The new Volcker rule is all the rage today in the world of finance, as Obama announced that he wants a ban on proprietary trading activities at bank-holding companies. Though I have been critical of the Obama administration’s economic policies from the day he took office, as well as his tendency to absolutely ignore Paul Volcker, today appears to be a sudden reversal in the palatability of his policies, at least to middle class America.
But there may be more than meets the eye.
As the market has rallied from last spring, Obama’s popularity had the reverse effect. His disapproval rating, as measured by Gallup, has skyrocketed from 12% a year ago to 44% today. The inverse correlation is quite striking, and is graphically presented below.
Why the inverse correlation? For one, declining purchasing power probably didn’t increase Obama’s popularity amid middle class America, as the USD has tanked since March 2009. In addition, the aftermath of the fall 2008 liquidity crisis has led to populist rage, that has slowly but surely shifted direction and blame toward Obama, who has done nothing but perpetuate the structural problems in today’s American financial system.
During the dark days of fall 2008, Henry Paulson presented Congress with a mutually assured destruction justification for TARP. When the first version failed the House, the stock market crashed. Subsequently, MAD was used as a justification for the AIG bailout. Again and again MAD (otherwise known as “systemic risk”) has been used to rationalize taxpayer bailouts and backstops for insolvent firms.
With the S&P up huge since last spring (and every bit of equity and debt issued by banks and retailers and every bit of equity squeezed by PE firms from their HY assets through a mass influx of dividend recaps), and QE liquidity all but dried up, little upside remains for the stock market (ceteris paribus). However, declining asset prices means the Paulson/Bernanke/Geithner/Summers/Obama plan failed, in the midst of a record bonus season on Wall Street.
Already America is angry, and unemployment, a declining dollar, and anger at Wall Street are to blame. But for the rising equity market to collapse because of no dollar-debasement juice left would be the nail in the coffin for the Obama administration.
This is purely speculation, but the sudden reversal of Obama’s policies may be a ploy (or at least on some level, whether from his friends on Wall Street or in Washington), to catalyze the inevitable sell-off in equities with an anti-Wall Street policy announcement, and attribute subsequent asset deflation to the populist policy. This would be a direct exploitation of mankind’s greatest failure- its tendency to overuse induction.
Correlation does not imply causation. But Wall Street received bailouts and QE liquidity and prop trading revenues skyrocketed and the stock market surged. Take away prop trading, stocks decline, and what’s left? A public that may start attributing banks for the “recovery” and anti-Wall Street reform for the decline.
I expect a decline in risk assets to come, especially as the dollar has reversed its downtrend. But this isn’t the “reason” for stocks to fall. It may prove to be a catalyst, but at levels like these, any small flare can trigger a six sigma price fluctuation in assets.
The next wave of bailouts and pro-Wall Street policy (again under the guise of systemic risk, presumably) may undo the hard work of pro-reform politicians in Washington. And if Volcker’s plan ends up twisted or thrown away (eg. exemptions for certain BHCs, lack of transparency or method for efficacy, or altogether elimination), the influence of Wall Street in Washington may be here to stay.
Is the Volcker plan merely being implemented at this toppish time in equities to serve as an “I told you so” from Wall Street to quell populist anger?
Purely speculation but food for thought.