Turmoil in the real estate market and a slowing economy have bent the knees of many investment banks, but not of Goldman Sachs and Morgan Stanley. Although bruised, the two global investment giants are still standing. Their mid-year earnings, to be published next week, will show only moderate losses, say analysts. It may not sound like much to celebrate, but in crisis-battered Wall Street it's worth the champagne bottle.Today's Wall Street Journal echoed the general enthusiasm: "Goldman Sachs Groups and Morgan Stanley look like the last two kids on the tour of Willie Wonka's chocolate factory," writes Mark Gongloff.
"On Wall Street, where just about everyone has lost confidence in financial assets, Goldman Sachs Group Inc. and Morgan Stanley are making money the old-fashioned way: Buying and selling commodities," adds Christine Harper on Bloomberg News.
Harper's article unveiled the secret that supposedly prevented the two firms from slipping through the traps of the financial "Wonka factory" of the mortgage crisis and the credit crunch. With stock tied to the real estate markets become untouchable and inflation threatening returns on bonds, Goldman and Morgan Stanley have turned to assets tied to the soaring price of commodities, such as gold, corn and oil.
That strategy, however, may have dangerous drawbacks of its own. In Roald Dahl's tale, it was the Umpa Lumpas', Willy Wonka's midget dwarfs, to warn the contenders of dangers lying ahead. In the global financial market that role belong to the Saudis, who have long insisted that the recent spike in crude prices results not from an imbalance of supply and demand, but from a weak greenback and speculations.
Most energy markets experts share Saudi concerns. Heavier investment in energy-related assets, writes Frank Verrastro at the Center for Strategic and International Studies, contributed to unusually volatile prices, which sent the price of crude from $135 a barrel to $122, and back up to $139 a barrel in one week.
The traditional supply and demand mechanism "cannot explain current prices or the rapid increases seen over the past few years," writes Verrastro, and some analysts have noted similarities between past financial bubbles and the current behavior of oil prices.
In other words, Goldam and Morgan Stanley may be contributing to the first oil bubble on record as they try to tampon the cash-bleed from the housing market bust. If that proves true, Wall Street may have to wait long before boarding the Great Glass Elevator of economy recovery.
