Home > Uncategorized > 2011/10/07: QuickPost: Erratum, Markets, Banks on Volcker Rule, Soros

2011/10/07: QuickPost: Erratum, Markets, Banks on Volcker Rule, Soros

It is a very minor misstatement that does not affect the trend view at all, but Tuesday’s December T-note future Close noted in our early analysis was in fact 130-30.5, and not 130-17. Still very much consistent with the need for the market to generally push more convincingly above 130-20 to foment a more aggressive bullish condition.

And to cut to the chase in the wake of the much better than expected US Employment report this morning, the December S&P 500 future maintaining itself to this point above the 1,160 trend resistance noted earlier must be respected for now. However, on balance, the response to the number (and especially the upward revision to the August figure) has been distinctly underwhelming. While its influence may keep the market today above that resistance, and it may even still run up to around the 1,200 area, any subsequent slippage back below the 1,155-45 area will be that much more troubling in the context of today’s UP Breakout attempt. We shall see.

Of course, that informs our view of other asset classes, where the government bonds and US Dollar Index are getting beat up in the face of the equities strength. However, at least so far they are also holding somewhat lower supports, and a lot is going to depend on how equities proceed from here. Especially whether the December T-note future fails the secondary support at 128-16 that is held so far, and whether the euro back above EUR/USD 1.3400-60 can also knock out the more prominent resistance in the mid-upper 1.3500 area will likely be telling for both of those other asset classes.

Banks find the Volcker Rule to be significantly misguided, and it seems it is giving the regulators know small number of headaches as well. As discussed at some length in the Financial Times’ insightful LEX column today, the rule seems less and less about the real problems that caused the financial crisis back in 2007-2008. As LEX notes, it is more so about the currently friendless banks being an easy target to punish in areas that are not going to make all that much difference to the stability of the financial system.

As noted by us and others previous, LEX says, “First, it fundamentally confuses sicknesses and cures. The financial crisis had nothing to do whatsoever with proprietary trading desks, nor with bank investments in private equity. Rather it was due to direct as well as related bets on an asset class – property – which eventually went the wrong way. While the FDIC wastes time trying to define ‘short-term’, Bank of America, for example, still has $450 billion of real estate related loans on its balance sheet.”

It goes on to cite how government guaranteed deposits can be better protected from banks proprietary trading in other ways. Not that this is going to make much difference at this point. Yet, while vox populi rages against increased bank fees (most recently the debit card charges banks have instituted in response to implementation of the Durbin Rule), everyone seems to forget the banks are not run as charities. Remove their ability to profit in some areas, and on behalf of their stockholders and stakeholders they do need to find other areas from which to garner income.

And speaking of one of the biggest fans of greater state intervention, there is a bit of schadenfreude in the fact that George Soros could not get his old insider trading conviction in France from back in 2002 overturned at the European Court of Human Rights. That was interesting enough for a Financial Times front-page story today.

Let’s allow that Mr. Soros and his lawyers are probably more so right that not that French insider trading laws back in 1988 might have been too ill-defined to warrant the case being brought, or certainly any conviction. However, it does illustrate interesting point: here is a reminder that one of the most ardent supporters of social justice and Left-wing causes makes his money as a hyper-aggressive speculative genius.

For any of those who might not be aware of it (i.e. either not in the financial business long enough or not in it at all), a major chunk of his fortune was made in 1992 speculating against the value of the British pound within the European Exchange Rate Mechanism (ERM), a pre-euro experiment in coordinated, stabilized change rates. Its failures were in fact part of the incentive to form the European Monetary Union as opposed to continuing to manage the exchange rates of separate currencies.

So we wonder what this significant proponent of greater government involvement in everyday life, and especially rebalancing the disparity between rich and poor, thinks about the power of the state now stubbornly finding him to have violated financial regulations. Perhaps the court is wrong, but the whole episode illustrates the misguided nature of ceding too much power to the state, especially in financial matters it often does not understand very well.

Maybe there’s a lesson there for the current administration in the US about the degree to which overregulation and overt animosity toward the financial services industry has been, and will continue to be, less than supportive of their goal of reinvigorating the US economy. Certainly the Volcker Rule is among the most glaring cases in point.

Thanks for your interest.

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