Dollar further enables the military by underwriting its expenses. Says Paul, "Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar." Thus, a return to the gold standard would undermine some of the raison d’etre of the military, not to mention make it more difficult for it to finance large scale operations.
3. Increase in Gold Prices: It has been estimated that "only" 142,000 tons of gold have been mined in the history of the world. Based on prevailing prices, this translates into approximately $4 Trillion, not nearly enough to cover all paper currency in circulation. Thus, a return to the gold standard would necessitate a drastic increase in the price of gold. Does this mean that you should invest your savings in GLD? Probably not, since it’s unclear exactly how a conversion of paper currency to gold would take place.
4. Relative Impact: If only a handful of nations adopted a uniform gold standard, it could prove comparatively difficult to maintain. Under a gold standard "Countries seeing downward market pressure on the values of their currencies are forced to contract their economies and raise unemployment." By analogy, think of the futility of Cuba’s quest to preserve some semblance of communism in a world where nearly every nation is unabashedly capitalist. If the US adopted a gold standard in isolation, for example, the US Dollar could become overvalued as a result of perennially low inflation, which would make it difficult for it to compete in the global economy.
5. Shift in Balance of Power: This is essentially an extension of "He who has the gold makes the rules," whereby return to the gold standard could affect relations between gold producers and gold importers. Countries like South Africa and Australia would suddenly find themselves awash in cash, and would then become entrenched in the power struggles. Such countries could also effectively control global inflation levels by moderating the production and hence, supply, of gold. Again, it would depend on the precise mechanics of the gold standard, but prices could theoretically be influenced by geopolitics more than on economic fundamentals, much like oil is today. Speaking of which, the price of oil would probably decline upon the return of the gold standard. Currently, most of the world’s oil contracts are settled in US Dollars; accordingly, part of the fluctuation in the price of oil can be explained by fluctuations in the Dollar. The inherent stability implied by the gold standard, in contrast, would mitigate these adjustments, and the price of oil would presumably fluctuate in accordance with supply and demand.
6. Increased Equity: This implication is largely political/philosophical, rather than economic. As described above, inflation represents an indirect tax on the citizenry. Moreover, since legislators don’t need require the explicit approval of their constituents when deficit spending, the tax is automatic and impossible to avoid. Under a gold standard, all levels of government would be able to spend only that which they own in gold, a method which is inherently more democratic than the current system. In addition, the fractional reserve banking system (that is made possible by fiat money) enables lenders (banks) to lend out a multiple of savings. Under a gold standard, such lenders would be able to lend the nominal amount of savings, thereby protecting savers from the inflation that results from an expansion of the money supply.
7. No Financial Bubbles: Asset price bubbles represent one of the most pernicious (and recurring) byproducts of the fiat money system. "The new economy belong[s] to finance, insurance, and real estate—FIRE. FIRE is a credit-financed, asset-price-inflation machine organized around one tenet: that the value of one’s assets, which used to fluctuate in response to the business cycle and the financial markets, now goes in only one direction, up, with no more than occasional short-term reversals." In the last 10 years alone- to say nothing of the previous 100 years- the US witnessed two major asset bubbles, the first in technology, the second in real estate. Both bubbles were directly made possible by fractional reserve banking, as lenders are encouraged to conjure money out of nothing. Many of these borrowers are actually investors, producing nothing of substantive value, but rather purchasing "proxies" for value. In the case of the dot-com and real estate bubbles, the proxies refer to technology stocks and subprime mortgage debt, respectively. At the peak of the dot-com bubble, it was estimated that over $12 Trillion of completely fictitious value had been "created." As the real estate bubble is still deflating, it could be years before economists can accurately calculate the size of the bubble at its peak. Unless the monetary system- not to mention the financial culture- that produced these bubbles is reformed, it is inevitable that investors will rush to inflate a new one in the not-too-distant future. Perhaps in healthcare technology or alternative energy…
8. Change in Economic Structure: According to Congressman Paul, "The artificial demand for our dollar, along with our military might, places us in the unique position to rule the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last." In other words, the perceived infallibility of the Dollar, combined with globalization, has enabled the United States to consume nearly $800 Billion more than it produces- every year! Over the last decade, factory work and increasingly, white collar-work, has been "outsourced" to countries with large pools of cheap labor. It is not necessarily the case that these countries’ supply chains and manufacturing processes are more advanced than those in the US. In fact, more often than not, the opposite is true. Rather, extreme confidence in the US Dollar makes it possible to pay overseas workers a small fraction of what comparable American workers require, due to exchange rates. As Congressman Paul further points out, "It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth." Unfortunately, cracks are beginning to appear in this arrangement. It goes without saying that a return to the gold standard would force the US to balance its current account and reduce the gap between domestic production and consumption.
9. No More Central Banks: This aspect of the gold standard is the most dependent on the precise type of gold standard that is adopted. In most cases, Central Banks (The Federal Reserve Bank, in practice) would face a drastically reduced role. They could no longer print money at will to assist governments that engage in deficit-spending. In addition, they could no longer indirectly print money by using monetary policy to expand the money supply. Interest rates would be determined by the markets, and would be a measure of risk, rather than manipulated by Central Banks in order to control the speed at which new money is created.
10. Multiple Currencies: The elimination of Central Banks and the return to the gold standard would end the government’s de facto monopoly on the issuance of money. One economist notes: "Under a 100 percent gold standard…the various countries would have a common monetary system, just as the various states of the United States now have a common monetary system." Accordingly, investors and consumers would theoretically be free to mix and match currencies when engaging in commerce. Especially, if the gold standard was adopted universally, currencies would no longer compete with each other in terms of their ability to "store value." Rather, their function would be to serve as "mediums of exchange" and consumers could feel confident knowing that all currency is ultimately backed by gold, regardless of which specific "brand" of paper money in which they were dealing.

There seems to be a question of causation inherent in the return to the gold standard. Would it be precipitated by a recognition that the current system of deficit spending and "Dollar diplomacy" is probably unsustainable, or rather would it be adopted for political reasons, and then ultimately lead to a change in culture that produced the current system? In any event, the theoretical implications of such a return are manifest: increased governmental accountability, macroeconomic stability, and political freedom.

Unfortunately, the structural weakening (to put it mildly) of Fannie Mae and Freddie Mac has happened so suddenly, and so violently, that there simply isn’t time to dwell on the past. "Despite repeated assurances from regulators…financial markets have concluded that by some measures they are deeply troubled. Freddie, for instance, is technically insolvent under fair value accounting rules, in which the company puts a market value on assets as if it had to sell them now."

The Bush Administration has already taken several measures to shore up both companies, culminating with an expensive bailout. Below, I will explore the forms this bailout could plausibly assume, several scenarios for the future of Fannie and Freddie, and the implications for homeowners and investors. First, however, some lingering questions regarding the seriousness of their condition need to be answered.

1. How Bad is It?: In the last twelve months, Fannie and Freddie have reported a combined $14 Billion in losses. "Executives believe the housing market is only about halfway through its downward cycle…they expect the firm’s losses would increase through at least 2009, and that home prices would continue to decline by as much as an additional 9 percent." Unfortunately, a clear picture is difficult to obtain because the companies are subject to conflicting standards and can manipulate their financial condition accordingly. Freddie Mac, for example, recently presented investors with a dizzying array of statistics designed to demonstrate the soundness of their capital position. And analysts were understandably skeptical: " ‘We discount Freddie’s presentation …about how it can stay above regulatory capital minimums come hell or high water. Any number of assumptions in it are questionable,’ " offered one analyst. In short, it’s probably safe to say their condition is perilous, at best, and catastrophic, at worst.
2. What’s at Stake?: The phrase too big to fail comes to mind. "With the credit crunch, Fannie and Freddie have become more important than ever, financing some 80% of mortgages in January. So they will need to keep lending," argued The Economist. Suffice it to say that the US economy, in its current weakened state, simply could not tolerate the complete collapse of the mortgage giants, which together support more than $5 Trillion in mortgage securities. There are a few different groups of people who have a direct stake in what happens and will probably try to influence the process accordingly. First, there are shareholders and bondholders, who have invested and lent money, respectively to Fannie and Freddie. Meanwhile, there are speculators who have bought insurance (in the form of derivatives) against a potential bond default. In the event of a government bailout, bondholders would probably have to accept a "haircut" (discount) on bonds they own, while shareholders would probably be wiped out completely. The nature of the insurance derivatives, on the other hand, would entitle the speculators to a payout. Then, there are the company’s employees. The executive team of Fannie Mae has already turned-over, and it is believed that even the Boards of Directors would be replaced in the event of a full government takeover. This probably won’t provide much solace for rank-and-file employees, who face an uncertain future, and an Employee Stock Ownership Plan that is nearly worthless. We also need to consider American taxpayers, who will probably end up footing some portion of the bill, regardless of their level of complicity in inflating the housing bubble. Finally, there are other sectors of American capital markets, and even the broader international financial system, which would feel the ripple effects of a Fannie and Freddie collapse. Demand for certain types of securities, many of which are essential for the functioning of the economy in its certain form, would virtually dry up. Enter the Federal Government…
3. Government Bailout: After the panic in July sent the share prices of Fannie and Freddie tumbling, the Federal government intervened. It was announced that the Fed would allow both firms to borrow from its "discount window" in order to buttress their capital positions and enable them to continue to provide liquidity in the mortgage markets. In addition, Congress passed legislation permitting the Federal government to further shore up the firms’ capital positions through the use of investments and loans. This piece of legislation set the stag for a more formal bailout, which was executed by the government on September 7. "Under the takeover, the government replaced the companies’ chief executives and shifted management control to their regulator, the Federal Housing Finance Agency, or FHFA. The government pledged to provide as much as $200 billion to help both firms ride through their expected mortgage-related losses." By placing the firms in a so-called conservatorship with the clear backing of the federal government, the Fed has changed the nature of the guarantee that is attached to their debt. Previously, it was assumed that the bonds issued by them enjoyed the implicit backing of the government; that guarantee is now explicit. Aside from this semantic change, the government bailout of Fannie and Freddie closely mirrors the rescue of Bear Stearns last March; shareholders will be left with next to nothing, while bondholders and counterparties are prrotected against the risk of default.
4. No Long-Term Solution: Analysts agree that this plan represents a mere stopgap measure, intended to bide time until a more stable solution is drafted. In fact, "lawmakers and government officials said it could be a year or longer before the next Congress and the new president settle on a new role for the companies." Besides, a legislative solution could do more harm than good since the government stimulus plan that was hastily implemented in March probably contributed to the collapse of Fannie and Freddie: "lawmakers raised the limit on the size of home loans mortgage giants Fannie Mae and Freddie Mac can guarantee, from $417,000 to as high as $729,750 in some of the most expensive U.S. markets." In addition, the permission that Congress granted the Treasury Department in July to execute a complete takeover was hardly fair, rewarding investors and homeowners at the expense of taxpayers. Perhaps, then, it would be wise for Congress to remain on the sidelines going forward.
5. Nationalization or Privatization?: "Fannie and Freddie were unique hybrids…they enjoyed the benefits of being publicly traded corporations with a government subsidy because of an implicit guarantee of their obligations." The ambiguity surrounding this structure is partially responsible for their spectacular collapse, and resolving the private/public dilemma will be part and parcel of their restoration. Favoring nationalization is the government bailout, itself, which proved that the banks simply are too big to be allowed to fail. Furthermore, the banks are mandated by law to facilitate affordable ownership, by providing liquidity in the secondary mortgage market. There are a few Congressman who are interested in reforming the banks so that they can fulfill this mission more efficiently. In addition, "Fannie Mae was [already a government organization] for the first 30 years of its life before President Lyndon B. Johnson sold it to the public to help pay for the Vietnam War." On the other hand, this debacle illustrates the high cost associated with guaranteeing the agencies’ debt, most of which will be born directly by taxpayers if the banks are nationalized. Also, it is only because of the government backing that Fannie and Freddie were able to borrow so cheaply, and expand their operations without expanding their respective capital bases. "Privatisation should then create a much wider range of competing entities. It is not entirely clear why the core business of the enterprises—providing guarantees for mainstream (not subprime) mortgages—needs government sponsorship."
6. Liquidation: Perhaps, the government should simply allow nature to take its course. Or, better yet, perhaps, after nationalizing the two banks and restoring calm in the housing market, the government should force their liquidation or break-up. According to one "analyst, "Fannie Mae and Freddie Mac are not essential to the mortgage market; if they were put out of business in an orderly fashion over 5 to 10 years, the market would pick up the business they abandon." One need look no further than Europe, points out another commentator, "where mortgage markets are completely private, but just as stable and efficient as in America. "
7. Merger: "Given that the companies do pretty much the same thing - buying mortgages from banks, insuring them and creating mortgage-backed securities - there might be opportunities for savings if many of their managers and staff are, to put it politely, "redundant." Should the merged entity be called Freddie Mae or Fanny Mac?
8. Debt Refinancing: As stated above, it will probably be months, perhaps even years, before a long-term plan for the beleaguered mortgage giants is settled upon. In the mean time, they must continue to maintain their day-to-day operations. "The two companies need to "refinance $225bn (£121bn) of debt by the end of September, a prospect which looks expensive after both were forced to offer record coupons on relatively small [recent] bond issues." In the last few weeks, the firms have issued a record $12 Billion worth of debt. While continued financing should not be too difficult, given the government bailout, it cannot be taken for granted. Some "investors are still stinging from the collapse in share price, and may be wary about buying bonds, given that the government guarantee may not last forever. In fact, one of the more recent financings was only possible because of "switching," in which buyers are permitted to swap old bonds for new ones, such that their net exposure is unchanged. There is particular concern that foreign buyers, which already own $1.5 Trillion worth of "quasi-governmental securities, will curtail their holdings. Even before the government bailout was announced, there was anecdotal evidence that foreign commercial banks had begun to reduce their exposure to the US real estate market by paring their holdings of mortgage-backed securities. In the future, such banks can be expected to err on the side of caution.
9. Presidential Implications: Given that the government bailout in its current form is mainly a stopgap measure, the upcoming presidential election carries significant implications for the future of Fannie and Freddie. Historically, the Democratic party has maintained closer ties with the two organizations, compared to Republicans. This is a product both of political ideology and the companies’ targeted buying efforts. Surprisingly John McCain, the Republican Presidential nominee, has received $169,000 in "campaign contributions from individuals tied to one or both firms, compared to the $17,000 that Barack Obama, the Democratic Nominee, has grossed. Regardless, both candidates have voiced tentative support for the government bailout. Says "Obama: "Long term, what we have to do is go ahead and make a decision. If these public entities, then they have to get out of the profit-making business, and if they are private entities, then we don’t bail them out." To the chagrin of his fellow members of the "Republican Party, McCain was "quoted as follows: "Those institutions, Fannie and Freddie, have been responsible for millions of Americans being able to own their own homes, and they will not fail, we will not allow them to fail." The candidates have yet to provide specifics on how they would deal with the situation should they be elected. Based on historical precedent Obama could reasonably expected to nationalize both organizations, whereas pressure from his party could lead McCain to privatize them and leave their fate to the whims of the market.
10. Implications for Investors/Homeowners: While the government bailout will enable Freddie and Fannie to stay afloat, both will probably be forced to curtail their role in the mortgage markets. As a result, home prices will continue to fall, and mortgage rates will continue to rise. As far as investors are concerned, there is always the potential to turn a profit. According to Barron’s, many institutional investors are making large bets that Fannie and Freddie will default, although the newspaper also notes that there are investors who believe the paranoia is overblown and are doubling down on their bets. The bonds of both organizations were trading at a discount prior to the government bailout as a result of cuts in their respective credit ratings. Perhaps of greater significance is the impact on the finances of the Federal government. The Treasury’s upfront liability for the bailout may reach $200 Billion, which could rise drastically if Fannie and Freddie are forced to write-down more of their more than $5 Trillion in mortgage securities. The Bush Administration has  managed to avoid accounting for this commitment. While the US has ultimately managed to maintain its AAA credit rating, "traders in the credit-default swaps market have recently made bets on the unthinkable: that America may default on its debt."

1. Stockbroker Jokes: The first joke was brought to us by WorkJoke.com, which features a terrific array of stockbroker jokes. Among the highlights are two new versions of the classic "light bulb" series: How many stockbrokers does it take to change a light bulb?

   Version 1: "My God! It burnt out!! Sell all my G.E. stock NOW!!!"

   Version2: One to take out the bulb and drop it, and the other to try and sell it before it crashes (knowing that it’s already burned out).
    

2. Letter of Resignation: Who among us hasn’t fantasized about quitting our mind-numbingly dull desk job? Moreover, who among us hasn’t fantasized about quitting our desk job and sticking it to the boss and the company on the way out the door? Okay, so some of us are naturally more vindictive than others, but that can’t be helped. While the internet contains a plethora of hilarious letters of resignation, the greatest one surely belongs to Cian Kelliher who seemed to positively delight in quitting his position at Ernst&Young, an accounting firm. The letter can be summarized by, "Your demands were high and your patience short, but I take great solace knowing that my work was, as stated on my annual review, mostly satisfactory! That is the type of praise that sends a man home happy after even a 10 hour day, smiling his way through half a bottle of mostly satisfactory scotch." Ouch. Apparently, Mr. Kelliher realized that he had crossed the line, and posted an apology a few days later, after copies of the letter began circulating first around his firm, then around cyberspace.

    

3. Buzzword Bingo: Sticking with the corporate theme for a minute, raise your hand if you have come to loathe the business jargon which seems to exist to make the speaker sound as intelligent as possible without conveying anything of actual substance. Anyone who has ever endured listening to an investment banker pontificate about cost synergies or business models or monetization schemes knows what I’m talking about. At least one website has attempted to expose and ridicule this annoying trend by using a "buzz word generator" to combine corporate buzz words into nonsensical, but hilarious combinations. Examples include "expedite integrated partnerships" and "disintermediate robust deliverables." The same site also offers sample game cards to be used in playing buzzword bingo, inviting participants to "print this page out, and take it to the next meeting and let the fun begin!" Even IBM is getting in on the action, having recently poked fun at itself in this commercial, in which an obtuse manager finds himself on the outside of such a game of buzzword bingo.

    

4. Investicon: College Humor is cashing on the "it’s cool to make fun of Wall Street" craze by offering up a satirical twist on the age-old perception that stockbrokers con investors out of money. Their advertisement is built around the fictitious Investicon, which aims to "get on board early, and we make big bucks. You ask, what are some of our big successes? Well, ever heard of the Internet? Investicon has too. We’re currently researching this new phenomenon with scientists."

    

5. The Onion: The Onion is in a league of its own when it comes to satirical journalism, and its coverage of fake financial news has earned it a spot on this list. In a 2004 piece, entitled "Stock Analysts Confused, Frightened By Boar Market," The Onion subtly gibed investing terminology. "I have no idea what to expect," stock analyst Christopher Mattson said. ‘This market is highly unpredictable, tusked and savage and covered with coarse, bristly hair. I didn’t know if I should buy, sell, or shoot.’ " In a more recent edition, The Onion published a report on the declining Dollar, which was apparently losing value to the apocryphal Canadian acorn: "The inedible dollar simply does not offer the same long-term security or short-term benefits as the acorn," said James Aucker of the Commodity Futures Trading Commission. "It is even falling against the Costa Rican pocket, the Latvian thimble…"The article also included fictional testimony by Alan Greenspan on factors that weigh on the price of acorns and the value of the Dollar.

    

6. Buying on Margin: A lesser-known source of satirical journalism is The Spoof, which recently published a piece lampooning the surge in liquidity over the last decade. According to the article, "Under Alan Greenspan the Federal Reserve had an anti-cash policy and had spent nineteen years taking cash out of the American fiscal system. The policy was very successfully implemented meaning that there is currently $113,367.78 in circulation, most of which is in quarters." As a result, a new (fictitious) rule will soon come into effect that requires future stock market transactions to be conducted in cash. Perhaps The Spoofis onto something, as the recent collapse of liquidity has caused a proportionate decline in equity prices.

    

7. High Oil Prices: Satfin, the self-proclaimed financial satire website, offers a convincing explanation for the recent surge in oil prices: aliens. According to their analysis, "It is believed that the move is the first in a series designed to cause economic turmoil on earth. Some people further believe that this will be followed by an invasion of the planet." Perhaps, this is a thinly-veiled critique of the paranoid efforts to pin the blame for high oil prices solely on speculators, despite the myriad of other contributing factors.

    

8. More Stockbroker Jokes: A page devoted entirely to stockbroker humor can be found at Rec.Humor.Funny. These one-liners are especially pertinent, given the current bear market.

   Merrill Lynch has adjusted its investment portfolio: 50% cash and 50% canned goods.

   Bumper sticker on Wall Street: My other Porsche is for sale.

   How many investment bankers can you fit in the back of a pickup truck? Only 2 - you have to leave room for the lawn mowers!

   I have an uncle down at Wall Street. He used to have a corner on the market. Now he has a market on the corner.

   "Get my broker, Miss Jones." "Yes sir. Stock, or Pawn?"

    

9. Throwing Darts: Doubtful Accounts features the work of financial and business cartoonist Doug Pike, and includes an inventory of over 1000 cartoons. One particular cartoon riffs on the oft-cited idea that one is more likely to pick winning stocks by throwing darts at the stock listings than by actively trying to outsmart the market. It illustrates the danger of taking things too literally, as the subject of the cartoon tries to adapt this strategy to choosing a stockbroker. Another one of Mr. Pike’ cartoons pokes fund at high prices for pharmaceuticals, noting irreverently that only 2 prescriptions need to be filled in order for the fictitious drug to become a blockbuster.

    

10. Top 10: One of the staples of the Late Show with David Letterman is "The Top Ten List." One particular list caught my attention for its comparison of investing to sex. The parallels are nothing short of remarkable. Especially with regard to the respective jargon; one has to wonder if the first stockbrokers used sex as inspiration for coming up with clever investing strategies. Think about "naked call" and "straddle," two common strategies when trading options, for example. My personal favorite on the List is #8: "Those who talk about it the most, have the least experience."

     

11. About.com: The one-stop shop for information, About.com has devoted an entire page to stock market humor and other diversionary activities. Included is a list of the best investing movies of all-time; "Trading Places" beat out "Boiler Room" for the #1 spot, in case you were wondering. There is also a list of funny ticker symbols for equities and mutual funds, including BYO.AX and GEEK. One has to wonder what the person who conceived of SRRY was thinking; surely there must have existed a more optimistic choice?! Also contained herein is a picture of the founding staff of Microsoft Corporation, circa 1978. It features a rag-tag group of nerdy looking, middle-aged men (and women) as well as a young Bill Gates, with the caption: "Would you have invested?"

     

12. The broker and the dead horse: You know you have the cunning to be a stockbroker if you not only find this joke amusing, but also are inspired to try something similar yourself. "A broker bought a horse from an old farmer named Ben in Texas for $100. The farmer agreed to deliver the horse the next day…."

     

13. Currency Report: While Jon Stewart’s Daily Show typically focuses on political "fake journalism," is has also been known to turn its camera towards economic news. Forex traders will find this segment especially hilarious: "now that the British pound is worth more that two U.S. dollars, John Oliver is almost comically rich." The focus of the piece is the declining Dollar, with the ostensible outcome that the Daily Show’s British correspondent, John Oliver, is suddenly much wealthier. Unfortunately, as Jon Stewart points out, he is paid in US Dollars. What a pity.

     

14. The $7 Billion Fraud: Last but not least, remember that as bad as your day has been, it doesn’t even compare to the losses of Jerome Kerviel- unless of course your name is Nick Leeson or Samuel Israel. Identified as ‘"a rogue employee" of Societe Generale, Mr. Kerviel apparently executed a series of "elaborate, fictitious transactions" that cost the company more than $7 billion, the biggest loss ever recorded in the financial industry by a single trader. So relax, you’re going to be just fine.