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6:00 AM EDT, Friday, November 6, 2009: I'm bugged by one question. How is Wall Street able to make so much money and pay such huge bonuses this year? IPOs aren't hot. Investment banking is slow. Managing rich people's money is less profitable, as rich people are less rich. So where are the profits coming from?

It's coming from The Carry Trade. Before you dismiss this as self-evident, bear with me for a moment.

The Fed has reduced interest rates to basically nothing. It is making money cheap so that businesses will borrow, build factories, employ people and get the economy going again. At least that's its theory. Here's the chart.

But, Harry, no one can borrow at these bargain rates. Why the pretty chart?

Wrong, someone can. They're called banks and investment banks. They can go to the Fed and borrow Fed money at basically nothing -- maybe 0.025% a year. Now what to do with the money? The theory is they'll lend it to businesses to employ people. That's hard work. The easiest thing to do is to buy government and high quality bonds paying between 4% and 7%.

Figure it. Borrow a million at 0.025% a year. That will cost you the grand sum of $2,500 for a year. Now, let's say you buy a corporate bond yielding 7%. You've earned $70,000. But you have interest expenses of $2,500. That gives you a net profit of $67,500 for doing basically nothing. Borrow a billion, and you've just made $67.5 million.

That's a simple trade. This can get much more "interesting" if you're an aggressive, arrogant bond trader. Let's say you borrow the money from the Fed and buy Australian dollars and Aussie bonds. You earn a nice return on Australian bonds (Australia keeps raising its interest rates) plus you get the appreciation of the Australian dollar (also called the depreciation of the American dollar). This transaction is more typical of what we know as The Carry Trade. For a good explanation of it, there's a really good video from the Financial Times.

But, Harry, there's got to be a limit to this. The banks can't just keep on borrowing forever. True, because all the big investment banks are now banks and hence "regulated," they can't borrow more than a certain amount of their own capital. In the old days when we had serious regulation, the banks couldn't borrow more than 12 times their own capital. But that rule disappeared (after heavy lobbying in Washington a few years ago). The figure presently appears to be anywhere from 30 to 40 times their capital. (This, of course, was the leverage that brought Lehman Brothers down and nearly killed Wall Street. Nothing has changed in regulation since. Heavy lobbying accomplished that. All those investment bankers relocating to run Washington financial institutions, like the Fed and the Treasury, helped, too.

Anybody who's been reading this column knows I don't counsel investors to finance their investments with OPM -- other people's money. Things go awry. You get margin calls. They're always at the worst possible time. And you get wiped out.

But this is different. First of all, our Government doesn't make margin calls. Better yet, it saves banks by giving them more money to mess around with. Second, the Fed has said it's keeping interest rates ultra-low for a long, long time. (It said that earlier this week.) So, one risk is removed. Your costs of borrowing won't rise. They're staying ultra-low. The only thing you got to do is not to be too greedy and use this borrowed money to make ultra-risky bets -- like speculating in the equities of emerging countries. I mean, it isn't as though the temptation isn't there.

Let's say you've borrowed a billion. Your emerging equities rise 50% . You've just made $499,975,000 without using one penny of your own money. Heck, this is better than working for a living.

The downside to this is your bet is wrong and emerging equities drop. So what. You're not in trouble. The bank that lent you the money is in trouble. Would it want to look really stupid that taxpayer money is being used to gamble? Can it afford another financial crisis? Would it bail you out? Heck yes. It owns a printing press. Just print more and more of it.

Writing earlier this week Nouriel Roubini wrote:

Since March (2009) here has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply

Guess what's causing the rally? Fed Government money financing The Carry Trade. Roubini argues eventually prices will unravel. Says Roubini,

"The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall."

Hence, why I'm feeling very very cautious at the present time. This asset bubble can't last.

A reader emails: "The market is climbing a wall of worry." Investopedia explains:

When stock prices are rising regardless of market uncertainties, the stock market is said to be climbing a wall of worry. These worries may include political or economic risks. Once the perceived risks have been resolved or have past, average market share prices tend to decline.

Stop press: My rich friend tells me the private wealth division of a major bank is lending him money at 1.25% a year. He's using the money to invest in private equity funds. I asked, "This seems insane. Your private equity funds are totally illiquid. What will you do if your bank wants its money back?

"They won't.," He answered, "I've got the money for as long as I want it."

"How did you get money so cheap?" I asked.

"I ride on the coattails of the bank's billionaire customers."

I'm guessing the bank itself borrowed the money at 0.025% APR from the Fed. So, it''s even making money on lending it at 1.25%. This is bizarre.

I don't make this stuff up.

Nouriel Roubini is not Dr. Doom. They call him Dr. Gloom for his (accurate) economic predictions. But the man is anything but. He probably runs the best and most famous parties in New York City. According to friends who've been to his parties, they range from sedate 40-person sit-down dinners to 400-person party-through-the night orgies. This is an amusing piece from

The Secret Pleasures of Dr. Doom
One can tell the world's condition is dire because the practitioners of that famously dismal science, the economists, are the new celebrities. Putting aside Princeton's Paul Krugman—who this week won the Nobel prize for economics—one academic has emerged with a reputation of a seer, Nouriel Roubini. The NYU professor's once-mocked warnings—of a real-estate collapse, equity market slaughter, the systemic bust of the banking system—have largely come to pass.

It's no wonder Roubini has earned the nickname Dr. Doom. One website suggests a Halloween mask of his unsmiling visage. And the New York Times chose a photograph (left) of the Stern School 'permabear' to go with this description. "With a dour manner and an aura of gloom about him, Roubini gives the impression of being permanently pained, as if the burden of what he knows is almost too much for him to bear. He rarely smiles, and when he does, his face, topped by an unruly mop of brown hair, contorts into something more closely resembling a grimace."

It's time to call bullshit. The image of Dr. Doom may satisfy the needs of the media and partygoers this Halloween—but Roubini is anything but dour. The 50-year-old Iranian-Jewish economist is a promiscuous Facebook friend who draws a cosmopolitan crowd to the frequent parties at his Tribeca loft—an apartment with walls indented with plaster vulvas, incidentally. As this party photograph shows (right), the professor's gloomy public image is entirely at odds with his playboy lifestyle. In a Facebook message, Roubini makes no apology:

"Dear Nick, I work very very hard and I also enjoy life. My home is also partially a cultural salon where I host book parties, debate and election night events, independent film screnings, live music nights, theater/performance acts, fashion shows, dinner parties and even plain old fashioned dance parties.

I have this professional Dr Doom nickname but I am quite a cheerful person with a few close friends and eclectic group of friends who, like most New Yorkers, are members of the creative class. The innovations of lawyers and bankers can be as creative as those of visual or performing artists, at times too creative you may say given the current financial meltdown. So I live life to its fullest. To paraphrase Seinfeld; anything wrong with that?"

In another piece, there's this dialog:

So, what makes his parties so great? we asked.

"Fun people and beautiful girls," Roubini said, grinning. "I look for ten girls to one guy."

His friend Bill Clinton, he added, is a fan of this ratio.

How to buy gold coins -- part 23 (or whatever). My friend likes Gold American Eagles. He buys them from American Precious Metals Exchange. He says they give excellent service. Click here.

The value of gold. The following story rings true. My father and mother escaped Nazi Germany. Father had converted all his assets into raw diamonds. Mother carried them out in that special place women have. Now to the story.

Moisha Rabinowitz in the late 1930s fled his native land of Germany.

He sold all his assets and converted it to gold and then had 5 sets of solid gold false teeth made.

When he arrived in New York the customs official was perplexed as to why anybody would have 5 sets of gold teeth.

So Moisha explained: "We Orthodox Jews have two separate sets of dishes for meat products and dairy products but I am so kosher and religious I also have separate sets of teeth."

The customs official shook his head and said, "Well that accounts for two sets of teeth. What about the other three?"

Moisha then said, "Vell us very religious Orthodox Jews use separate dishes for Passover, but I am so religious I have separate teeth, one for meat and one for dairy food."

The customs official slapped his head and then said, "You must be a very religious man with separate teeth for food and dairy products and likewise for Passover. That accounts for four sets of teeth. What about the fifth set?"

"Vell to tell you the truth, once in a while I like a ham sandwich."

Going overseas until Wednesday November 18. My sister, a travel agent, has organized a little tour for herself, her husband, Susan and myself around Hungary, Austria, Poland and Germany. Highlights of the trip will be Budapest, Vienna, Auschwitz, Dresden and Berlin. What about a carry trade on the Polish Zloty? You think I"m crazy, the Zloty has been rising strongly.

My next column will be Wednesday November 18. I'll be on email all the time, however,

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse any, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. Read more about Google AdSense, click here and here.