Politics Causing Great Uncertainty Among Traders

This morning, the market picture can be summed up as follows: global equities down; metals and precious metal prices down; US bonds up (yields down); and US Dollar up. Interventionists have stepped up their campaign to suppress the implied result of the Great Reflation Era, which is that extreme inflation is the most probable outcome.

In any case, wait 24 hours and the weather will change. More importantly, it’s time for Americans and the US media to ponder the issues of the day because the fate of the next generation or two of America will be decided this year.

What I spent an hour doing this morning was reading up on issues that are important. The first was a report from the Wall Street Journal on the forthcoming Obama White Paper on Financial System and Capital Market Reorganization. According to the WSJ, the House Financial Services Committee will possibly have a bill passed this summer, and the Senate Banking Committee in the fall, with the final bill passed by Congress before calendar year-end.

http://online.wsj.com/article/SB124502035340513635.html

More informative was an essay by Simon Johnson, chief economist of the International Monetary Fund in 2007 and 2008, entitled The Quiet Coup. It is a long read, but certainly worthwhile. You will see that Mr. Johnson and his associate James Kwak have written pretty much the same information and opinions that I have been publishing in this blog for a few years now.

http://www.theatlantic.com/doc/200905/imf-advice/4

Johnson asserts that politics is behind every financial crisis and the obstacle of effective solutions. The politicians have allowed - in fact, enabled - power elites within and connected to Humungous Bank & Broker to overreach, take on too much risk, bring about a financial crisis and then turn to the taxpayer for a bail-out.

The Quiet Coup asserts that the crisis facing America is no different at the root or in the attempts to resolve it than all those that occurred in emerging market countries. The authors say we don’t want to think the unthinkable, which is that the financial sector is a pied piper leading the nation into becoming a banana republic, largely due to the ease of passage along the Wall Street-Washington corridor, that has led to a new power elite called the financial oligarchs operating in their own interests. There is a way out, the authors say, but the final paragraph of this well-written essay is rather blunt in its message:

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression-because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

We bloggers need to impress upon the mainstream media that these serious issues need to be placed front and center on Main Street. Ultimately, the people still hold the power to vote out of office any and all legislators who fail to act appropriately.

Before the final outcome is settled, I foresee incredible wrangling among political forces, which will cause great uncertainty among traders. Volumes will decline even more and ultimately prices will fall until such time as there is a reorganized financial system and capital market in America, including the recapitalization of the surviving banks. Then markets will stabilize, interest rates will rise to a point that makes economic sense, and equity prices will return to being a fair measure of corporate values.

That may take some time. Until then, prices will go up one day or week and down the next.

Have a good day, and hopefully a good week.

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