Friday, September 30, 2011

Bernanke can't see the forest through the trees, Europe losing the battle with Greece

Bad News Banks (or is it bears - both in this case):
Banks led the sell off today which was very much fitting do to the unstable scenario they have created. Of course this issue is much deeper thanks to former President Clinton who signed the repeal of the Glass Steagall Act which unregulated banks while in office. The act was founded by the FDIC and the original law was an amendment to the Federal Reserve Act but later was withdrawn.

The Banking Reforms drawn up in Glass Steagall (in short) forced banks to be either an investment bank (ie brokerages & hedgefunds) or commercial banks (ie checking & savings banks). The repeal allowed commercial banks to gamble with customers money and many feel it caused a deeper crisis in 2007 and maybe partially if not directly the cause of it. Don't blame this repeal just on the Democrats (although Obama supports it's repeal too) the Republicans also supported it's repeal on the most part.

Even though I'm a trader I don't support it's repeal because it sets up a dangerous environment where you have banks like Wells Fargo and Bank of America gambling with people's deposits. In my opinion the 2nd part of the GS act was created to prevent a 1929 like depression and by repealing Clinton (with support of Republicans) insured there will be another. Contrary to what some traders think there are many more opportunities to making trading profit in bull markets rather than bears (although a sharp trader can still make a fortune but there's less opportunity when the market shrinks).

Greece in the news:
Over in Europe, Finance Minister Evangelos Venizelos had discussed plans for an orderly Greek default with the IMF last week (although the reports were played down - it is still on the table). The question many are wondering has to do with if Greece will survive it's debt or will Greece survive the Euro? Unfortunately it's a difficult problem because although Greece has created alot of it's on debt through bad business decisions it is also being punished by having to be in the Euro which policies are actually set to benefit the industrial countries (namely France and Germany).

The fear of a member default is the domino effect. In other words if one member defaults it cause other weak members such as Ireland, Portugal, Italy, and Spain to consider following Greece's lead. In such a case, a default could be disastrous for the Euro and it's very survival at stake even those Greece alone would not be a loss to the Euro because it make up only a very small fraction of it and barely 3% in terms of GDP.

So the Euro could survive the loss of Greece but it could cause contagion to spread at a time when a recovery has not taking foot. This fear should not be underestimated. Markets are not just statistics but emotions - that's why the real value is never reflected by the market. The combination of emotion, manipulation, and fundamental worth gives you the financial markets value.

Some economist estimate that the Euro is overvalued by as much as 25%. So just imagine if fear took over the market and there was a 50% change in the other direction if this figure is correct. Or even if it was 10% and it took a 20% swing in the other direction. In my opinion no amount of support from the Euro will be able to save Greece. It only a matter of time before the day of reckoning occurs.

But the question still remains is the US dollar more stable with a man like Bernanke in charge who can't see the forest through the trees and is behind the curve everytime.


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