As the old song says “What goes up, must come down. Spinnin’ wheel got to go ‘round. Talkin’ bout your troubles it’s a cryin’ sin. Ride a painted pony let the spinnin’ wheel spin…” by Blood, Sweat, & Tears. I know I am starting to give away my age. If you have been watching the current market volatility of the Dow, you have been on quite the ride. Down 1100 points one day, then up the next day by 300 points. Up again by 400 points the following day, and once again up by 200 points the very next day after that. A week later you watched it go down 500 points for the week, then up the following week by 1200 points. All of that and then flat in the fourth week of the month. Then, the first week of the next month, the Dow drops over 1,000 in a day and down another 300 points the next day — and then the recovery happens again.
Why is there so much market volatility this year compared to previous years?
Is there a pattern to when this happens? What are the triggers that caused this market volatility? Leadership usually influences people, either positive or negative and sometimes both. It happens in churches where the congregation will take on the passion and the personality of the Pastor. It happens in companies where the type of company and the CEO dictates the environment of the company, such as Google. The corporate environment of Google reflects that nature of the IT or Tech stock. They are very creative and their environment displays that not only with free breakfast, lunch, and dinner meals, but also the snacks in between. All their social activities are free, such as classes to attend, from lectures, to cooking. With all the food you eat they also offer on-site gyms. For the social music lovers, you can hear a lecture from music celebrities ranging from Josh Groban to Lady Gaga. This environment that leadership brings to the table is also created by governments as well as the news media.
In President Trump’s first year in office he focused his time on more inward things such as appealing Obamacare and creating tax reform. In 2017 he pulled out of NAFTA and The Paris Climate Agreement. Both multi-country agreements he opted out. When doing so it caused a small market reaction, yet was not “addressed” in detail until 2018. He bundled all trade agreements into one category, making America great, by making America first. Renegotiating trade with China, renegotiating nuclear disarmament with North Korea, and renegotiating Iran’s nuclear deal. Those all at times have caused market turmoil. Three weeks ago the U.S puts $150 Billion tariffs on Chinese products, Steel and Aluminum — and China retaliates by putting tariffs amounting to $50 Billion on Soybeans from the U.S. The market gets spooked and goes down several hundreds of points. A week later China and the U.S. meet and come to an agreement where tariffs are being put on hold for the time being to negotiate a trade deal between the two countries. This week the White House administration announced that it would proceed with its proposal to impose tariffs starting with $50 Billion worth of goods from China and put in place new limits on Chinese investments in U.S. high-tech industries. Markets went down as part of that announcement.
On Monday April 23rd, on two national radio programs, I said this: “If the earnings report comes out, and investors don’t like what they hear… even if earnings are up, should investors get spooked, you will then see the 10-year yield move over 3%, and when that happens… the Dow will go down several hundreds of points.” Tuesday, April 24th, the very next day, those predictions became reality. The Dow went down over 600 points and closed down 424 points. How did I know this? Bad news really spooks investors in this enriched environment of massive uncertainty. When bad news comes out, investors are easily spooked since they feel a down turn is inevitable.
Reaction to The Fed selling off treasuries
The most consistent downturn in the markets has happened in the middle of the month on the 15th (or a day or two after), and the last trading day of the month (or the first or second trading day at the beginning of the next month). What has caused this consistently every month from January until mid-May? I wrote about this in our February newsletter, describing how the Fed is selling, or unwinding their balance sheet. One of the two assets is Treasuries, and they are sold in the middle of the month and the last trading day of the month. This selling has caused a downturn in the market causing volatility as much as over a 1,000 points in the Dow a couple of times this year. During the other times, the downward drops in the Dow have amounted to several hundreds of points. This will continue to happen this year and the next, causing this volatility or until the market factors this in. Keep in mind as time moves on the Fed will have raised interest rates which will cause more downward pressure on the indexes. Also, by the fourth quarter of this year, the Fed will have reached selling $50 Billion a month in Treasuries. Next year, if the Fed follows their plan, they will sell $600 Billion in Treasuries.
The Volcker Rule
A new component that will soon be put in place is the revamping of the Volcker Rule. Let’s put this into a perspective with some understanding. In the 1920’s the economy was booming and banks were leveraging money, and also using depositor’s money on account to go into the stock market. When the market got spooked, there was a downturn. Then the panic happened and investors sold massively, causing the market to go even lower. When people heard that the bank was using their money in the market, there was a run on the banks – and then we had a “Banking Holiday”. As a result of this, the government passed a law titled the Glass-Steagall Act. This prohibited commercial banks from participating in the investment banking business. This stopped depositor’s money from being used by the bank to go into the stock market and speculative markets. For decades we didn’t have a major crash caused by any certain group of financial institutions. In 1999, Glass-Steagall was repealed by Gramm-Leach-Bliley Act. Congress wanted to “unshackle the banks”. It was said by congress in the Act that its amendments would “Enhance the stability of our financial services system. This would permit financial firms to diversify their product offerings and thus their sources of revenue and make financial firms better equipped to compete in global financial markets”.
The green light was given to banks and they merged into the financial markets making very speculative trades called derivatives. Many people contribute the 2007 downturn as a direct result of the lifting of healthy bank regulations. In 2009 Paul Volcker, previous Federal Reserve Chairman, wrote a paragraph banning speculation by federally insured banks to reduce risk to the world economy. Four years later, the nation regulators issued a final rule based on Volcker’s proposal. It was close to 100 pages, and another 100 pages more in supporting material. Welcome to our government taking something simple and having the lawyers define it so it is so restricting that banks don’t lend out money from 2009 -2017. Rather, they hoard it and buy Treasuries and have them held at the Federal Reserve. These banks don’t make much money, but they don’t have any risk yet. They also don’t operate in their main function… to lend out money. This is why we saw very little loans to small business during this time. So the pendulum has swung the other major direction. Now it is time to swing it back the other way. The Federal Reserve just announced that it is revamping the Volcker rule. Here is what we know so far:
- Now banks can do short term trading. Short term trading historically can influence market direction and banks previously were not allowed the benefit of influencing the market with a large trade to cause it to move in a certain direction.
- Banks in their hedging are now allowed to place a trade and not have to document how this is tied to another trade for the purpose of hedging. This allows banks to significantly influence the market either up or down to help banks make money. This is under that category of derivative trading, which is what contributed to bringing down the system in 2007. In the banking industry banks should lend but they also trade and that is the key point of this and that is where regulations should remain intact. The news is early still on this and I will be talking about this on national radio and writing more about this.
I grew up on the farm and my dad said to me when I was young “Lock your doors, to keep honest people honest.” Although there are probably many honest people on Wall Street and in the banking industry, creating healthy guidelines or laws keeps honest people honest. It’s called locking your doors! Taking away these laws is giving the green light for dishonesty to take foot. It also allows the dishonest and the greedy to implement unscrupulous financial trades that are high risk, which have been titled as “Financial Weapons of Mass Destruction”.
Do you lock your doors to your house? Do you lock your doors to your car? If yes, why? The obvious, just in case…”to keep honest people honest,” to protect yourself. Most feel we didn’t “fix” things in 2007 and just put a band aid on it. The revamping of the Volcker Rule rips off that band aid that is stuck to your skin and exposes a raw wound that has never healed. Get ready for some pain, and also massive infection that will be much greater than 2007. It is coming, mark my words.
Isn’t your portfolio a much larger asset than your car, or the items in your home? You lock your door there, why wouldn’t you lock your doors financially? How would you like to learn how to “lock your doors” and be protected from the upcoming actions of the banks and Wall Street? How would you like to become “your own Banker”? Now is the time when markets are calm before the storm. Give Landmark Capital a call to get started in this simple journey or to add more “insurance” to make sure your doors are fully locked!