May
22
When the final chalk line is drawn around the airline industry, David Caruso will turn around slowly, remove his sunglasses, and say, “We are looking for a punk investment broker.”
“YEEAAAAAAAAAOOOOOOOH!”
I suggest to you that wingtips clipped the airlines’ wings.
Wall Street turks in search of ever-larger profit returns created demand for mortgage-based investments which in turn led to promiscuous mortgage lending to people who had no business getting a home loan.
When the mortgage-backed securities bubble burst and stocks took a dive, turks in search of ever-larger profit returns took money out of stock and put it into commodities futures, like oil. Rising oil prices lured them to these contracts, and then their own demand for these contracts led to even faster-rising oil prices.
Efforts by the Fed to solve the mortgage default credit crisis by pouring billions of dollars into the global economy, meanwhile, led to a weaker dollar, which in turn made dollar-denominated securities cheaper for people who keep their wealth in other brands of money, like euros or yen. Oil, of course, is a dollar-denominated commodity.
Result: crude oil topping $130 a barrel, jet fuel that has doubled in price in the past 12 months, and airlines taking steps that will clearly damage them, yet which they cannot avoid, like pulling out of routes that would be profitable if oil cost $80 a barrel, and charging $15 for the first checked bag, as American announced Wednesday it will now do.
In the business and entrepreneurial community it has long been an article of faith that it’s good for everyone in society if some people are allowed to become rich. The idea is that it is useful to incentivize people to work hard to achieve wealth, and that when they do they will spend the money in a variety of useful ways, investing in start-ups, giving money to charity, buying more sandwiches, whatever. The point is that you benefit from other people getting rich even if you don’t get rich yourself.
What we have learned in the past year is that is ain’t necessarily so. Until about a year ago the world had all kinds of wealth that could have been used to endow nonprofits, contribute to economic activity through spending, or invest in companies. Instead it got diverted into wheel-spinning middleman activities — buying and selling securities and futures contracts — that don’t benefit most of society at all. All this wealth, misspent, very nearly wrecked the economy. It is certainly wrecking the airlines.
This verges on a sermon, but I haven’t actually said that wealthy investors should avoid high-return investments out of high-mindedness. No such worthy incentive is required. One may avoid flipping futures to make a quick profit for the simple reason that it’s a whole lot riskier than was previously realized. Is this not clear now?
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Aloha Howard!
I don’t know much about stocks or about how the system works but I’m just wondering “who pulled the plug” in the mortgage backed derivitive market so that all the chips fell? I can’t believe that the comparitively small amount of subprime mortgage defaults have caused this free-fall around the world. There has to be something more.
I recently listened to Dr. Robert Zubrin talk about how he believes that OPEC is purposely restricting the supply of oil in order to put us into a recession and enables them to buy up our banks, land and companies. With this restriction, the airlines are in big, big trouble - especially with, as you say, the speculators doing the same thing in oil as they did with mortgages. I’ve been wanting to run these thoughts past someone who is more educated about this than I am. You’re IT! LOL! Thanks for your work! Jen