So there goes our support at 1085 on the SPX as I mentioned a few days ago. If the market cannot bounce into the close, from a technical analysis point of view, the chart looks very ugly as the uptrend since August of last year has been broken. Today’s reversal is particularly disturbing given a series of good news such as Helicopter Ben’s reappointment for another term and a surprisingly strong advance Q4 GDP at an emerging-market-like 5.7%.
Look out below!
Federal Reserve Chair Paul Volcker and President Obama are shooting straight for the jugular with their newly presented proposal to eliminate proprietary trading from large investment firms. Proprietary trading, a firm’s ability to trade for direct gain instead of for commission (as seen in hedge funds), allowed the top tier of today’s investment banks to thrive over their industry counterparts. However, with top firms such as Goldman Sachs, J.P. Morgan, and Morgan Stanley so heavily weighted in prop trading, this restriction will essentially be sending these firms back to square one with the wave of a pen. Bringing in more than 90% of Goldman’s pretax earnings last year, the prospective restrictions on prop trading are obviously going to bring a resounding halt to the investment firms’ recoveries.
At the Economic Club of New York, Volcker was quoted as saying, “The point is that they present added risk and virtually unmanageable conflicts of interest with more essential customer relationships.” And moreover, Obama in his January 20th address stated, “My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.” Thus, with the best interest of Joe the Plumber (is that term still kosher?) in mind, Obama has deemed the current financial services industry unfit to exist in its current state. And as such, Obama is dramatically restructuring the present financial landscape.
This proposal addresses two essential issues: limiting the scope and limiting the size. To limit the scope, Obama plans to “work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.” And to limit the size, Obama plans to “place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.”
So, with the economy in the state that it is- are we ready to put such a heavy burden on the financial industry? Like Obama said, that these investment firms cannot lend out even though they are realizing record profits, how would they perform under these unrelenting restrictions? And if the banks cannot loan out apt amounts of money, what are the grander implications on the recovery of the U.S. economy?
And on an unrelated tangent…
http://pragcap.com/the-ultimate-guide-to-2010-investment-predictions-and-outlooks
A good read for those with time
TARP deployed upto $700bn to save the financial system. The final cost however turns out to be much lower. In August 2009 the bill was estimated to be $341bn, revised down to $117bn this month. The final number, according to the administration, is expected to be $90bn.. and that is almost equal to carmakers bailout + AIG + subsidies to homeowners. America did not even experience a simultaneous currency crisis. This really means that the crisis barely costs 1% of the GDP!
To put that in relative context, IMF issued a paper – Leaven & Valencia - that examines all the past banking crises between 1970 to 2007 concluding that the average cost of such events is around 16% of the GDP. This paper has a good database so check out the tables that start from pg.32. We notice that although countries have adopted different crisis management strategies, almost all of them used emergency liquidity support and blanket guarantees.
Too good to believe?
Well..
1. The cirsis is rooted in illiquidity, not insolvency.
2. It’s too early. The long term performance of the economy determines the ultimate amount of aid the ailing financial system requires. For example, in 1996 Japan’s bail out cost was penciled at 3% of GDP. Today it is 14%.
3. Numbers are too optimistic. Perhaps the government accounting takes a narrow view of the fiscal cost of the crisis leaving out impact of the recession on the broader economy
Recently, I’ve noticed a new trend that seems to be applying to the generation of the early 90s, or Generation Y/Z (disputes occur regarding the calendar frequently), and this trend focuses on the spending habits of youthful adults. Economists have noticed that we have cut back in general, like during the Great Depression, and this will probably continue throughout our entire lives. The generation from which he have come is known for spending, interestingly enough, and so I wonder if that is why the “Great Recession” hurt them on the level it did. Obviously, savings were not large enough, but did the spending and over-budgeting habits kill the Baby Boomers?
On another note, I’ve observed that a dollar has lasted longer if it is my own money . . . I still spend the money that I receive from my mother rather foolishly (I’m food-minded and Hugo Boss is my life partner), but I know that I’m not the only one who’s truly beginning to appreciate the value of a dollar, in general. As business and economically-minded individuals, an amount of currency holds a sacred status with us, since we want to multiply it, and of course, spend it! I’m approaching my penultimate year, and as I freak out about internships and other rather unimportant concepts, I want to hear your thoughts on this topic. Do you think your spending habits have been changed forever, temporarily, or not at all? Have you started saving or investing wisely?
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