The Washington-Beijing Axis again hammered New York and London overnight. U.S. stocks fell two percent after suffering a surprise attack from the regulatory flank by President Obama. The Obama proposals are designed to prevent any one bank from becoming "too big to fail." They aim to achieve this - in ways not pleasing to the investment banking industry - by cracking down on proprietary trading and bank sponsorship of hedge funds.
Not that we are going to defend the investment banks. But Washington should make up its mind. The Rubin Treasury had a clear economic philosophy. It thought up the academic jargon of the day, it "privileged" Wall Street over Main Street and Detroit (manufacturing).
The U.S. ran a capital account surplus and a massive current account deficit. Wall Street thrived and booked record profits (as a percentage of S&P 500 earnings) and stocks soared. The wealth effect even trickled down into 401(k)s during the dot com boom. And it was all good.
But now, it's not all good. Banks are bad. And fresh from a third-straight trip to the electoral woodshed, the American president is prepared to go populist. We don't know if the President's proposals will pass, or if they will fix a banking sector that's still saddled with debt. But we doubt it.
Regulatory reforms deal with the future. In the "now", banks still have massive exposure to falls in residential and commercial real estate. Accounting tricks have forestalled the realization of losses. But not even Moses could hold back the tide forever, we reckon.
Speaking of rising tides...another 482,000 Americans filed for unemployment benefits for the first time. That was a 36,000 increase over the previous month. Economists expected a decline.
Stock prices, under siege as Washington attacks the only profit engine in America's economy still firing away, were also hammered by growing concern over tighter Chinese bank lending. That concern, ironically, was even stronger when China reported that fourth quarter GDP came in above expected at 10.7%. If inflation gets loose in China, the central bank will have to be even tighter.
Thus gold's fall and the zombie-like rally of the U.S. dollar. We've seen this before in the last two years. When bad news gains momentum in the investment press, the dollar rallies and gold and stocks fall. The dollar gets a strange "flight to familiarity" bid. What does this say about gold?
It says that dollar rallies are great chances to enter or add to your positions in precious metals or precious metals stocks. Even base metals like copper might be worth a look on the dips, says Diggers and Drillers editor Alex Cowie. Alex sent us the first draft of his January letter late last night.
Commodities will retrench on dollar strength but these dollar rallies on uncertainty and gloom shouldn't be confused with any kind of real dollar strength. On an interest rate basis, the dollar is still getting clobbered by the Aussie and other commodity currencies.
Or, if you prefer to view your currencies as proxies for an entire economy and its growth prospects, you could do worse than look at Brazil. Granted, there aren't a lot of highly liquid options to the USD that don't also suck (the yen, the Euro). But we read in the wee hours of the morning that the Russians are loading up on some of Canada's money and lightening their load of USD.
The main point? The United States is a worsening fiscal trap. Washington confusing the markets about policy and being alternatively negligent and belligerent won't help anything. But then, this is government we're talking about.
Nope...we have not forgotten our promise to investigate the structure of the Financial Claims Scheme that's been proposed by APRA. It's a subject we've been circling around for a few months...trying to figure out if it really does transfer responsibility for guaranteeing the banks to the public balance sheet. But it's a big subject. So be patient, we'll get back to it. Until then...
Dan Denning
for The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Ned S on 22 January 2010:
That Massachusetts election must have really rattled poor ole big ears. The last I'd heard on US bank regs was that the plan was to let it all lay until 2012. Which wasn't making the Krauts very happy of course. But with the Yanks pretty much adopting the attitude of Tell someone who cares.
The plan being that all the stimulus would have gone into the economy by then. With things having become about as good as they could get. And all happily if only totally coincidentally timed to suit Mr BO's next date at the polls.
Interesting times indeed. Lucky China ... No whingy voters to answer to there!
Still sounds like typical political BS to me though - Say what the voters want to hear, pretend to try and do it and then find someone else to blame for why all your best efforts were thwarted?
Comment by Ross on 22 January 2010:
Bloomberg already carries the question "Define proprietary?" Volcker is not to be trusted either.
But if all those fake claims on ownership of foreign assets (those using hyper leveraged USD liquidity) are to be unwound then we go immediately back to the heart of the crisis, and a USD spike against margin / debt covenant calls, then the idiots start either pulling the printing press levers or sovereign debt defaulting to rein it in (they can't drop rates or put offshore "mark to fantasy" assets on their reserve balance sheets can they?).
Comment by Ned S on 22 January 2010:
"If" he's serious Ross, yeh, it's way bigger than the likes of Dubai and Greece struggling a bit to pay their bills ... Although I'm still battling to accept they are going to let such carefully laid plans go bye the bye? Who's to know ... Worse comes to worse they nationalise the banks maybe??? (That probably would have been the best thing originally anyway - But noone really knew which ones to nationalise I
)
guess - And they couldn't just nationalise ALL of them on spec!
Although in the interim, the printing press option may well continue to have it's attractions?