Banking Industry Buying Pressure
As I wrote last year, there is a premise from which one needs to operate when it comes to a community's money; oversight, oversight and oversight. There is absolutely no circumstances under which banks should be allowed to get into unregulated businesses or legally skirt regulation through accounting shell games and business relationships. There is also no circumstance under which politicians should not be keeping the financial industry under their thumb of oversight as the industry finds ways to innovate out of regulated areas. Instead politicians have buckled under corporate lobbyists who aren't paid to think about the consequences of their actions. Or put another way, the law of unintended consequences. If Alan Greenspan is guilty of anything, I suspect it is his support of the many incarnations of financial deregulation or lack of regulation over the years. Mr. Greenspan likely supported such a position more as a result of his political leanings rather than analyzing said decisions from the point of view that confidence in the financial system is the only matter of primary importance. A lesson that might be taken away from this fact is that academics or apolitical economists might make better choices for decision making roles within the Federal Reserve.
Support of deregulation and the implied assumptions by regulators and politicians that banks will employ risk management practices is a false truth. In other words, risk cannot be removed and neither can human nature be changed. The repeated messes created by concentration of power without oversight is a timeless truth. Our founding fathers realized this about government. Why would we not apply the same litmus test to our monetary system? As I wrote in a comment some time ago, assuming there is an entity on the other end of the risk trade is another false truth. When you buy car insurance, does risk disappear? Hardly. It is simply transferred. Wall Street, for all of their sophisticated terminology, employs strategies no different than you do while buying car insurance. Risk never disappears and is incredibly hard to quantify let alone control . Arguing anything other than this fact is simply talking to the hand.
We discussed many topics last year that nearly everyone must have thought was very bizarre, not relevant or quite ridiculous; the finance industry peaking, banks being unsafe, a scenario unfolding where banks might not lend, moving my assets out of financial institutions I feared might be at serious risk, the repeal of Glass Steagall, financial deregulation being a serious mistake, etc. This at a time when market professionals couldn't get enough of financial stocks. Or telling the public to buy them for their dividend or explosive earnings growth. So, does that all seem bizarre and ridiculous today? Especially since some of these seemingly bizarre issues have already started to unfold? Not just in the U.S. but globally. It seems so many have been caught off guard by the events unfolding. No one could have predicted this seems to be a general conclusion drawn by most. The new favorite term of this being a "Black Swan" or an event that could not have been predicted or expected. According to whom? These events are symptomatic of the macro environment surrounding the global economy and should have been anticipated in one form or another.
Last year many bears were talking about the foolishness of the American consumer while the bulls were oblivious of any problems whatsoever. I'm not sure how to interpret those perspectives on the consumer. To me it seems an elitist mentality implying the masses are incapable of managing their own affairs. And, by extension that they aren't capable of self determination and democracy is a farce. Well, Americans, as an example, have comparatively managed their affairs quite well over the last two hundred years now haven't they? I suspect peoples in other democracies feel quite the same. Do people make mistakes? Sure. But in a free society, that is our choice. It is our right. An inalienable right. But then individuals aren't going to destabilize the financial system either. The consumer is going to suffer as is housing but the consumer is incapable of bringing down the economy. If you believe the current situation is a result of consumer foolishness, you need to rethink your thesis.
So, now we see start to see the iceberg's tip and who we should really worry about. First to rear its head is Wall Street. A term I use to loosely implicate the global financial industry. I don't believe there was any malicious attempt at creating messes as a *general rule* but that again misses the point. Wall Street isn't smart money. It's market moving money. Wall Street will dish out their version of reality as long as there is ample opportunity to do so. What they leave in their wake is for the general public to deal with. Or as I've said repeatedly, "Wall Street is always wrong eventually.". The mess extends well beyond the borders of the U.S. to Australia, Europe, Canada, etc. It is indeed global group think. Fubar. In fact, to date it appears we have seen more stresses on non U.S. financial systems. Don't worry. There is no need to jump to the front of the line. Everyone will get their fair share of gruel.
Below is a chart of buying pressure for the banking industry over the last ten years up until the second quarter of 2007. Unfortunately, it would be cheating to give you a current chart. What fun is life without a little imagination? So, what do you see? Buying pressure up through 2000, the biggest stock market bubble in history, has been dwarfed by buying pressure since 2003. Conclusion? Supposed "smart" money has shown an incredible exuberance and belief in their own invincibility by investing with wreckless abandon in their own industry.
A little side story about psychology on that topic. Last fall I went to a social event with a handful of friends. That included an acquaintance I know who manages about $400 million for a major Wall Street firm. Over the evening we exchanged views of the markets. He said his team was moving clients out of emerging markets and into high dividend yielding stocks such as banks and financial institutions. After I picked my jaw up off the floor, I shared a perspective of the mess that was about to confront his industry. He seemed caught off guard by my conclusions. The moral of the story? Those benefiting from a bubble are always the last to realize a trend is ending. What industry has an overwhelming influence on the media, advertising, politicos and therefore society in general? So much so as to convince society that a secular change has taken place even though it actually hasn't? Believe society is beyond social engineering? Who do you think created the "White picket fence, a house in the suburbs, Golden Retriever, 2.5 kids and a corporate job" version of the American dream? Today's version of the American dream is far different than the one of a century ago before mass media was coursing through our veins. Or should I say coercing through our veins. What industry is attracting all of the oblivious MBAs and scientists in record numbers? I can assure you that most hedge funds, banks, investment banks and other Wall Street organizations generally have little idea what is awaiting their future. It is terribly unfortunate but as we discussed last year, the good news is those resources will be reallocated into productive and new businesses needed to fuel a new bull. When the tide rolls out, you're going to see the tenuous underlying fundamentals of the global economy come to light. I suppose that sounds as bizarre today as my comments about banks and financial institutions sounded last year. On a go forward basis I expect the best that can be attempted is mitigation of some outcomes. Will that prolong the negative imbalances? We shall see first hand. But, on a positive note I must say that I'm glad Bernanke is the one who is going to lead the Fed through this time. Although as I wrote on another blog some time ago, I believe the Fed is toothless and always has been. (Not that they aren't without merit. Because there is much merit.) Okay, they do have a few teeth. They had better get out the toothbrush because it's time for them to smile for the camera.
In closing, if buying pressure is over three times what it was in the biggest stock market bubble in history, what do we have today? A picnic? I believe the long future is bright for the world's democracies after we conclude this cycle. But, there will be a time for cleansing and a system reset. And what will likely be a very unpleasant one at that.
Update Tuesday afternoon: After I posted this I saw a few commentaries where some impetuous types are calling this credit situation over. Nothing like a sign of the times where lack of reasoning and impulsive decisions are rampant. A more appropriate perspective would be that it hasn't even started. T-i-p-o-f-t-h-e-i-c-e-b-e-r-g.
Support of deregulation and the implied assumptions by regulators and politicians that banks will employ risk management practices is a false truth. In other words, risk cannot be removed and neither can human nature be changed. The repeated messes created by concentration of power without oversight is a timeless truth. Our founding fathers realized this about government. Why would we not apply the same litmus test to our monetary system? As I wrote in a comment some time ago, assuming there is an entity on the other end of the risk trade is another false truth. When you buy car insurance, does risk disappear? Hardly. It is simply transferred. Wall Street, for all of their sophisticated terminology, employs strategies no different than you do while buying car insurance. Risk never disappears and is incredibly hard to quantify let alone control . Arguing anything other than this fact is simply talking to the hand.
We discussed many topics last year that nearly everyone must have thought was very bizarre, not relevant or quite ridiculous; the finance industry peaking, banks being unsafe, a scenario unfolding where banks might not lend, moving my assets out of financial institutions I feared might be at serious risk, the repeal of Glass Steagall, financial deregulation being a serious mistake, etc. This at a time when market professionals couldn't get enough of financial stocks. Or telling the public to buy them for their dividend or explosive earnings growth. So, does that all seem bizarre and ridiculous today? Especially since some of these seemingly bizarre issues have already started to unfold? Not just in the U.S. but globally. It seems so many have been caught off guard by the events unfolding. No one could have predicted this seems to be a general conclusion drawn by most. The new favorite term of this being a "Black Swan" or an event that could not have been predicted or expected. According to whom? These events are symptomatic of the macro environment surrounding the global economy and should have been anticipated in one form or another.
Last year many bears were talking about the foolishness of the American consumer while the bulls were oblivious of any problems whatsoever. I'm not sure how to interpret those perspectives on the consumer. To me it seems an elitist mentality implying the masses are incapable of managing their own affairs. And, by extension that they aren't capable of self determination and democracy is a farce. Well, Americans, as an example, have comparatively managed their affairs quite well over the last two hundred years now haven't they? I suspect peoples in other democracies feel quite the same. Do people make mistakes? Sure. But in a free society, that is our choice. It is our right. An inalienable right. But then individuals aren't going to destabilize the financial system either. The consumer is going to suffer as is housing but the consumer is incapable of bringing down the economy. If you believe the current situation is a result of consumer foolishness, you need to rethink your thesis.
So, now we see start to see the iceberg's tip and who we should really worry about. First to rear its head is Wall Street. A term I use to loosely implicate the global financial industry. I don't believe there was any malicious attempt at creating messes as a *general rule* but that again misses the point. Wall Street isn't smart money. It's market moving money. Wall Street will dish out their version of reality as long as there is ample opportunity to do so. What they leave in their wake is for the general public to deal with. Or as I've said repeatedly, "Wall Street is always wrong eventually.". The mess extends well beyond the borders of the U.S. to Australia, Europe, Canada, etc. It is indeed global group think. Fubar. In fact, to date it appears we have seen more stresses on non U.S. financial systems. Don't worry. There is no need to jump to the front of the line. Everyone will get their fair share of gruel.
Below is a chart of buying pressure for the banking industry over the last ten years up until the second quarter of 2007. Unfortunately, it would be cheating to give you a current chart. What fun is life without a little imagination? So, what do you see? Buying pressure up through 2000, the biggest stock market bubble in history, has been dwarfed by buying pressure since 2003. Conclusion? Supposed "smart" money has shown an incredible exuberance and belief in their own invincibility by investing with wreckless abandon in their own industry.
A little side story about psychology on that topic. Last fall I went to a social event with a handful of friends. That included an acquaintance I know who manages about $400 million for a major Wall Street firm. Over the evening we exchanged views of the markets. He said his team was moving clients out of emerging markets and into high dividend yielding stocks such as banks and financial institutions. After I picked my jaw up off the floor, I shared a perspective of the mess that was about to confront his industry. He seemed caught off guard by my conclusions. The moral of the story? Those benefiting from a bubble are always the last to realize a trend is ending. What industry has an overwhelming influence on the media, advertising, politicos and therefore society in general? So much so as to convince society that a secular change has taken place even though it actually hasn't? Believe society is beyond social engineering? Who do you think created the "White picket fence, a house in the suburbs, Golden Retriever, 2.5 kids and a corporate job" version of the American dream? Today's version of the American dream is far different than the one of a century ago before mass media was coursing through our veins. Or should I say coercing through our veins. What industry is attracting all of the oblivious MBAs and scientists in record numbers? I can assure you that most hedge funds, banks, investment banks and other Wall Street organizations generally have little idea what is awaiting their future. It is terribly unfortunate but as we discussed last year, the good news is those resources will be reallocated into productive and new businesses needed to fuel a new bull. When the tide rolls out, you're going to see the tenuous underlying fundamentals of the global economy come to light. I suppose that sounds as bizarre today as my comments about banks and financial institutions sounded last year. On a go forward basis I expect the best that can be attempted is mitigation of some outcomes. Will that prolong the negative imbalances? We shall see first hand. But, on a positive note I must say that I'm glad Bernanke is the one who is going to lead the Fed through this time. Although as I wrote on another blog some time ago, I believe the Fed is toothless and always has been. (Not that they aren't without merit. Because there is much merit.) Okay, they do have a few teeth. They had better get out the toothbrush because it's time for them to smile for the camera.
In closing, if buying pressure is over three times what it was in the biggest stock market bubble in history, what do we have today? A picnic? I believe the long future is bright for the world's democracies after we conclude this cycle. But, there will be a time for cleansing and a system reset. And what will likely be a very unpleasant one at that.
Update Tuesday afternoon: After I posted this I saw a few commentaries where some impetuous types are calling this credit situation over. Nothing like a sign of the times where lack of reasoning and impulsive decisions are rampant. A more appropriate perspective would be that it hasn't even started. T-i-p-o-f-t-h-e-i-c-e-b-e-r-g.
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