For more than a decade, some of us have warned that the abolition of Glass-Steagall was a horrible mistake. As a former (discount) brokerage firm senior executive, I was one of the leaders of that chorus. I once saw first-hand the avarice and gluttony of The Beast known as Wall Street’s full-commission proprietary trading firms.
In more recent years, I also inveighed against the abolition of the uptick rule for short sales, preferential tax treatment for hedge funds, and no-limit shorting, even when there was no stock available to short, by “primary banks” (basically, those Too Big To Manage a.k.a. Too Big To Fail.) All a matter of public record in my previous articles…
At last, even those in bed with Wall Street (US Treasury, Congress, The Federal Reserve, Council of Economic Advisors, etc.) were forced to awaken from the nightmare they created by their decisions to sell their souls and their votes to Wall Street.
So we finally get a small dose of sanity, courtesy of the one man Sanford Weill couldn’t buy with his shareholder's money, Paul Volcker, and everyone panics!
Former Fed Chairman Volcker has been advising big bank / Wall Street reform ever since he was given a token seat at the Obama administration’s economic table. Not that Presidential confidantes Rahm Emmanuel, Tim Geithner and Larry Summers ever gave him the courtesy of a return phone call or a dollop of respect. After all, he did save the country from the last economic catastrophe some of us lived through in the 21%-to-get-a-loan, stagflation is the only thing worse than inflation, late 1970s.
But after Scott Brown’s victory in Massachusetts the President and every Democratic senator and representative up for election in 2010 panicked. Suddenly the dust was blown off Paul Volcker’s proposals which had been sitting on a corner of the immaculately clean desk in the Oval Office. “We need to do something!” was the cry. “How can we make the Republicans look bad and keep our incumbent-advantage seats? How about a two-pronged approach? Let’s claim they are the party of Wall Street and then let’s go after the same guys who used to employ us on Wall Street and say we’re going to put them in their place!”
Having now stated this position publicly, Wall Street panicked (justifiably) and the rest of the investing public panicked, as well (not so justifiably.) It makes sense for Wall Street to get all squirrelly and squishy since it is their bull-ox that is being gored. But many of the rest of us are now up in arms because the market might go down short-term as a result of these reforms. It's the old refrain: "Be careful what you wish for – you just might get it."
Personally, I’m quite comfortable accepting that something has to be the catalyst for a long-overdue correction. I’d rather it be the short-term pain of a market correction followed by the long-term gain of a more robust economy, a level playing field, and the foundation for a true long-term bull market anchored by bank lending and Wall Street liquidity – with rules that dictate that ne’er the twain shall meet.
Why do I believe the market will decline in the face of these much-needed reforms? Well, duh. “The market” is now 76% institutional and 24% real people investing their money in the future of the country.
Institutions – proprietary trading at Too Big To Manage Wall Street firms, pension funds run by gunslingers rather than investors, mutual funds desperate to beat their benchmarks, etc. – jump in and out of the market like a cat going from one hot stove to another. They are not just day-trading, they are trading minute to minute and nanosecond to nanosecond. Really, now, does paying $2000 a square foot for space in a building a block closer to the electronic trading floor servers, so they can middle a trade for a hundredth of a penny 100,000 times a day, resemble anything akin to “investing”?
With 76% of the money in the market thinking reform is a bad thing, of course the market is likely to decline! On the other hand…
The (some segment of the) 24% of us who actually believe that investing is all about what asset classes make the most sense, when is the smartest time to be fully invested, and what are the best securities to allow us to increase our net worth, should be ecstatic, not filled with sour grapes, as I have seen many pundits who now kvetch that reform is ruining a perfectly good rally. Such myopic thinking is what got us in to this mess!
Yes, there will be some short-term pain if there is a market correction. But if one were to move, say, 50% into cash for a short time, with the idea of redeploying that cash into the best choices after the 800-pound gorillas have finished crushing each other to get through the door, would that be a bad thing???!!! Isn’t the whole idea to buy low and, after the events our research led us to believe would transpire, do transpire, to sell high?
I’ll let others who carped and complained that the big banks were running amok now carp and complain that we need reform, but not at the expense of allowing the market to drop a single point. I’m willing to take a little short-term pain in exchange for long-term gain. A more robust economy, a level playing field, and the foundation for a true long-term bull market anchored by bank lending and Wall Street liquidity sound pretty good to me. If the President doesn’t wimp out in his State of the Union and carries through with these initiatives, it will be a huge long-term positive for a sane marketplace.
Either way, of course, I’ll still ask the same questions I ask every day when I come to work as Chief Investment Officer of our firm:
How should I allocate assets among asset classes, what is the optimal time to rebalance portfolios, and which sectors, industries and companies will do well this week, this month, this year?
If you’re interested, the way I have answered that question, expecting at least some Wall Street reform, is to raise cash by taking some very nice profits and by investing the remainder in the strongest stocks of the strongest nations, like Australia, New Zealand and Canada; to own bonds denominated in such currencies as well as, in the US, senior floating-rate bond funds and other inflation-protected securities like TIPS; and to keep 50% of our MLPs and other high-dividend energy stocks.
Representative names include, among others, Encana (ECA), Magellan Midstream (MMP), Boardwalk Pipeline (BWP), ASA (ASA), Goldcorp (GG), Penn Virginia (PVR), Natural Resource Partners (NRP), Atlantic Power (OTC:ATLIF), Imperial Oil (IMO), Bell Canada (BCE), New Zealand Telecom (NZT), and Nuveen Tax-Advantaged Floating Rate Fund (JFP).
Author's Disclosure: We and/or clients for whom it is appropriate are now raising cash, but are still long ECA, MMP, BWP, ASA, GG, PVR, NRP, ATLIF, IMO, BCE, NZT, and JFP.