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  • Paul Volcker Spooks the Markets
    Standing shoulder-to-shoulder with Paul Volcker and Joe Biden, President Obama proposed plans to curb the finance industry by re-enacting Depression-inspired banking legislation.

    Obama is expected to publicly endorse proposals by Paul Volcker, including limits to proprietary trading within commercial banks. Volcker believes banks should be broken up, essentially leading to the resurrection of the Glass-Steagall act of 1933.

    Volcker, who was head of the Federal Reserve in the 1970s/1980s, is often referred to as the Dean of American banking. He is widely respected as a man who has the balls to do what it takes to make things right.

    Volcker has publicly stated that many financial innovations provide no benefit - and are often dangerous - to society as a whole. In fact, he proposes the current system (as demonstrated via the bailouts) presents high risks to society but high rewards for banks. Interests are clearly not aligned.

    I believe the fact Geithner and Summers were nowhere to be seen sends a big message. The Obama administration is taking a hard-line position against the banks. Politically-motivated or not, such a move is welcome given the ridiculous antics (high risk behavior, bailouts, subsequent return to high risk behavior, followed by record-breaking bonuses) of banks over the past 2 years.

    Such threats to the banking industry are bad for bank executives and bank shareholders...but a stable banking system will be good for society (and the economy) over the long run.

    Disclosure: No stocks mentioned

    Jan 21 9:57 PM | Link | 1 Comment
  • The 7 Signs of a Speculative Bubble

    With all the recent talk about new bubbles forming, I thought it timely to review what a bubble looks like.

    How do you identify a bubble? Here are a few things to look for:

    1. Experienced, older investors stay away while novices invest in droves.
    Older investors tend to have learned from prior bubbles and busts, while less experienced investors feel and act as if they were invincible.

    2. The justification for continued asset appreciation has little to do with profits.
    A ‘new paradigm’, unique measures of success or the promise of huge profits years into the future are usually signs that fundamentals are not sound.

    3. Insiders (e.g. company executives, company treasury) selling stock.
    Insiders tend to have the best knowledge on their company and industry prospects. If insiders don’t believe the hype, should anyone else?

    4. Mainstream media is all over the asset class/sector.
    Remember all the reality TV shows about people buying, renovating and flipping houses? By the time an asset or investment becomes so popular that average people want to spend their free time dreaming about the money to be made, the party is usually over.

    5. The lifestyle of the average citizen becomes extravagant.
    When people with average incomes start to live above-average lifestyles (frequent vacations, expensive cars, etc), it is usually a sign that people are living beyond their means by using easily accessible credit. When credit is easily accessible a portion of the abundant credit moves into the hands of speculators creating asset market bubbles. On the flip-side, asset bubbles may have funded the extravagance. Regardless, when wealth creation isn’t real it usually ends up vanishing.

    6. People make more money investing than working. Speculation becomes a career for many.
    Investments should be based on the value creating capabilities of companies, which are grounded by returns on land, labor and capital. If average people make more money owning shares of companies compared to building companies, it is a sign that the corporate value creation capabilities are weak relative to asset returns. [It is also a sign that assets are over-levered,  as that is the easiest way to squeeze higher returns out of marginally profitable companies. But asset prices can only go so far before fundamentals pull them back down to earth and borrowers are wiped out.]

    7. Asset prices fueled by credit–>Credit expansion justified by rising asset prices.
    This is a feedback loop where higher asset prices support greater credit extension, which leads to even higher asset prices. The opposite becomes true once the feedback loop reverses.

    Jul 28 4:15 PM | Link | Comment!
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