fraud and conspiracy he had been charged with. What did in this Raj was his irrepressible penchant for trading on inside information—bad enough, but, even worse, committing the unpardonable sin of indulging in his dirty dealings via the telephone, with, as it happens, the feds an appreciative, if mum, audience.
We say "once-billionaire," because his lawyers reportedly have already relieved him of millions, and the appeals have yet to begin. The reckoning is that the inside dope (and, the trial revealed, there were no end of dopes eager to supply him with material tidbits) enriched Raj by nearly $64 million, a tidy sum consisting mostly of winnings, but also gains from dumping losers ahead of the crowd. The penalty for his mischievous doings could mount to over $170 million and an extended stay -- oh, say, 15 years minimum -- in the slammer.
Our fervent hope and prayer is that the Raj's misfortune will teach an invaluable lesson to the golden hordes of hedge-fund kingpins, indeed, to all who labor in the rich vineyards of Wall Street. And that lesson: If you insist on making illicit trades on privileged information, for heaven's sake, forget the phone and e-mail, and take a crash course in signage.
For the stalwart, upstanding 9,500 or so hedge-fund stewards of some $2 trillion in assets who aren't in jail, we suggest they brace themselves for intense scrutiny. Thanks to batting 1,000 against the Raj, prosecutors (to shamelessly change the metaphor in midsentence) smell blood in the water and are apt to pursue with newfound vigor other likely perpetrators of such illegal activity, determined to see justice done and not unmindful, to be sure, of the potential political gain of their worthy endeavors.
While the stock market seemed to shrug off the possible negative implications of sharply stepped-up surveillance of hedge funds, we have a hunch that the absence of the market's customary brio last week and, in particular, its limp performance in the final session, was in part a reflection of the unease such concerns engendered among the hedgies and their easily spooked investors.
Rather dispiriting, too, was that even much of the ostensibly good news was tinged with disappointment. For example, while retail sales in April extended their winning streak to 10 months in a row with a 0.5% gain, they shrank to 0.1% if you X out gasoline and food -- and they compared with 0.9% in March. The big jump at the pump also helped fuel a 0.8% increase in the producer price index, stirring renewed fears of inflation.
In like vein, while new claims for unemployment insurance fell a hefty 44,000 from the previous week, they still weighed in at 434,000, a formidable figure this late in a recovery. Moreover, the four-week moving average rose to 436,750, from 432,250. And while the most recent survey showed that job openings were at their highest since September 2008, there still were 4.3 folks out of work for every job available.
Lest we seem xenophobic, we should also note that restraining investor enthusiasm was fresh anxiety about the financial viability of the weak sisters in the European Union, especially Greece, and the ramifications of sovereign default (not good, in case you're wondering).
At the other side of the world, China continued to wrestle inflation, largely with monetary tightening. So far, this approach has not been notably successful, but Beijing seems intent on slaying the dragon, and, should its efforts seriously curb growth, the consequences for the rest of the globe are not clear -- but, chances are, they won't be salutary. At least, that's the view of nervous investors here.
None of this suggests that we're in imminent danger of the economy's staging a double dip. But it does help explain the ebullient stock market's sudden lack of oomph. And just so you don't fret too much over the weekend, it does provide a bigger wall of worry for equities to climb, and the bulls insist this is very, well, bullish.
To that lugubrious list of unsettling influences on investor sentiment, we might well add remaining bad vibes from the big shakeout in commodities that all but rubbed the shine off silver, nicked gold, dealt some mean blows to oil and, all in all, did a number on just about every commodity known to trading man.
Helping to polish off silver futures was a boost in margin requirements, while energy's drubbing sprang in no small measure from the better tone to the dollar and overstocking of gasoline and even some indications of softening demand. But the primary reason for the exodus from commodities was that so many of them had come too far, too fast and were begging for that nice euphemism known as "a correction."
The blame for the flyaway price surge is easily laid at the door of Federal Reserve chief Ben Bernanke and his beloved policy of quantitative easing. But we don't buy it. Rather, we think the culprit is better identified by that simple but revelatory table below. It's the handiwork of the admirable Jeremy Grantham of GMO, whose unvarnished insights we've had the pleasure of passing along from time to time.
China's Share of World
Commodity Consumption
CHINA %
COMMODITY OF WORLD
Cement 53.2%
Iron Ore 47.7
Coal 46.9
Pigs 46.4
Steel 45.4
Lead 44.6
Zinc 41.3
Aluminum 40.6
Copper 38.9
Eggs 37.2
Nickel 36.3%
Rice 28.1
Soybeans 24.6
Wheat 16.6
Chickens 15.6
PPP* GDP 13.6
Oil 10.3
Cattle 9.5
GDP 9.4
*Purchasing power parity
Source: GMO
We've lifted it from Jeremy's quarterly letter to shareholders. And what it depicts we find astonishing: namely, China's outsized appetite for commodities, and just how big a share of each one it consumes. Actually, the table appears in Part 1 of the missive, that bears the exhortatory heading, "Time to Wake Up: Days of Abundant Resources and Falling Prices are Over Forever."
The piece is really an extraordinary job, and we can't do full justice to it in the confines of the space allotted to us. So we suggest that, if you get a chance, plug into GMO's Website and read it at your leisure. The essence of it is that the world is using up its natural resources at an alarming rate, and "this has caused a permanent shift in their value."
The rise in global population (fast approaching 7 billion, and a recently released United Nations report estimates that it'll top 10 billion by 2100), the increase in wealth in developed countries, and the current explosive growth in developing countries, Jeremy warns, "have eaten rapidly into our finite resource of hydrocarbons and metals, fertilizer, available land and water." Despite a massive increase in fertilizer use, the growth in crop yields per acre, he observes, has declined from 3.5% in the 1960s to 1.2% today.
After a stretch of a hundred years ending in 2002, during which the world enjoyed price declines averaging 70% for all important commodities except oil, Jeremy reports wonderingly, ballooning demand from developing countries, especially China, has caused an unprecedented shift, and prices are now rising. Indeed, in the last eight years, they've risen enough to wipe out the effects of a century of decline.
The market, he contends, is sending us "the mother of all price signals." Statistically, by his reckoning, most commodities are so far removed from their extended former downtrend as to makes it likely that the old trend is gone -- "that there is, in fact, a paradigm shift -- perhaps the most important economic event since the Industrial Revolution."
To Jeremy, this means we'd better get serious about resource planning, and quickly. To us, it means that whatever the day-to-day or even month-to-month dips and blips in commodity prices, if Jeremy's right, the long-term trend has no place to go but up.
PART TWO OF JEREMY'S MESSAGE to shareholders may not be as cosmic as Part One, but it may be at least as important. It's about the stock market -- toward which he has been a bit antsy, but mostly positive. His advice, pure and simple: lighten up on risk-taking rather than waiting, as he had previously recommended, for October. And he admits that he may be too early, but there are worse things, we might interject, as 2008-09 painfully demonstrated.
What disturbs him is that here are equities a stone's throw from the 1400 on the Standard & Poor's 500 that he had targeted as the lower part of the 1400-1600 range he had expected it to reach. But the stock market, he points out, has reached this elevated level as if the economy were humming along strongly, as if housing had started to regroup after two years of being dead to the world and, most importantly, as if we hadn't experienced special and exogenous shocks. Yet, he sighs, "all of those presumptions are at least partly wrong."
He worries, particularly, about the Tunisia-Egypt-Libya-Yemen-Syria shock, that can be summed up as "oil shock." An oil shock has the potential to inflict serious damage on the economy, and touch off a big decline in stocks. While, the market has bounced back smartly, Jeremy fears it's underestimating the potential for bad trouble.
He owns up to other reservations as well. But it all boils down to this: "The environment has become too risky to justify prudent investors hanging around, hoping to get lucky."
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