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Uncle Ben bites bulls, markets swoon

Written By | Jun 8, 2012

WASHINGTON, June 8, 2012 – Yesterday was a truly weird day in the market. All the averages opened strongly up in the morning, following through from Wednesday’s huge move up. The action was aided and abetted by China’s announcement of a rate cut of 25 basis points (essentially a quarter of one percent). Since Europe is in the tank and the U.S. is sliding back into its 2008-2009 black hole, optimists are now looking to China to inflate its own mess out of recession along with everyone else’s, but that’s not likely to happen anytime soon.

No matter. After the China news, the bulls held sway. Until Fed Chair Ben Bernanke made his expected Thursday pronouncement. Problem is, it wasn’t much of a pronouncement. Uncle Ben let it be known that the Fed would be “flexible” in the coming quarter. But that wasn’t good enough for Wall Street.

South Park satire.

Well, who else you gonna call at a time like this?

The mini-rally of the last day or so had largely been predicated on the metaphysical notion that Europe wouldn’t matter if Uncle Ben announced QE (Quantitative Easing) 3, or 4, or 5, or whatever the next one would be. But Uncle Ben didn’t announce it, sending the markets into a slow, steady swoon, accelerated near the end of the trading day by a follow-up announcement from the Fed; namely that, like a boa constrictor, the Fed was going to impose gradually increasing reserve requirements on America’s largest banks, ratcheting those requirements up through 2019 to eventually match the still-evolving “Basel III Standards” being thrashed out in Europe.

Why we would conform to or even encourage the feckless Europeans to impose draconian reserve requirements is beyond this writer’s ken. This “world government” infatuation by the West’s ruling elites is a recipe for disaster, but hey, they’re smarter than us so why should we worry.

Yet paradoxically (or not) the notion that we should put trillions of dollars and euros in cold storage forever seems like it’s beyond the ken of Wall Street, too, which looks like it’s going to open sharply down this morning after giving back most of its Thursday’s gains near yesterday afternoon’s close.

What’s going on here is that between Basel III and Dodd-Frank, our government at least is slowly squeezing the life out of the big financial institutions, gradually making it impossible for them to turn a conventional profit without the kind of wild and risky trading and hedging that got JP Morgan and Jamie Dimon into deep kimchee a couple of weeks ago, courtesy of that “London whale.” There’s certainly no profit these days in conventional banking. Loan spreads are too narrow, and the banks (contrary to their pronouncements) aren’t really loaning much money anyway, particularly if you don’t happen to be Warren Buffett or GE’s Jeff “Gravy Train” Immelt.

Maybe a better idea would be to go back to the future by trashing the idiotically complex Dodd-Frank legislative goulash and reimposing Glass-Steagall, which Bill Clinton and the Republican Congress should never have eliminated in 1999.

Glass-Steagall, which prohibited banks from getting into other businesses than banking, had worked brilliantly since it was initiated in Great Depression I (as opposed to the current Great Depression II). It kept the major banks from committing the same stupid, greedy, counterproductive trading crimes that were a major trigger for the first Great Depression.

It’s a fact borne out by history that allowing bankers to do anything else besides loan money to individuals and businesses will result in catastrophe. Since they’re in control of vast sums of money to begin with, allowing banks to gamble with it rather than collect interest on tamer loan portfolios was, is, and always shall be a recipe for disaster. The firewall erected by Glass-Steagall efficiently eliminated this problem. And, with the exception of the late 1980s savings and loan debacle—which wasn’t directly covered by the act—America avoided major banking crises for well over 60 years.

Roller coaster.

Looks like it’ll be another roller coaster ride today on Wall Street. Is it maybe time to take our government back?

Unfortunately, after transforming small and large business accounting into an ongoing nightmare with the enactment of Sarbanes-Oxley (aka “Sarbox”), Congress decided to one-up this Enron-inspired debacle by passing the immense, complex, and self-defeating Dodd-Frank.

The upshot of this complex mess is this: between Dodd Frank and the evolving Basel III standards, large banks are being forced to secure millions and billions of Benjamins in subterranean vaults after which they will throw away the key. Already loath to loan any money to anyone other than IBM and Obama-favored GE, the likes of JP Morgan may now be increasingly reluctant to loan money to Big Blue.

Keeping this vast horde of cash in locked vaults with little hope of releasing it is precisely why the Fed’s accommodative monetary stance has produced effectively zero results in the economy. All the money the Fed has effectively printed over the last four years—or at least an awful lot of it—remains in cold storage. It’s a rainy-day fund of epic proportions and far larger than is needed even for another debacle.

Yet in storage this money stays. And, thanks to yesterday’s Basel III acquiescence by the Fed and the U.S. government, that’s billions and billions of dollars that will remain in solitary forever—dollars that could otherwise be used to create new businesses, grow old businesses, and get America’s huge cadre of unemployed and underemployed back to work and productivity.

Overreaction to disaster is always the wrong solution. But it’s being repeated again here. The market will remain weak to horrible as a result.

The only possible silver lining is the possibility that Uncle Ben’s non-pronouncement was yet another stalling tactic in an age where stalling is the substitute for decisiveness and action. The Fed is not due to make it’s official announcements on monetary policy until June 20. To announce anything decisive before that date would indicate to the market that things are far worse than anyone thinks, causing the Fed to panic and jump the gun on potential stimulus measures.

Likewise, just prior to the 20th, on the 17th, we have the Greek elections, which will, as is customary over there, probably not be decisive either. Europe is stalling on making any monetary decisions until the Greek vote is counted and, happily (for the Fed), Ben & Co. aren’t on the hook for a real tea leaf reading until the 20th.

So again, we wait for Godot, and the market will probably stay weird to negative until then, a situation worsened by the fact that next week is “quadruple witching week” a quarterly phenomenon in which options and all manner of hedging bets expire, causing wild market swings as professional traders try to game the expirations.

Ugly stuff. Even the REITs have been getting kicked in the teeth this week as all manner or charting and fundamental analysis is proving useless in a market controlled by faceless, high-speed trading algorithms. Utilities and your mattress still look to be the best places to stash whatever cash the government’s disastrously flawed policies have allowed you to retain. But gee, we hate to even mention mattresses and utilities lest the current Congress and Administration swoop in to somehow destroy these as well.

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.




Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17