Decade 2000 was the decade of the bubble.
The collateral damage caused by the dot-com, housing, oil and uncertainty bubbles was the leading cause of market underperformance in the lost decade. To this day, none of the affected sectors have been able to regain their prior strength. The automotive industry was left in ruins, the financials decimated, and the housing sector doomed to years of slow recovery.
Now President Obama is poised to introduce the first real solution to the bubble problem. The banks have turned into quasi government hedge funds that are held so hostage by their speculative investment profits that they no longer fulfill their intended purpose to lend.
How has this happened? Look no further than a company like Goldman Sachs (GS). We should rename them Goldman ‘Bubble’ Sachs. This firm has grown so large that it is conflicted at every level. How could anyone trust what comes out of a Goldman ‘Bubble’ Sachs analyst when the firm has such a huge speculative stake in analyst recommendations. Remember how these GS analysts were pumping up the price of oil as the Bubble Sachs were minting money on the trade? That kind of activity is damaging to the entire global market; the only ones who benefit are the money managers and select clientele. The truth of the matter is that Bubble Sachs along with the other quasi government hedge funds caused food inflation in third world countries because of their commodity trades. If we want stability in our financial markets, this kind of behavior must come to an end.
In the short run, investors fear that new regulations imposed on the banking industry will cause big bank stocks like JP Morgan (JPM), Bank of America (BAC), and Citigroup (C) to sink. I agree with this assumption. The broad economy needs to get back to an environment where banks make their money from lending and not much else. This regulation will limit future growth. Good. The days of speculative bubble growth didn’t work out so well for the broad market.
In the long run, this restructure is very different than the collapse of the financial industry that we witnessed in 2008/2009. The economy won’t go into a double dip because of these regulations. The economy should actually be better off in the long run. If investment capital is going to leave the financials, where will it head? It will flow to real areas of innovation like technology, alternative energy, and successful biotech. The time to own the banks was during stage one of the market recovery, now that we are in stage two it’s time to look elsewhere. The market will be able to move on without them.