On The Linkage Between Politics And Markets

Tyler Durden's picture

On a very slow trading day, some big picture observations from Russ Certo of Gleacher:

On The Linkage Between Politics And Markets

Good afternoon.  The S&P 500 slid for a sixth straight week, its longest swoon since July 2008.  The Dow closed below 12,000 for the first time since March, and 6.7% off the highs and has been bantering around all day today.  Declining stocks outpaced advancing ones by 4-to-1 ratio on Friday.  Stock, money market and muni funds had a weekly net outflows averaging $4.2 billion, $1.1 billion and 141 million respectively, in the latest four weeks.  Investment grade corporate issuance fell to its slowest pace of the year last week spooked by a host of global, sovereign and geopolitical items.  Just $6.3 billion in new investment grade bonds were sold last week in this climate. 

The “Sell in May and walk away” mantra is on trader’s minds as last year the Dow receded nearly 14% from late April through early July.  Remember the calls to attention to the Hindenburg formations which cast a cloud over markets before they climbed a wall of worry since? 

Increasing banter about sovereign debt exposure and residual impacts of prospective Greece restructurings, bailouts, creditor exposure, CDS, and consequent impacts of such on broader PIIGS added to the consternation in markets.  Essentially, Club Med is at the forefront of investor considerations today. 

News leaked out of ECB exposure, $637 billion  PIIGS holdings itself, which failure could cause writedowns to ECB capital.  The ECB is leveraged 23 times with about 83 billion Euros of capital and reserves versus owning 1.9 trillion Euros in assets.  Whatever, the actual ratio, a miniscule decline in asset values of loans or government debt holdings on books of, let’s say, 5%, would wipe out the entire ECB’s capital base.  ECB Greece exposure alone is 190 billion Euros not to mention peripheral exposure.  And this is only one source of consideration which has markets in a rut.  http://online.barrons.com/article/SB50001424053111903588204576369741392085006.html?mod=googlenews_barrons

OTHER things are on market’s minds too.  The markets also don’t like the punitive regulatory landscape.  The Federal Reserve warned of broader bank purview.  A Fed proposal would require U.S. banks to develop detailed capital plans and submit them for federal review BEFORE MAKING DIVIDEND PAYMENTS OR STOCK REPURCHASES.  This rule is aimed at banks with  more than $50 billion in assets.  Bank stocks have been responding to this uncertainty in kind.  http://online.wsj.com/article/SB10001424052702304392704576377464238788864.html

Now the rush to avoid being designated at “systemically important” by the council of financial regulators.  Everyone is now trying to be too small to fail.  Dozens of firms are scrambling to be not enough important.  Not just banks.  Hedge funds, private corporations, insurers, money managers, and quasi-government entities like the FHLB banks.  These regulators have EVERYONE scared and no wonder why there is $1.9 trillion dollars sitting on the sidelines waiting to be deployed if they EVER get relief from the current regime or regulatory climate.  

And Barney Frank heralds who or who is not the cause of financial meltdown.  He should know, but insurance companies in his district surely aren’t likely to be the future cause.  How can Barney Frank, one of the primary architects of mis-allocation of government resources instrumental in crises and not resolving it, canvass for who is systemically relevant in the future, with their new broad powers as a result of his own critical failure and contribution?  Don’t make me YouTube all of Barney’s housing proclamations or unearth the litany of his cozy courtships and relationships with housing players, friends of Angelo below market deals and the like.  http://www.nytimes.com/2011/06/12/business/economy/12big.html

Other than requiring banks to hold more capital and gaining permission from regulators on investor business decisions, these queries will likely adversely impact lending and growth given the myriad of uncertainty of committing capital to ANY business plan in banking or otherwise. 

“I have a great fear someone’s going to try to write a  book in 20 years, and the book is going to talk about all the things that we did in the middle of the crisis to actually slow down recovery,” Dimon told the Fed chairman during a conference.  The Chairman replied, “The points are valid and the Fed lacks the quantitative tools to study the net impact of all the regulatory and market changes over the past three years.  Direct quote, “It’s too complicated”.  Atlas Shrugged. 

Allow a diatribe for a moment.  I wonder what Pearl Harbor was “really” like given historical accounts and knowing the rewriting of history in front of our very eyes regarding the causes of the credit crises.  You would never know that “liar loans” were made by mortgage companies (Countrywide, NOT BANKS, was nearly 35% of the most troubled loans) and that Congress had working groups to court some of these firms aggressively to support housing formation goals at all cost and encouraged GSE lenders to make subprime loans and had intimate relationships with these institutions.  And that the FHA is still making these loans with less than 3% down and zero interest in some cases.  As the bank witch hunt continues for “lending abuses”?!#%%*$  of the past?!#$^  And overleverage, artificial interest rate engineered policy%#!#%$#^  

How politicized is the Fed today with its conflicting dual mandate of full employment and moderate prices?  The bank unfurled a rainbow flag recently with political underpinnings?  How can this be?  Separation between church and state.  http://www.nytimes.com/2011/06/11/us/11flag.html

Is the bank independent of political forces like social goals?  Bernanke noted the banking system’s “social” function last week.  Can you find it in his speech?  Fed Chairman Bernanke speaks about fiscal sustainability on Tuesday.   Why is the Fed Chairman discussing FISCAL sustainability?  Why does the Fed chairman have to consider FISCAL ineptitude or Jamie Dimon like over-zealous regulation when it aspires to gauge economic activity and, hence, monetary policy which is DEPENDANT on such?  The greater overarching slowdown regulatory framework or $70 trillion in structural entitlement spending means policy is easier for longer or tighter for longer or both? 

Political corruption in markets from all angles.  Members of the U.S. House of Representatives may have had a great “informational advantage” from 1985 to 2001 as they had substantially higher portfolio returns than other investors including corporate insiders.  http://online.barrons.com/article/SB50001424053111903588204576369670961147188.html?mod=googlenews_barrons

Screwflation:   
http://online.barrons.com/article/SB50001424053111903588204576369783343545812.html?mod=BOL_hpp_popview

Peru’s election of the left leaning Ollanta Humala as president sent investors heading for the border last week with broad declines in equity bourses responding to economic prospects of a particular ideology.  This election was a timely, albeit likely temporary boost for Hugo Chavez, populist who leads like minded Latin American leftist leaders. 

Chavez, former military and leader of Venezuela is beset by mounting economic problems of skyrocketing crime rates, the world’s highest inflation rate and sluggish economy.  See the policy parallels and how markets and capital mobilize instantly on their perceptions of policy prowess or lack thereof?  This is kind of some Peruvian anecdote but kind of not.    http://online.wsj.com/article/SB10001424052702304474804576371980223043622.html

Barron’s conducted its round table interview of veteran pros.  What was consistent and revealing to all which invest in markets was how GEOPOLITICAL inefficient allocation of national resources is contributing to a less than stellar investment climate.  Not an anecdote to these great investor minds.  http://online.barrons.com/article/SB50001424053111903425204576373910676523034.html?mod=BOL_hpp_popview#articleTabs_panel_article%3D1

Scott Black :  The national debt exceeds $14.3 trillion.  It is equal to 96% GDP, the highest since WWII.  At least then we had an excuse.  IT IS DISGRACEFUL THAT BOTH PARTIES AREN’T DOING WHAT’S RIGHT FOR AMERICA.”

Felix Zulauf:  “By the middle of the decade, we will have a major crises, bigger than 2008.  Several countries will default.  U.S. and Chinese exchange rates will unravel and force US dollar down tremendously.”

Mario Gabelli: “NO ONE IN THEIR RIGHT MIND WOULD TRUST THE U.S. GOVERNMENT.”

Archie Macallaster:  “Obama administration is anti-business.  The president is good on his feet. He speaks well. He has a sense of humor.  But he is anti-business because he never grew up with business.  Also, both parties don’t get along, which makes things difficult for business.  In this environment it is hard to know what stocks will do.” 

A former Clinton White House aide:  “There’s no economic thinking going on at this White House.  It’s so obvious.”  The president hasn’t seen the light on jobs.  http://online.barrons.com/article/SB50001424053111903425204576373451448216690.html?mod=BOL_twm_col

Look at interview with Jim Rogers last week on government spending.  Think he knows a thing or two about finance, the allocation of resources?   http://www.marketwatch.com/video/asset/rogers-only-a-crisis-can-fix-us-debt-problem-2011-06-08/7B14FAAB-F745-4ECA-ADB4-F8D5BD0A2C96?link=MW_story_insert#!7B14FAAB-F745-4ECA-ADB4-F8D5BD0A2C96.                                              

But the lawsuits keep coming as Goldman’s Tourre loses bid to escape SEC suit.  http://www.bloomberg.com/news/2011-06-10/fabrice-tourre-loses-bid-to-dismiss-all-charges-in-sec-suit.html

Honda, Mazda, GM fight California’s bid to peg Zero-Emission vehicles at 5.5% of sales by 2018.  I’m sure that Japanese have a few other items to concern themselves since Toyota sales down 70% since nuclear fallout and 31% fall in year’s profit.  Government controlling retooling and procurement decisions for companies.  http://online.wsj.com/article/SB10001424052702304778304576377823227859488.html

Subprime education:  Congress needs to rein in for-profit colleges that leave students with debt. http://topics.nytimes.com/top/reference/timestopics/subjects/f/forprofit_schools/index.html

Barron’s Up and Down Wall Street Column suggests ISI outfit believes administration may tap the strategic petroleum reserve as gas prices are hurting consumers, the economy, and the president’s poll ratings.  “Too, we seem to recall, 2012 is an election year.”  Should an administration even remotely consider strategic oil supply when couching votes and approval ratings or even have integrible shops confuse such?  http://online.barrons.com/article/SB50001424053111903588204576369661532710914.html#articleTabs_panel_article%3D2
    
Politics, good or bad, affect markets.  The linkage between politics and markets if you will.  How about a lunch with fat cats at “Daniel” where the six course tasting menu is $195 per person.  http://www.nytimes.com/2011/06/11/us/11flag.html

And oil down $2 today

Russ