Tuesday, November 15, 2016


...with one small interruption.  Obama was in Greece today and the presser with the Greek Prime Minister Alex Tsipras, was something to behold.  I never thought I would say it but Alex was the only one on the stage with a remote grasp of reality.  The other guy...

Anyway back to basics.  Things slowed down a bit today with the 10 year slipping slightly which was of course to be expected.  Yet the two year closed over 1.00%  and everything around the world was coming back into positive yields being dragged along by the U.S. market.  Up were equities again with the NASDAQ the star performer as the rotation continues into the "Trump Economy" although if you really try to pin people down as to just what that may be things get a bit mushy except that everyone seems to agree that financials and especially banks are the place to be as the regulatory picture we almost certainly appear far brighter.

A harbinger for that view came today in the audit report on the Fed's "stress tests" requested by the House Banking and Finance Committee whose Chairman may just wind up as Secretary of the Treasury.  While not as damning as some might have expected (or hoped), the report none-the-less did highlight that the Fed was far from transparent in it's approach.  This is going to be argued for weeks but let's boil it down to what is really important.  The objective measurements of the stress test are really no problem despite what the banking lobby would have you think.  Basically, they concerned with capital adequacy and to be honest while some might think that the levels may be set too high the banks really have no problem in meeting anything that might be required.  Do they infringe upon ROE?  Sure, of course but not to the extent as do some of the other regulations  in Dodd/Frank.  But the subjective tests...ah, that's another deal entirely.

To say that the Fed can make these up as it goes along is very close to the truth.  To begin, the banks have little idea as to what they are and NO idea as to the methodology by which these things have been invented.  They are unique to each individual bank and can be as subjective as to the distribution of the risk assets.  That is bad enough but think of it in the context of a nut job like Big Danny Tarullo running the show with crazy Lizzy looking over his shoulder.  Subjective means subjective: if he doesn't like you, tough nuggies.  This is exactly what happened to Citibank two years ago.  You see, Danny doesn't like international exposure whether he understands it or not, and guess who is the only real international bank in his small world.

Bad?  Yep, but it's not the biggest problem.  As administered, what the Fed has supplied to itself is a legislatively approved power to--if they were so willing--distribute credit through the regulatory process..."We don't like this in your portfolio; we would like to see more of...say...non-prime housing loans, or green energy projects, or loans to make widgets."  Now where have we seen that before?  Do we really want these guys to--as we allowed Barney Frank to do while spitting all over the House conference room, "Roll the dice on this one?"  A thought for your day.

And before we close a thought for the President Elect.  Be careful for what you wish.  China, your bete noir when it comes to currency manipulation announced today that they expect the Yuan to be in the 6.90 range by year end.  A boon to Chinese exports?  You bet.  Currency manipulation?  Only if one considers a Trump victory to be a manipulative tool in creating a roaring Dollar market.  This stuff gets complicated, Donald.  Don't move too fast.

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