Market participants placed a low probability on a Trump win last month. I agreed. Markets also bet on a risk of a sell-off in stocks (stocks sold off as polls tightened, puts went bid) I sort of agreed on that. Both were wrong. But, the rally in stocks, the U.S. dollar, commodities and bond yields since the the election is fraught with contradictions in possibly one of the most uncertain geo-political backdrops of my adult life. I was not constructive on the investment environment for stocks, even when I thought the Dems would win, which would have meant a continuation of the status quo that has seen stocks basically triple in the past 8 years. I am even less so now. That’s not meant as a political view, it’s merely that sentiment has shifted too far too fast, for too few sound reasons. And stocks aren’t exactly reflecting that sentiment because they were basically already at record highs. And while U.S. stocks are at new record highs, it is important to note that despite the daily euphoric headlines, the Dow Jones Industrial Average is only up 5% from its Nov 9th post election early morning lows, and that a third of those gains in the price weighted index can be attributed to Goldman Sachs and JP Morgan’s 25% & 20% gains (respectively) since Nov 8th.
There is no doubt that the 50 basis point rise in the 10 Year U.S. Treasury Yield has been a massive tailwind to for the banking sector in the last month, but I suspect the prospects of greater de-regulation is what is really driving these stocks. I am all for an level playing field, and some of the talk of changes to Dodd Frank have to do with mid-size and smaller banks that have been neutered alongside the big boys on Wall Street. But do remember that the world’s financial predicament over the last 8 years is largely the result of a de-regulated banking industry from the late 1990’s and early 2000’s (Financial Services Modernization Act, Commodity Futures Modernization Act, Capital Requirements, Shadow Banking System, etc).
This time around, my guess is the powers that be won’t go nearly as far as most think on banking de-regulation for a couple simple reasons. First, PEOTUS has already betrayed one of the tenets of his populist message, by appointing members of what he called “the global financial power structure” to key cabinet positions like Treasury and Commerce. These guys know better than anyone just how quick things would re-vert to the gogo times of the 2000s and how quickly the crash after could come. They also know how few traditional options we would have to combat the next crisis given the current interest rate environment and the explosion in public and private debt over the last decade here and abroad. The next time around, the President will NOT have the moral high ground to shield bankers from “the pitchforks”.
And as far as regulations go, they are not a cure-all for bad behavior. There are a two prominent examples in the last 5 years of two of the largest, most venerable financials institutions in our country JP Morgan (JPM) and Wells Fargo (WFC) running afoul of regulators, despite the increased regulatory scrutiny that was reminiscent of behavior the prior decade in the lead up to the financial crisis. Of course their was Jamie Dimon’s “tempest in a teapot” with the credit derivative trading in their CIO’s office up until 2012 by Bruno Iksil, aka the “London Whale”. The losses ended up being manageable at less than $6 billion paling in comparison to the more than $25 billion in fines the company paid to regulators as fines for their activities related to selling mortgage securities.
Or take the recent Wells Fargo fake account scandal. This occurred under the onerous regulations put in place since the financial crisis. This affected thousands of customers and was perpetrated by 5000 employees.
This is a complicated issue obviously. Look the other way too much and banks run wild. Look to closely and you may hamper the economy while they still do evil shit. But the key is making sure they don’t blow up the entire system and leave us taxpayers to pick up the mess.
Give a mega-bank CEO enough rope and he (there are no women CEOs of any of the mega US banks) will ultimately hang himself and the economy. As someone who has been a professional in the financial markets for nearly two decades, I don’t say this with any particular disdain for the people involved. People on Wall street aren’t any worse than any other industry. It’s the perverse incentives, particularly in times of a financial bubbles, where Wall Street gets its reputation, one that PEOTUS was not shy to rail against throughout his campaign.
I worked at large U.S. bank (that was the next to go under) in mid September 2008. I have no ill will about it, but I recognize as tens of thousands of others who worked at similar institutions back then knew just how scary and fragile the whole thing was. The fact that they (and the system) were rescued and we’ve gone without a double dip recession since (who would have taken that bet?) means that in a lot of ways we’re now victims of our own success. We forget just how bad it almost was, and what got us in the mess in the first place.
Our large moneycenter and investment banks serve great purpose, thousands of large and small businesses and millions of consumers depend on their financial innovation and flexibility. But continued strict oversight should not be viewed as a negative, it is important to create long term sustainable growth. Sure, there are probably some things within banking regulation that need to be fixed. But a complete overhaul, like bank investors seem to think is going to happen, probably isn’t. I get it, investors think banks are too cheap, keep too much capital which should be returned to shareholders. But history rhymes, if not all out repeats. We’ll need to keep our feet on the ground at this stage of the game so that our financial institutions are a pillar to lean on in the next downturn rather than the cause.