Wednesday, February 3, 2016


Equities rose today.  Why?  For the same reason they always rise.  The smart guys are now convinced that there will be no tightening in March and some are even saying there will be no tightening for the remainder of the year.  Now you may ask where did this all come from?  Billy the Dud and Lael Brainard, that's where.  Unable to stay out of the spotlight, both expressed their opinions that economic life has just gotten a bit harder, credit has tightening significantly and that December's 1/4 point move was, well, perhaps unwarranted.

Aside from being right what they also did was to kick their boss, Janet, right in the bum; with two of her most stalwart sidekicks (as many believe) jumping off the band wagon, poor Janet has lost most of what little credibility she has left which is not good for anybody...particulartly at this time.  But there is a bit more going on here.

Billy the Dud is...well...Billy the Dud.  Lael Brainard is very bright, intensely ambitious and from what I can determine universally disliked (which may be a bonus these days).  What they have in common is that they both want "the Big Job" if the next Administration if Democratic or Socialistic.  That they make their present organization look foolish is of no importance.  Exposure and follow the party line.  Look for praise in Little Paulie Krugman's next rant.  Anyway, mission accomplished: the market went up and nobody really noticed that what the implied in their self-promotion is that the economy is and will stink.  The implications of that were immediate as the currency boys sold the hell out of the dollar as would be expected and the 10 year traded to 1.79% at one point before recovering at the end of the day.  Loose Lips Sink Ships.  Expect these lips to flap out of control until Hil or Bern or whomsoever loses.  Dreadful.

The banks, unfortunately, will continue to suffer.  As previously mentioned, the latest Fed action resulted in the exact opposite effect of what was intended: the yield curve flattened instead of steepening.  As a consequence, earnings from interest rate differentials will be negatively affected.  As a result of that, banks will reduce their lending business.  Credit growth will decline (the shadow system doesn't like the economic conditions) and the cycle repeats.  And then, there are the credit issues.

I do not believe that the system Over Here has least not any that are significant threats to the system or members thereof.  Exposure in commodities and especially in the energy sector will cause losses but from what I can see the institutions are well-positioned to ride out this patch.  There may well be some of the smaller, specialized regional lenders in a different situation but who cares.  Banks have always failed in conditions like this; we move on.  But one does have to ask where are banks going to make a profit these days and that is a far more difficult question to answer and it is one being asked by the equity mob.  As a result bank stocks are being hammered and unfortunately, will continue to suffer I think.

Unfortunately, Life has changed as well in this situation.  Prior to Dodd/Frank and the Fed getting overly involved, banks, like any other corporation, watching their shareholders wealth sink like a rock would put their spare cash to use (the banks have a lot) and enter into share buy-backs at least to stop the rout.  Uh oh.  Can't do that anymore says Billy the Dud.  And the rout continues increasing the worry.  Well, there are some opportunities in these 'bout FX?  With this kind of volatility a good trader like Mad max can make a fortune.  Uh oh.  Can't do that any more.  Govvies?  Nope.  Even though it's one way traffic you need inventory and even the obligations of the U.S. Government, which are by definition Undoubted, require addition capital which makes that business marginally profitable.  Wealth management?  When everybody is more concerned with preserving their wealth rather than return, the business becomes far less attractive.  What do you have to offer when Cash is King?  In short, in an attempt to protect the business, regulators have forgotten that for there to be a business, it is necessary to allow meaningful returns on capital: more and more this is becoming difficult if not impossible.  Once again, the Law of Unintended Consequences resulting from political convenience rather than intelligent application of regulatory power.

In a nut shell, that is the state of banking Over Here.  And Over There?  It is a very different thing creating the same dynamic.  Today DeutsheBank was priced at .31% of book (whatever book is).  We shall explore that tomorrow and its possible repercussions.

No comments:

Post a Comment