The economic news out of most of the world points to a continued, if not new, slowdown. Japan is going nowhere, Europe may be shrinking, China is bleeding capital, and the rest of the world is hanging on. The only place there is good news is here in the US where … there was a net slowdown in the number of jobs gained in May. None of this looks good.
For everyone outside the US, it doesn’t. But most of that money from China is coming to the US – or, more accurately, coming back. Why aren’t things looking up?
Global instability doesn’t help anyone, which is why the Fed stopped raising rates. We can’t go it alone anymore, not in this inter-connected world. It spooks everyone to see this much risk. Yet there is still reason to believe that the US, alone, will see a period of higher growth by the end of the year. It’s all about that money coming back – and when it gets put to use.
Tuesday is scheduled to be the day that everything changes. Not everything, really, but it’s the day that the “Volcker Rule” will finally go into effect. “Leave the capital markets to their own devices without any expectation of government protection and keep the existing safety net for the commercial banking system,” Volcker said in 2009. In practice, this means that commercial banking, with deposits backed by the FDIC, have to be separated from stock trading and similar activities.
It’s not the Glass-Steagall Act, which required completely separate kinds of banks operating as different companies to perform the different kinds of investing. But it’s not bad. And if it sounds simple in principle the regulation authorized by Dodd-Frank takes 800 pages. Four years from its proposal and 3 years from its passage, it’s ready to roll out. How will it go?
Two news stories highlight the precarious nature of the restructuring that has laid the foundations for the next economy. They don’t seem to be related at all, but they highlight the twisted nature of “risk” and what it means when interest rates are low but investors are developing a renewed appetite for risk.
The first is the bankruptcy of Detroit, a long time coming, which was filed today. The city has $18B in liabilities that they’d like to cut to $2B – hence a Chapter 9 liquidation filing, a declaration of surrender. The city is beyond broken and needs to start again. The second story is the rise of collateralized loan obligations (CLOs) and how our old friend Captain Morgain, er, JP Morgan is making a big bet on sketchy loans.
How are they related? Both stories show risk laid bare, and both stories have a backstory of pushing the ol’ red button with RESET in big letters on it.
Man Behind Desk: “Mr. Brain, As you know, we here at Fiero & Company are re-re-insurers. We provide insurance to re-insurers, who insure insurance companies.”
Brain: “Is that lucrative?”
Man: “Take a look.” (opens drawer)
Brain: (big eyed smile) “Ahem!”
– Pinky and the Brain, S1E2, “Of Mice and Man”
One of the basic principles of Barataria is that “Banking should be boring”. The main argument against financial regulation is that it stifles innovation. Yet that hallmark of the 2000s has been the source of excessive risk and nearly all the trouble we find ourselves in today. When banking is boring, the world is quiet and stable and those of us not in financial dealings have a decent chance of actually getting ahead.
The same is true of insurance. That’s not only true as a matter of policy, it’s apparently true as a matter of making a lot of dough.