The Volcker Effect: Making Markets Feel Good

By Dave Gonigam

Conventional wisdom says the Dow jumped nearly 3% Friday on the following perverse logic: Awful unemployment numbers would spur Congress to speed up passage of the “stimulus” bill, and happy days would soon be here again.

I have an alternative theory: After a lull of a couple of months, Paul Volcker is back in the news.

And when Paul Volcker’s in the news, the market feels good. It’s the Volcker Effect. He shows up on TV, it’s market Prozac. A warm glass of milk. Endorphins flow as traders conjure fuzzy memories of the guy who put the inflation tiger back in its cage and sparked a secular bull market in stocks.

But don’t take my word for it. Just look at his “news reference volume” on Google starting late last fall and compare it with a chart of the Dow. You’ll find a rough but compelling correlation.

Think back to the final weeks of the election cycle last year. It appeared Obama would emerge the victor. For all the campaign contributions he got from the banksters, the prospect of “change” still unnerved the broader market. From mid-October the Dow lurched downward about 1000 points in the space of ten days.

But late in the month, Obama started convening pow-wows of assorted worthies to discuss the economy. And standing right next to the candidate in most of the photo ops was Paul Volcker. The Dow zoomed up about 1500 points by Election Day.

From there, the Dow fell about 2000 points as Volcker seemed to fade from the scene and attention focused on the overall makeup of Obama’s economic team. But late in November, as word filtered out that Volcker would be named chief of an “Economic Recovery Advisory Board,” the Dow spiked again — not to the Election Day high, we still haven’t been back to that level — but it was a noticeable movement.

Ever since, the Dow has been range-bound between 8000 and 9000. And Volcker has been nearly invisible. According to Bloomberg, he’s been caught up in office politics with Larry Summers, for whom office politics appears to be casual sport.

But on Friday, shortly after the jobless numbers came out, Obama and Volcker showed up on TV again, finally naming the members of Volcker’s panel. There’s your 3% pop in the Dow.

Not that this market confidence is particularly deserved. For a panel that’s billed as comprising “outsiders” providing a “fresh perspective,” some of the names look pretty inside and stale. There’s Bill Donaldson, who as SEC chairman in 2004 went along with Hank Paulson’s demand to let the investment banks jack up their leverage from 12:1 to as much as 40:1. That turned out well. There’s Jeff Immelt, who helped transform GE into a company whose primary business was lending money to its customers so they could buy stuff from its now-secondary businesses. That turned out well. And there’s Penny Pritzker, subprime lending pioneer who helped blow up Chicago’s Superior Bank years before subprime became front-page news.

Why Volcker wants to tarnish his reputation with this crowd so late in life, at a juncture when the chances he could take credit for a turnaround are so slim, I have no idea. But there you have it.

Already today it appears the Volcker Effect is wearing off because Treasury Secretary Tim Geithner’s scheduled announcement of “Son of TARP” has been put off from today till tomorrow. The official reason is the administration wants to keep the focus on getting the “stimulus” passed. But as the Wall Street Journal reports, “The administration hasn’t settled on exactly how [the plan] will work and intends to hash out the structure with the private sector over the next few weeks.”

Not exactly confidence-inspiring. As I said on Friday, Geithner has only one shot at this. If he comes back next week or next month to fine-tune or tinker with this thing, markets will write him off as Hank Paulson reincarnated, the Dow could easily slide 2000 points, and the Volcker Effect will be rendered irrelevant.

Comments

[CJJ:]

Is this a serious article, as in, is this not a joke? It has to be a joke right? You don't actually want people to read this and think you actually believe it or that you actually wrote it, posted it and expected people to read it and that would make them want to read more of what you have to say?
Must be a joke.

Feb 09 05:00 PM

[ROLEX18:]

I was reading Bill Bonner's newsletters since I started trading but of course never followed his advise as today I would be broke already 10 years ago.
I marked this e-mails as spam and tried to unsubscribe, but they still arrive almost everyday. Sell Bill.

Feb 09 06:05 PM

[doubtful:]

Interesting observation. Volcker looks like Obama's bodygard with his grim look and hands in pocket in all photo-ops. I don't understand and still don't believe a man of his stature and accomplishments would lend himself to be used. His resignation would not be a surprise. The markets will tank.

Feb 09 06:34 PM

[SW Richmond:]

"Why Volcker wants to tarnish his reputation with this crowd so late in life, at a juncture when the chances he could take credit for a turnaround are so slim, I have no idea. But there you have it."

I have marveled at this myself. Not only are the chances of a turnaround slim, but even slimmer are the chances that, if there were one, he'd be given any credit for it.

It's possible that he still cares about what happens. I don't want to be the one to tell him he's the last one in DC that does...

Feb 09 06:43 PM

[Moon Kil Woong:]

The fact we pay so much attention on government action rather than market sentiment and conditions is frightening. To think that Volker has even a tacit hand in this now is a pity.

I am reminded of Donnie Darko. The plane has crashed folks. The market is in a fictitious government manipulated dream state. AIG, Citibank, Fannie Mae, Freddie Mac, BoA, et al are all the manipulated dead.

We are told to root with criminals telling us to be happy and everything is our fault as he commits unspeakable crimes in the dark. (In this case it's banks sucking public money, gambling on derivatives, and telling us helping them is good for us.) We are worried about the sparkle girls sideshow (stimulus, bailouts, Fed bond buying, Fed loan backing, Fannie and Freddie special deals, dress up Volker as a cheerleader too, etc.) when we should be worried about our very existence as a capitalist society.

We need a wake up call. When government givaways of your money stops making the market happy, then and only then, maybe we can have a decent discussion about economic reality.

Feb 09 10:05 PM

[Jim Hawthorne:]

constructe's comments are dead on! It is really scary when experienced and (mostly) sane traders are terrified of holding positions over the weekend for fear of some government announcement sending a torpedo into their well thought-out market play.

Some call this a range-bound or sideways market. It looks to me more like it's become a 'buy the government rumor and sell the government news' market!

On Feb 09 10:05 PM constructe wrote:

> The fact we pay so much attention on government action rather than
> market sentiment and conditions is frightening. To think that Volker
> has even a tacit hand in this now is a pity.
>
> I am reminded of Donnie Darko. The plane has crashed folks. The market
> is in a fictitious government manipulated dream state. AIG, Citibank,
> Fannie Mae, Freddie Mac, BoA, et al are all the manipulated dead.
>
>
> We are told to root with criminals telling us to be happy and everything
> is our fault as he commits unspeakable crimes in the dark. (In this
> case it's banks sucking public money, gambling on derivatives, and
> telling us helping them is good for us.) We are worried about the
> sparkle girls sideshow (stimulus, bailouts, Fed bond buying, Fed
> loan backing, Fannie and Freddie special deals, dress up Volker as
> a cheerleader too, etc.) when we should be worried about our very
> existence as a capitalist society.
>
> We need a wake up call. When government givaways of your money stops
> making the market happy, then and only then, maybe we can have a
> decent discussion about economic reality.

Feb 09 10:54 PM

[Shiva:]

I do admit that market movements are irrational most of the times. But seeing a person on TV would jack up the DOW and vice versa ?? I won't buy that....

Feb 10 12:00 AM

[Jim Hawthorne:]

Shiva, try the 'Bad Bank'for an example...

Last Tuesday, Liesman on CNBC 'announced' the 'Bad Bank' plan. The markets took off in the after-market and soared much of Wednesday.

On Thursday/Friday, Charlie Gasparino shot the idea down due to pricing issues and the markets tanked.

CNBC and to a lesser extent Fox Business are watched and followed; The content might want to make you vomit, but make no mistake; the blabbering heads can and do move markets. In the absence of good fundamentals, the rumor mill will suffice! Again, it's not the news; it's how the market reacts to the news!


On Feb 10 12:00 AM Shiva wrote:

> I do admit that market movements are irrational most of the times.
> But seeing a person on TV would jack up the DOW and vice versa ??
> I won't buy that....

Feb 10 12:32 AM

[atlasman:]

I would short any Volcker fed market rise. I do believe Summers has effectively marginalized him in the administration leaving Volcker the role of inflation hawk window dressing. I am sure this will change in the next 12-18 months once inflation gets out of control. However, I would not be my money that he will be there to try and save the day.

Feb 10 08:42 AM

[derryl:]

Volcker stands there as the hired gun ready to shoot down any inflation that dares to raise its black-hatted head. He's there to assure us hyperinflation won't be allowed to even get out of the saddle, no matter how much money the Fed prints and Treasury spends. Why would Volcker allow himself to be used like this? Maybe the man feels it's his 'duty', a good old moral concept from pre-entitlement days.

Feb 10 09:46 PM