| |
What Chance Bernanke & Banking Restrictions?
|
|
|
Ben S. Bernanke is set to complete his term as the Fed Chairman on the 31st January 2010. On
the 17th December 09 The Senate Banking Committee voted in the affirmative recommending Mr.
Bernanke’s nomination to the full Senate. Their vote was 16 for and 7 against. Last week saw
questions raised and a less stable view of a second term coming to fruition due to the Massachusetts electoral result.
The financial markets just had a very rough week and this was just one of the issues of concern.
The Massachusetts election loss and the new US Bank Plan really threw a cat or two amongst
the pigeons.
At this stage, the reading I have done over this weekend, suggests it is more likely than not that
Mr. Bernanke’s position as Fed Chariman will be confirmed and given a second term. The whole
issue does raise some interesting questions which I shall cover below.
I am not taking sides one way or the other I am just asking the question – could Mr. Bernanke be
replaced at this time and what would that signal? Would this signal a total back flip and a change
in strategy to resurrect sustainable growth in the US economy? Would it state that all the efforts
and money the US spent were all in vain?
Americans are angry about the condition of their economy and have every right to be. It is clear
big changes are needed to support the American people to re-build the world’s largest economy.
US citizens are not alone however just look at Japan, Europe and many other economies that
struggle under the weight of debt, reduced living standards and unemployment.
Spending and stimulus have to be curbed on a global basis at some point yet removal of stimulus
at this time is also a political decision that would be so very hard to make. Growth, employment
and popularity are on the line and any negativity could result in an election loss. Yet any tough
posturing on banks for instance that brought instability on the economy would later be seen as a
mistake. Any serious decline in stocks now would lead to more pain for the electorate.
I understand that growth has been synthetic and employment has declined but how much worse
would it have been it those steps were not taken. The abyss is not a pretty place and in the absence of an alternate banking system the choice to potentially allow the system to implode
completely was simply not acceptable back in 2007 / 2008. One has to keep an eye on the big
picture however and also ask how much worse it will be when we do face the inevitable as a
result of those policies.
The larger negative last week was the Thursday release of the White House’s “anti risk taking and excessive size” plan for the big banks and the fear that this would restrict bank profits. Why
should we care about bank profits you may ask and I will cover that below as well if you care to
read on.
The Obama Administration proposals are designed prevent banks or financial institutions that
own banks from investing in, owning or sponsoring a hedge fund or private equity fund. Without
entering into a debate about all the related issues let me just consider the immediate economic fall out from this proposed policy.
This has been a highly profitable income stream for some of these banks and to limit this activity
or stop it completely would be a major negative for their struggling balance sheets. Given that
many unrealized losses (non performing loans) are still yet to reach the correct column on their
balance sheets I find it highly concerning that this action be taken at this point in time.
I ask the obvious question – is that going to assist in the stabilization of the US or global economy? Investors, banks and hedge funds voted NO last week as bank stocks were hammered along with other equities in the US and around the world.
In order for any economy to function it is necessary to have a stable banking system like it or not.
I am all for bank reform and complete monetary reform don’t get me wrong but it is hardly wise to
start re-designing your motor car when you are sliding towards a 20 car pile up. Sort the mess
first and then go back to the drawing board – we have to put the fire out first or have a Plan B.
I have been writing for months that vital time was being bought via stimulus spending. One would
have to wonder about a political back flip that jeopardized its own strategy which was a game plan of massive bailouts that stabilized the system, followed by stimulus. This time was providing
the chance for insolvent banks and corporations to trade their way out of trouble by addressing
their balance sheets.
(This time should also be used to re-design the whole system and get a replacement system in
place in my humble opinion but they want to try to revive the old system for now - so at the very
least they need to be consistent.)
The bank debt was partially transferred to the sovereign states of our fair planet. In a no growth
environment the only way to repair a balance sheet for companies is to cut costs and rapidly reduce debt. Doing this has the curious and negative effect of reducing money supply because
money is effectively debt in this monetary system.
The only way out for the banks is to trade their way out. They have to play the yield curve, speculate, minimize risk and play their own banking game. Now perhaps Volcker is right and that
given more time the banks would do even more harm which has now got to be limited.
It was bank deregulation which gradually morphed into the fashion of zero risk that led to the bank excesses in the first place and the umpire did not step in then. The game gradually got out
of control and eventually blew up causing catastrophic losses.
This is all history (repeated within a long term cycle) and we do need to learn from history
however a very cautious and measured cure is now needed if the current strategy is to have any chance at all of success. Would it be wiser to let the BIS and various standing committees handle the situation of global monetary and financial stability? Are these new proposals in the US aligned to compliment international stability efforts or not?
A measured cure is no doubt what the White House is trying to achieve by gradually reintroducing
regulation however the banks are now factoring risk already and need time to trade out of trouble. One comment I read suggested that the banking industry does not need a straight jacket at this point in time and I would agree with that within the constraint of ethical responsibilities.
The Government resurrection strategy has not had anywhere enough time to play out however it
appears that because of the electoral cycle and political unrest we now enter a very dangerous
game. Perhaps some commentators are right that this new bank legislation proposal is just a
political move to capitalize on anti-bank sentiment and nothing more. All I care about by making
these comments is to set the question – who’s side are they on? There are three parts to this puzzle. We need strong business, consumers need protection and jobs and the politicians need
to get re-elected.
It would be too easy to knock our leaders who are in a place and time that nobody in their right
mind could envy. They are lobbied by business and minority interest groups, pushed by political
need and pulled by advisors and conscience to navigate these treacherous waters. Jobs growth
has not eventuated as business cuts costs, credit remains tight as a new era of more correct risk
assessment is reintroduced by the banks.
Profits from the hedge funds, banks and institutions were being made in the equity markets so a
grind sideways would be the best outcome while the corporate world traded its way out of these waters. We don’t want an excessive bubble and crash environment it is just not good for stability.
A crash at this time will destroy capital all over again.
As I said there is no easy way out; we either have a depression today or tomorrow take your pick.
Elected Governments are not provided with enough time by our electoral systems around the
world to settle into long term plans to deal with situations like this or to drive viable long term business models for our economies. This is a problem not just faced in the US it is a global condition. So Governments feel they have to be seen to be doing something so they tamper and
posture.
China has just announced that it has to step on the brakes due to excessive growth and inflation
concerns. This is good for longer term stability however it has come at a bad time considering all
of the above. The Dow was set for a correction as shown in the chart below after a long period of
RSI divergence. The question now is how deep do we go?
The RSI is approaching an oversold level and we are sitting on a support level increasing the possibility of a short term correction however the jury is out on the potential duration of this. Will this turn out to be the beginning of the end or is this another buying opportunity?
The markets have not been acting as I would have expected them to due to the policy events and talk of the last week. I have therefore moved from not expecting a crash this year to a neutral position. The expected volatility is here as I expected however if the banks get their wings clipped too early or too excessively we could crash here. In that case all bets are off.
At least gold stabilized on Friday night so now we turn to the ASX gold stock response on Monday in Australia for one indication of the severity of the current situation. We are not done yet and the nature of the events last week were not the same of a major default so I am currently suggesting extreme caution. This is a time to have some cash just in case, keep a very close eye
on the market not a time to panic. Here is a chart of the ASX – XGD weighted gold index.
The uptrend is not broken however we are at a critical time and should be ready to act fast if
required. I posted a similar chart and warning last week in the GoldOz Gold Members area as
well as some important information on the situation in Japan.
If we crash just remember we will still need power, energy, food, water and fertilizer. These commodities will not drop in price and this is why I spent the past two months reviewing an energy stock and preparing a major report in addition to positioning GoldOz for a new development which will benefit subscribers. This week the report goes public for promotional purposes. Let us be watchful on developments this week and take great care here.
If we do crash I will be watching the markets for early warning signals we have hit bottom and will have as much cash on hand as I can. It will be a fantastic opportunity. If we see volatility within a range this year as I expected – no crash – then gold stocks will do what I expected and gold will head to higher levels. This will be a fantastic opportunity to make additional capital and I would not want to miss that either.
Good trading / investing.
Regards,
Neil Charnock
****
GoldOz has developed a basic Member area (news only) and a Gold Members area with substantial investment tools. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia, ASX share quotes, Aussie Gold Index charts, brokers, bullion dealers in addition to the company research via our paid Membership services.
Neil Charnock is not a registered investment advisor. He is an experienced private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services. The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are his current opinion only, further more conditions may cause these opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.
|
