The Dichotomy of The President's Attack on Bankers and Paul Volker's Elegant Solutions

Since my last post, the President's State of the Union Address reinforced Wall Street's fears of a President who is out of control and hostile to business. This caused the market sell off to escalate and plunge to a total breakdown.

On the surface, the President's address hit many of the right political notes for the crowd. However, when one digs deep, one discovers an illogical hodgepodge of half baked measures, gross inconsistencies, misstatements of facts, cheap populist attacks on convenient political scapegoats, and a denial of the fact that the country has rejected his healthcare reform plan.

Yes, the President threw a few bones to the Republicans in the form of offshore oil drilling, nuclear power plants and tax incentives for small business. But he continued his attack on the banks and his insistence of moving on with his dead policies.

Furthermore his proposed spending freeze makes no sense. One the one hand the President recently raised spending by 19% in the very areas that his spending freeze will cover a full year from now. On the other hand, the President proposed all kinds of spending increases in other areas that dwarf the so called freeze.


I could go on and on with examples, but the key takeaway from the speech is that markets perceive a president who still has not processed what has happened in Massachusetts and all over the country. Instead, the President keeps on talking about how he is now willing to work with the Republicans towards enacting his healthcare program if only the Republicans would just cooperate with him. As we all know, the problem is that the Democrats through Nancy Pelosi and Harry Reed have totally shut the Republicans out of the process. More important, the country has made it clear that they do not want the Presidents healthcare plan.


Furthermore,  the President has continued to bash the banking system in Joe McCarthy like fashion. Next, President Obama hid behind Paul Volker as a cover for his hollow theatrical exploitation of the nation's anger at irresponsible bankers and the bailout. It was almost like Europe punishing Germany after World War One. That policy led to World War Two.


Then, just when I thought that everyone was insane, I read Paul Volker's tour de force Op Ed piece in today's New York Times in which he brilliantly laid out a plan to fix the world's banking system. The article contained none of the President's attack dog rhetoric. Instead, it logically reviewed the problems and offered a common sense long term blue print to fix them. I suspect that had President Obama read Paul Volker's article to the nation, the markets would have already rallied.

In my opinion Paul Volker was our greatest Federal Reserve Chairman because he had the courage and intellect to do what was necessary and unpopular to kill the massive inflation of the 1970s and then start the economic boom that ran from 1981 through 2000. After Volker retired in early 1987, he was succeeded by the irresponsible Alan Greenspan, whose policies led to the stock market and real estate bubbles and busts.


Now Mr. Volker is back. The question is whether the President will give us selective parts of the plan or the real deal. I am optimistic but also skeptical.  Let me explain.

The reason for my skepticism is the well known fact that the President has kept an unhappy Paul Volker away from the inside for the past year. In my opinion, the President is using selective parts of Mr. Volker's plan for political gain. Despite that, Mr. Volker soldiered on hoping that the President would enact all of his ideas. He was visibly upset with the President when he recently alluded to his White House ostracism on the Charlie Rose Show. Then, White House economic advisor, Larry Summers neatly skirted around the "what to do about Paul" issue when questioned by Charlie Rose last Friday at the Davos world Economic Summit.


The reason for my optimism is that the President has no choice but to enact Mr. Volker's plan. The genie is out of the bottle and the entire who’s who of world banking and economics has seen it and will embrace it. Sooner or later, the President will also embrace the entire package and stop his bank bashing through selective cartoon like use of the plan. Maybe the President will continue with his populist rhetoric but enact the entire Volker plan, thus signalling to the markets that he is really doing the right thing.



The sooner the President wakes up and acts like President Clinton did after his health care set backs in 1994, the sooner our markets will recover. The Volker plan has a good chance of being the first step to get the President and the markets back on the right track.

Right now I am short the market via stocks like HOG and ETFs such as TZA - above right  - which I am long because it goes up when the market goes down. I am looking to cover if the market "whooshes" down into some sort of selling climax. That may start to happen this week. There is no need to rush and no need to catch a falling knife in an attempt to be the hero who picks the exact bottom.  At the same time I have selected special situation longs with very tight stops such as MMR, which just had the greatest natural gas discovery in the Gulf of Mexico in decades. The key is to have a short side bias , but trade around this oversold market in case it spikes up.

So step number one is for President Obama to let the public and our congessional leaders know the entire Volker plan. He must stop obsessing with the proprietary trading issue, which is not set in stone, and realize that Volker has placed all facets of banking system reform on the table for negotiations. The next step is for him to face the music, fess up to his mistakes and get his spending act together.