Volcker Rules

As President Obama announced the Volcker Rules last week, thousands of bank/hedge/equity linked individuals spit their coffee across office suites and began gagging. The V Rule or rules are two fold. One. If you are an institution that take federally insured deposits, you cannot speculate. Two. You will be limited to the amount of risk you can take and you will not be able to own, advise, or invest in hedge funds or private equity.

If you take deposits and cannot speculate, and you can speculate but cannot take deposits, how will these poor institutions survive?

Well the first V Rule can be taken care of simply giving up the Fed window deal. The second rule however is a bit trickier when trying to figure out how to get proprietary trading into the bottom line. Goldman and JP Morgan can go back to being strictly investment institutions but will have to scale back their business models that had recently included deposit nirvana. Growth will be a problem and growth by exponential dimensions has allowed them the ability to intertwine transactional volume together with speculative venues. Trading services is a wonderful thing since charging, not really trading is the game.

Volcker will testify on Tuesday in front of the Senate Banking Committee and then will be followed by Goldman and JPMorgan of Thursday as they try to modify the Volcker Rule with the Weasel Adjustments.

Save Us, Never Mind

Nervousness about the reappointment of Bernanke a bit over done on Friday. Democrats in the Senate got the red growing when several announced they would not vote for reconfirmation of Mr. B. This may have been a direct response to the election results in Massachusetts as Democrats came to realize they can play hardball too if all their health care efforts are to be undone. Being obstructionist, they reason, works both ways. Of coarse the Fed and especially Treasury have few friends as the tired public views the treatment of the same 'good old boys' and their financial workouts as only for those who are guilty of the greatest errors in fiduciary responsibility. Crying save us and then saying never mind after their rescue has the general public annoyed.

The 'worst is over' cheers suddenly got quiet as selling appeared late last week and may have made a dent into those who truly believe the market will gain in 2010 and their current long position. Those folks do not want to sell but do not want to leave all on the table again.

All this may be tied to a general realization that the nation's job creation engine will only idle in the coming years as everyone discovers the manufacturing of ring tones is not the lift the economy needs. No, a world of shrinking leverage opportunities will make it hard to employ those who came to rely on the broad uplifting effects of a climbing real estate market. Maybe congress should consider tax credits for families who take in lawyers, real estate agents, and mortgage dealers.

The paradox of is that there is plenty of money supply, but not enough supply of money to go around to the ever growing ranks of jobless Americans.

Mystery China Trade

Market's decline today partly blamed on China credit restrictions, but regardless, as mentioned here in September, the whole China story is going to end badly. The Google internet dilemma is hardly a surprise. Totalitarian forces will ultimately harm the entire China fantasy along with trades pushed by commodity and stock traders long on China but short on original thought. The China demand theory evolves from the same level of excitement which delivered trades based on bundles of weak scrutinized debt which the rating agencies stamped AAA. The design flaw in the China trade is not because there are not enough Chinese to lift demand, but because the underlying economic conditions and data are a mystery and lack transparency. Mysteries always lead to bad trades, always.

Why Up?

Markets on the defensive heading into the three day weekend. Even with today's decline, the usual chant for higher prices emanating from business news channels has reached an elevated level of confidence mainly as a result of the repeated bid side momentum carried forth from 2009. Puzzled financial blogs have written about the invisible hand behind the rally in stocks. Foreign purchases, Fed/Treasury manipulation, and other forces have been mentioned as suspects. But the answer is not so mysterious.

Back in the panic of late 2008 and early 2009, participants all became linked in a kind of financial Coriolis Effect, you know, the direction toilet water spins. Normal value schemes were diverted by the force of plunging asset prices including stocks, commodities, and real estate. Massive liquidations to offset remaining risk was gaining velocity and was quite unfriendly to any rational market theory, now known as the useless theory. As prices for broad based assets fell, the otherwise normal attitudes regarding purchase opportunities were replaced by a reluctance to place any bids which had the potential of becoming targets for liquidators. In March, the combination of Treasury and Fed intervention along with declining selling needs, put in place a price level not seen in twelve years and having wiped out generational asset growth. After such a decline, prices naturally began to retrace some of the ranges penetrated during the panic. This in itself provided enough energy to rally based on repricing against diminished selling.

So now what? An up January by some bullish thinkers is the indicator month for all those other months because, well, they really need to have an indicator early to rationalize January purchases. Waiting for February will not work. However, if January is a down month, the bulls use other indicators such as the Chinese Demand Indicator. This is done by counting all the Chinese and dividing by one, the answer or quotient is the number of IPhones that will be sold in the near future. Bullish.

Now this renewed confidence that the worst of all asset declines is over and that the long term bull trend started after the Great Depression has been put back on track, comes from the same basic understanding behind mood modification drugs, that even bad things can look good if you just think they are. But more importantly, good profit seeking efficient stewards of corporate banking and business have adjusted to the cleansed market place. Your cleansing not theirs naturally. Further, increased vigilance by congressional investigations, Federal Reserve preparedness, and Treasury oversight, will be sufficient for a new bull phase.

Well, that is the plan anyway.

Rates To Rise

Warning from FDIC yesterday in a letter sent to banks regarding prudent risk to be applied as rates about to reverse course.

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