The rhetoric surrounding the so called Volcker Rule kicked up a notch yesterday when Dick Bove put out a lengthy report which you can read here calling for a crash if this gets put into place. He later went on CNBC to recap his thoughts. Basically limiting the growth of banks will, in his opinion, be crash inducing.
As financial stocks were falling and falling for two years the question on CNBC was always about whether now was the time to buy financial stocks. I was on CNBC in March 2008 saying no. I've been saying no for a while and still feel that way.
Part of my thesis, as simplistic as it has been, is that if this was the worst financial crisis in 80 years then we should expect more shoes to drop. I don't know if the Volcker Rule is another shoe or not because it has a long way to go before it can be possibly implemented. Between here and there it could be changed for the better, changed for the worse or simply disappear.
I would not argue with you if you think that the financial system is messed up but heavy handed fixing is going to bring problems because anything that might impede the flow of capital has consequences; how'd that short sale ban work out? I'm not saying things should not be changed or "fixed" just that the initial reaction could be unpleasant. If there is an unpleasant reaction then ok, the market will adjust and then move on. Fiddling with the financial system is different than options expensing (do you even remember that one?).
How complicated do you think this entire topic is? Do you think there are a lot of moving parts? How much of your money do you want to bet on getting this right?
One way to make navigating market cycles easier is avoiding the right things. This is where I am with the US financial system, choosing to avoid it. I was leery of the sector quite a few years ago as it flirted with being 20% of the SPX and then made a big stink later when the yield curve first inverted.
I've owned the same foreign banks for a long time (one from Australia, one from Chile and one from Canada), I also have a publicly traded exchange and just added an index provider. Fundamentally this combo avoids whatever might happen with the Volcker Rule. And if that is not another shoe, ok but I think there will be another one that will come and I don't want to expose the portfolio it.
With a nod to Occam's Razor, more problems ahead seems to be the simpler conclusion. To the extent you agree there are plenty of way to invest in the financial sector while still avoiding US and European banks. There are obviously plenty of stocks, and ETFs that allow access. iShares just launched several financial sector ETFs and one of them fits right in to the conversation. Decide for yourself if any are right for you, but beyond these new iShare funds there will be other products in the future if you are not comfortable picking individual stocks.
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18 comments:
Roger, do you think the same logic applies to healthcare? Certainly one could argue that governmental meddling makes US healthcare complicated, with lots of moving parts. On the other hand, there are some themes and trends within healthcare that seem investable, which might make the segment different than financials.
Thank you!
healthcare is different in many ways. getting a loan has a completely different set of demand characteristics from getting a prescription or an operation.
if you need a loan you don't have to get it at BAC you can go elsewhere. if you need a drug for a specific condition you probably need to go to one specific company. as people get older they collectively need more medical attention, this seems to me immutable. this makes healthcare a different type of investment IMO.
OK , so if we get a crash, it is probably a valid assumption that the 200 day MA gets taken out, which is still about 10% away. We have had 5 distribution days in the last 2 weeks (down days on higher volume than previous days). So the million dollar question in my mind becomes, it is really prudent to wait for another 10% down before taking some type of defensive action? Please don't shoot the questioner, as I wasn't the one who brought up the spectre of a crash...
Thanks!
L.D.
i have no idea what you should do.
the approach i write about is one of picking a strategy long before there is a problem and then sticking to it. IMO making it up as we go along will lead to a bad result. this is my idea of discipline and the acceptance that down a little goes with the territory of participating in the market.
"I'm not saying things should not be changed or "fixed" just that the initial reaction could be unpleasant."
We changed things in 1998 when Glass-Steagall was repealed. Since then we have gotten a stock market bubble followed by a housing bubble.
90% of the money is created by banks at a 10 to 1 ratio not the fed. Having banks owned and run by the hedge fund portion of the financial institution is a sure bet the banks can not say no to risky loans to the other divisions.
We can not survive long term with 90% or more of our money supply be recklessly created by bankers than can not say no.
We need to bring back Glass-Steagall and separate the banks not change a few rules that will be changed back in a few years.
Do you really think the 00's were better than the 80's and 90's?
BTW, I am no fan of Obama to put it mildly.
SEG
the quote you attribute to me is meant to imply that we are not trying to solve the issue of what should be done just ppointing out that a change would likely cause something in the markets that would need to be digested.
simply reverting back to what was created before the television existed is probably not how a proper fix should be handled.
I agree the change would need to be digested.
I do not trust financial firms OR expect financial firms to do anything that is not in their own best interest.
The banks have to be separate institutions as it will always be in their best interest to take excessive risk. Once separated the bank does not benefit from the capital gains and only collect the interest on the loan. Banks will deny excessive risk if separated.
BTW, why do people think this down turn is anything but a normal correction? You never know for sure, but I do not see the end of this bull market yet.
SEG
If it causes a crash, I think the crash would be more of a sentiment type of crash rather than a fundamentals crash.
Frankly, I believe action is needed; if a bank tax is the only thing our wonderful elected reps can get passed, then so be it.
Once you start comparing an American president to Chavez, you've pretty must lost credibility in my view.
Hi Roger:
Very interesting Feb update by Bill Gross over on the PIMCO web site that I believe is "right up your alley". He talks about countries in the "ring of fire" as being poor investment destinations due to high public debt levels likely to exceed 90% of GDP going forward; this in turn historically has led to a drag in investment returns. Obviously this goes with what you have been doing by investing overseas on the country level. The countries that do not have these high debt levels include Finland, Denmark, Norway, Australia, Germany, Sweeden, and Canada, making them the preferred places to invest if you believe his thesis..as far as I know , the first 3 (Finland , Denmark and Norway) have no ETF's. I am wondering if you have any thoughts on GXF, the Nordic 30 ETF, which gives access to those countries. I also know from reading this site that you use STO as a proxy for Norway , and I am wondering if you have any thoughts on Finland and Denmark proxies vs. a broad ETF given the above. Thanks!
Best, Andrew L.
I thought the measure was about eliminating proprietary trading (speuclation). I don't see how that impedes the allocation of capital. They are proposing to curtail trading of securities already in existence, not the underwriting of new securities. Speculation is a net zero sum game whose only real value is to provide the market with liquidity. To the extent that the end of this activity causes a "crash," it just illustrates how little our economy is producing of real value. Real value comes from production of agricultural products, mining, manufacturing, and creation of intellectual property. Speculation just transfers wealth from one party to another. I guess it is ok for an entity to try to create profits for its shareholders through speculation, but the shareholders should purchase those shares with their eyes wide open and not expect a safety net from the federal government when things go badly.
Roger gives good advice in having a plan in place prior to any event that causes personal distress.
I've got the Pimco report open on another tab to read today. the two stocks from Denmark I know a little about are Novo Nordisk and Vestas--don't own either one. they are both relative large caps. Maersk is another large company but very difficult to trade.
Nokia is the largest company in Finland but it is quite volatile. GXF is heavy in financials if memory serves which is something to consider.
Bove tore Scott Wapner a new one for focusing on the prop trading, Bove said that was nothing. The thing per Bove is growth restrictions placed on banks as currently proposed.
Yeah. The proprietary trading is a piece of this, but my guess is that will be trivial for programmers/sneaky people seeking profit to get around if this is passed.
http://tinyurl.com/yk8vdz6
this might help...
no position
Roger,
My favorite Financial Planner, Ray Lucia, just discussed your SeekingAlpha article on "Trouble Brewing in the Bond Market" on his nationally syndicated radio show. His comments were flattering and I take that as a real validation of your thought processes.
Ray Lucia has kept me focussed, sane and solvent since I retired in early 2000.
hey that is kind of cool thank you for telling me but did he pronounce my name correctly?? LOL
Roger,
YES,, I'm pretty sure he pronounced your name correctly since I'm assuming they have pronounced your name correctly on CNBC and it was the same.
It pretty much made my morning since I try to listen to both of you....I guess I can't be too far wrong.
I like the Volcker plan as far as it brings back the Glass-Steagall light. There needs to be a clear delineation between depository banks and investment banks. Banks acting like hedge funds should not have a backstop at the taxpayer's expense.
However, I disagree that we need to break up the big banks. If we can draw a line in the sand between depository and investment banks then we should be able to keep the banks who take Mom and Pop's deposits on surer ground. If the risk taking banks make a bad bet or hedge, then they go under, rather than getting bailed out by the Fed.
The crash talk is fear mongering - pure and simple. That is the modus operandi when you can't make a valid, intellectually sound argument for a position. Geithner recently said the same regarding the possibility of not re-confirming Bernanke.
Pardon me for being so economically illiterate, but up here in the hill country we uses to grow stuff and make stuff like furniture and send the stuff down the valley and get back other things like farm tools and refrigerators.
Then we got a gambling house in town and we would bet on things like the temperature next Tuesday, some would win more and others lose more but the house always got it's cut.
Our idiot Mayor was saying that the town was booming because there was so much money sloshing around, but only money was going down the valley and less and junkier stuff coming back up.
Now I see you citi folk making bets on the price of stuff that the actual value does not change and doing so in ever fancier ways and I wonder if you folks caught the same thing that infected our mayor.
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