SeriousBull

Banks win another round of lobbying

Tags: Bailout + Banks + Economy + Federal Reserve + investing + Markets

The financial markets, to borrow a term from Fed Chairman Bernanke about the economy, are “unusually uncertain.” Yet on balance the greater volatility is not a category 5 event to worry about. That’s because global regulators are at the helm. They have too much invested in bailouts to let things go to hell now. As we have said the markets are in “safe mode.”

Nothing underscores this point more than the Basel Committee compromise to assist global banks. While the committee is adding new liquidity and leverage rules, they made major adjustments to modify standards so that banks could continue to operate and were given years to replenish their capital. For example, Japan, awash in losses for two decades was allowed to count deferred losses as an asset for bank capital purposes. The European banks were permitted to count the value of their minority interests as capital, a rule the US undoubtedly lobbied for as well though their big issue was winning the right to count mortgage servicing rights as capital. This aided JP Morgan Chase, Bank of America and Citi Bank still impaired by housing foreclosures.

The end result is that banks won time and that’s a tell–that they still have issues. Now having once again modified the the supply side of the equation, maybe someday they’ll look at the demand side? Jobs won’t return with lackluster demand and without job growth it will be a slow recovery in the industrialized world. Moreover there is a giant amount of de-leveraging yet necessary among consumers and ultimately western governments. Savings rates are improving from zero in the US, but spending by the government is setting up to be a humongous potential problem. Stagflation is surely around the corner.

Investors should count on the markets staying range bound for some time to come–swinging from support to resistance points. As stated above in ’safe mode’ it is unlikely that we’ll have a “black swan” event so the art of this era is to trade the swings. Corporate earnings are rising. There’s a lot of univested cash on companies balance sheets. Look for more mergers and acquisitions as companies move away from price competition to market share competition. Big is here and going to be sustained. Look out, the little guy without competitive advantage is toast.

July 28, 2010 - Markets