The Volcker Rule -- the idea of banning proprietary trading by investment banks -- is a terrible idea. This rule is designed as a response to the 2007-09 financial crisis. But, proprietary trading made no contributions to the financial crisis. This is simply one more punitive attack on Wall Street with unfortunate side effects for average Americans.
The problem is that in order to ban proprietary trading, you must define what you mean by market making and therein lies the problem. Market making is faciliting the purchases and sales of investors. The Volcker Rule requires no trade unless the other side of the transaction can be found. The bank itself is not permitted, under the Volcker Rule, to participate in any way on its own account to facilitate the transaction.
This is ridiculous.
The impact would be increased volatility and terrible transaction outcomes for traders and investors.
This reduced liquidity will adversely affect everyone.
Volcker's response: liquidity is a bad thing. Liquidity creates asset pricing bubbles.
Volcker's response shows that he really doesn't understand capital markets as well as he thinks he does. There has been a massive amount of research on liquidity and as yet no one has advanced the argument that liquidity creates asset bubbles. In fact, most research on this topic suggests exactly the opposite.
Andrew Sorkin reports in today's NY Times that JPMorgan's highly respected CEO (and Obama supporter) Jamie Dimon had this to say of Volcker: "Paul Volcker by his own admission has said he doesn't understand capital markets. He has proven that to me."
The country owes a great debt to Volcker for his management of the Federal Reserve in the early 1980s, but the "Volcker Rule" is a discredit to his legacy.
Selasa, 14 Februari 2012
Senin, 13 Februari 2012
Sentiment is Changing
It's interesting how much people's views of the market's future is so dependent upon its recent past. There is not much new in fundamental news from last summer until today, but the stock market is up nearly twenty percent over that period and you can see the shift in sentiment that has taken place. People now see less risk in the stock market and better prospects for higher prices than last summer when prices were much lower.
So, what's new (other than higher stock prices). Europe is in worse shape than last summer. The US fiscal situation continues to deteriorate and the political environment has become even more toxic. The future of the bond markets looks worse than ever. There is a threat of war in the air in the Middle East. Unemployment is still above eight percent and employment growth is still the slowest on record for an economic recovery.
But, prices are higher, so everyone extrapolates.
My guess is that stocks will continue to go higher. Stocks are still cheap, but not as cheap as they were. I expect 2012 to produce US stock returns in excess of twenty percent, but we shall see. The smart money is still bearish.
So, what's new (other than higher stock prices). Europe is in worse shape than last summer. The US fiscal situation continues to deteriorate and the political environment has become even more toxic. The future of the bond markets looks worse than ever. There is a threat of war in the air in the Middle East. Unemployment is still above eight percent and employment growth is still the slowest on record for an economic recovery.
But, prices are higher, so everyone extrapolates.
My guess is that stocks will continue to go higher. Stocks are still cheap, but not as cheap as they were. I expect 2012 to produce US stock returns in excess of twenty percent, but we shall see. The smart money is still bearish.
Sabtu, 11 Februari 2012
The $ 1.6 Billion Example
When you regulate everything, you regulate nothing. The recent MFGlobal disaster is just one more example of the failure of the over-regulation of the financial services industry.
Nothing could be more important than making certain that customer accounts are not commingled with their broker-dealer's accounts and looted in the interests of protecting the rich and powerful. Nothing! This is the most important regulatory function that the CFTC performs. And, how did it do? Total and complete failure, bordering on a lack of interest.
Meanwhile thousands upon thousands of new regulations proliferate. These new,stifling, regulations serve only to increase costs to consumers and protect the largest banks in our midst at taxpayer expense without adding one iota of protection for the hapless customer. The spirit of Sarbanes-Oxley and Dodd-Frank is punitive. Barney Frank is finally getting his revenge on the capitalist system. Who cares if the average American is the victim.
Meanwhile, customers who were told that their assets were "segregated" and protected by MFGlobal and by the CFTC regulatory protection are left with no protection at all as regulators were busy pursuing political agendas.
So, where is former Democratic Senator from New Jersey John Corzine who presided over this disaster? Is he to be protected as well. Is their no one to be held accountable when customer funds "go missing?" Obviously, this is not an issue the regulators are much concerned about, which gives one a pretty good idea of their priorities. I guess if you are a Democrat there are a different set of rules that apply.
Nothing could be more important than making certain that customer accounts are not commingled with their broker-dealer's accounts and looted in the interests of protecting the rich and powerful. Nothing! This is the most important regulatory function that the CFTC performs. And, how did it do? Total and complete failure, bordering on a lack of interest.
Meanwhile thousands upon thousands of new regulations proliferate. These new,stifling, regulations serve only to increase costs to consumers and protect the largest banks in our midst at taxpayer expense without adding one iota of protection for the hapless customer. The spirit of Sarbanes-Oxley and Dodd-Frank is punitive. Barney Frank is finally getting his revenge on the capitalist system. Who cares if the average American is the victim.
Meanwhile, customers who were told that their assets were "segregated" and protected by MFGlobal and by the CFTC regulatory protection are left with no protection at all as regulators were busy pursuing political agendas.
So, where is former Democratic Senator from New Jersey John Corzine who presided over this disaster? Is he to be protected as well. Is their no one to be held accountable when customer funds "go missing?" Obviously, this is not an issue the regulators are much concerned about, which gives one a pretty good idea of their priorities. I guess if you are a Democrat there are a different set of rules that apply.
Kamis, 09 Februari 2012
They Won't MakeThat Mistake Again
Several states led by California and New York (two states whose irresponsible spending is spiraling the states toward bankruptcy) have gleefully announced a settlement amounting to $ 26 billion from banks that made the mistake of lending money to prospective home buyers in the last ten years. That is pretty evil, I suppose. Imagine the temerity of providing a loan to someone who was buying a home. That deserves a whopping fine.
One thing for certain, banks won't make that mistake again. From now on, these banks will take care to lend only to those who they are 100 percent certain will pay them back, which means mainly people who don't need the loan in the first place. For the rest of the borrowing public, this settlement will make it much more unlikely that they will be able to borrow to buy a home in the future.
It is worth noting that the most irresponsible states in the US led the charge to tag the banks. Next they will complain that banks don't loan enough to underserved communities. They will be right. Who in the world would willingly loan to the underserved after experiencing these kinds of fines. No one.
One thing for certain, banks won't make that mistake again. From now on, these banks will take care to lend only to those who they are 100 percent certain will pay them back, which means mainly people who don't need the loan in the first place. For the rest of the borrowing public, this settlement will make it much more unlikely that they will be able to borrow to buy a home in the future.
It is worth noting that the most irresponsible states in the US led the charge to tag the banks. Next they will complain that banks don't loan enough to underserved communities. They will be right. Who in the world would willingly loan to the underserved after experiencing these kinds of fines. No one.
Selasa, 07 Februari 2012
Startup Act Is a Non-Starter
Republic Senator Jerry Moran and Democrat Senator Mark Warner have introduced another way of cluttering up the US Federal Tax Code -- the "Startup Act." (See their editorial in today's Wall Street Journal). This is another "targeted" tax measure that puts more pages in the federal tax code, is another bonanza for tax lawyers, is another way to pick winners and losers by using the tax code.
Warner, who never saw a tax he couldn't support or a new regulation that he couldn't back, is always positioning himself as a moderate. In fact, he and Nancy Pelosi think alike on everything of substance. Who knows how Senator Moran got duped into supporting this? But, Moran is from Kansas, after all.
Like all good ideas that get inserted into the tax code. This one promises major tax benefits to rich people like Mark Warner without any real hope of moving the needle for the unemployed or those at the bottom of the economic pile.
What is needed is true tax reform and simplification, not more clutter in the tax code with someone's next great idea. Great ideas get amended and amended so that only the Warren Buffetts of the world can truly derive any benefit. Meanwhile, the average American picks up the tab for the taxes that the truly wealthy, like Mark Warner, have no intention of paying.
If Warner and Moran wanted to do something for the jobs market, try eliminating minimum wage laws. That would provide more jobs quicker than any other measure that Congress could consider.
It's time the politicians stopped dreaming up new ideas to make the federal tax code worse and thought about returning to free market policies and reducing the reach of big government.
Warner, who never saw a tax he couldn't support or a new regulation that he couldn't back, is always positioning himself as a moderate. In fact, he and Nancy Pelosi think alike on everything of substance. Who knows how Senator Moran got duped into supporting this? But, Moran is from Kansas, after all.
Like all good ideas that get inserted into the tax code. This one promises major tax benefits to rich people like Mark Warner without any real hope of moving the needle for the unemployed or those at the bottom of the economic pile.
What is needed is true tax reform and simplification, not more clutter in the tax code with someone's next great idea. Great ideas get amended and amended so that only the Warren Buffetts of the world can truly derive any benefit. Meanwhile, the average American picks up the tab for the taxes that the truly wealthy, like Mark Warner, have no intention of paying.
If Warner and Moran wanted to do something for the jobs market, try eliminating minimum wage laws. That would provide more jobs quicker than any other measure that Congress could consider.
It's time the politicians stopped dreaming up new ideas to make the federal tax code worse and thought about returning to free market policies and reducing the reach of big government.
Minggu, 05 Februari 2012
Thinking About Debt
Lurking behind the good news of last Friday's employment numbers is the long running concern over sovereign debt problems in the developed world. Europe, the US, and Japan have unsustainable levels of national debt that get worse daily and there are no plans anywhere to deal with growing debt levels. There is conversation, but only conversation. No politician anywhere is willing to risk their political career by providing an honest assessment of the spiraling debt situations that the developed world faces.
Does this mean we are doomed and we should be storing up canned food in nearby caves?
The fear, of course, is that much of this sovereign debt will prove worthless and the collapse in values of the debt will be disastrous for the developed world.
Imagine the collapse of a stock market. In that case their is a real wealth loss of significance (just as a market bubble can create, if only temporarily, a real wealth gain).
But, debt is different. Debt is a zero sum game in a way in which other assets are not. If you owe money and can't pay it, sit down with your lender and restructure your debt, the gain to you is offset precisely by the loss to the lender. In the event of bankruptcy the bankrupt entity no longer owes the debt once legal bankruptcy is established. So, with defaulted debt, there is always a winner and a loser and one cancels out the other. There is no real net worth loss.
The only way that defaulted debt can lead to a net worth loss is if the lender has been pretending that there is no chance of a default -- not marking-to-market.
In the case of Greece, for example, the debt is trading well below 50 cents on the dollar, so that a default of 50 percent doesn't even penalize current bond holders, since the market would not give them 50 cents on the dollar anyway. But, one advantage of doing a workout for Greece is that now they don't owe the amount of debt eliminated in the restructuring. That is a plus for Greece and offsets the loss to its lenders.
Debt is different.
The point here is that if sovereign debt is restructured, the outcome need not be as disastrous as all the pundits think. It is only if these countries bury their head in the sand and refuse to proceed with restructuring, which is the route that Merkel and Sarcozy seem to be pursuing, will the exploding sovereign debt lead to catastrophe.
Pretending to have wealth that you don't have seems to be a national pastime in France. That should stop and the realities should be recognized for French and German banks who hold much of increasingly less valuable sovereign debt of Greece, Portugal, Spain and Italy. Germany and France will be forced, eventually, into nationalizing most of their major banks. Why not recognize the liabilities of these these banks now and proceed instead of a policy of "extend and pretend," patterned after the absurd policy antics of the the US government in 2008 and 2009.
As in most things, honesty and candor will lead to a good outcome, while obfuscation and hubris will only lead to disaster.
The realities of sovereign debt should be faced squarely in the developed world and the sooner that debt can be structured the better. Then, the developed world can rebuild their sagging economies and provide economic prosperity for their citizens, instead of the current plans for austerity and retrenchment.
Does this mean we are doomed and we should be storing up canned food in nearby caves?
The fear, of course, is that much of this sovereign debt will prove worthless and the collapse in values of the debt will be disastrous for the developed world.
Imagine the collapse of a stock market. In that case their is a real wealth loss of significance (just as a market bubble can create, if only temporarily, a real wealth gain).
But, debt is different. Debt is a zero sum game in a way in which other assets are not. If you owe money and can't pay it, sit down with your lender and restructure your debt, the gain to you is offset precisely by the loss to the lender. In the event of bankruptcy the bankrupt entity no longer owes the debt once legal bankruptcy is established. So, with defaulted debt, there is always a winner and a loser and one cancels out the other. There is no real net worth loss.
The only way that defaulted debt can lead to a net worth loss is if the lender has been pretending that there is no chance of a default -- not marking-to-market.
In the case of Greece, for example, the debt is trading well below 50 cents on the dollar, so that a default of 50 percent doesn't even penalize current bond holders, since the market would not give them 50 cents on the dollar anyway. But, one advantage of doing a workout for Greece is that now they don't owe the amount of debt eliminated in the restructuring. That is a plus for Greece and offsets the loss to its lenders.
Debt is different.
The point here is that if sovereign debt is restructured, the outcome need not be as disastrous as all the pundits think. It is only if these countries bury their head in the sand and refuse to proceed with restructuring, which is the route that Merkel and Sarcozy seem to be pursuing, will the exploding sovereign debt lead to catastrophe.
Pretending to have wealth that you don't have seems to be a national pastime in France. That should stop and the realities should be recognized for French and German banks who hold much of increasingly less valuable sovereign debt of Greece, Portugal, Spain and Italy. Germany and France will be forced, eventually, into nationalizing most of their major banks. Why not recognize the liabilities of these these banks now and proceed instead of a policy of "extend and pretend," patterned after the absurd policy antics of the the US government in 2008 and 2009.
As in most things, honesty and candor will lead to a good outcome, while obfuscation and hubris will only lead to disaster.
The realities of sovereign debt should be faced squarely in the developed world and the sooner that debt can be structured the better. Then, the developed world can rebuild their sagging economies and provide economic prosperity for their citizens, instead of the current plans for austerity and retrenchment.
Jumat, 03 Februari 2012
Outstanding Employment Numbers for January
Big numbers for January! Plus 240,000 jobs for January plus 60,000 more jobs in revisions for December. This is a strong number. This is the kind of number that you would normally expect in an economic recovery. It's the first strong number of the recovery. Let's hope this continues!
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