Like many of you, I’ve been watching the election with keen interest. No matter your party affiliation or who you’re voting for, you understand that 2016 is one of the most important elections we’ve ever faced.
In truth, who becomes the next President of the United States isn’t important to me.
I’m watching the election for one reason.
The next president will nominate the next Chairman of the Board of Governors of the Federal Reserve System – in reality the most powerful person in America and the world.
Here’s my candidate for the job…
While it’s highly unlikely, for a host of political reasons, that Hillary Clinton or Donald Trump would campaign on their choice for the next Chair of the Fed, they should.
A presidential contender’s nominee to be the next Fed Chair would speak volumes about the prospective president’s economic platform.
And the right economic platform to fix what’s wrong with the American economy, that makes banks safe engines of capital allocation, that rewards entrepreneurship, creates jobs and more importantly careers, dramatically narrows the income and wealth gap, and makes a comfortable retirement possible again, would deliver the election emphatically.
There’s someone out there who should be the Fed Chair nominee candidate, who would sway the electorate and be embraced by Americans, someone who we can trust holding the office of the most powerful person in the world.
My Nominee for the World’s Most Powerful Banker
My nominee is someone who’s a native of the great state of Kansas. Someone who has a bachelor’s degree in philosophy from the University of Kansas and a J.D. from the University of Kansas School of Law.
It’s someone who’s an academic, who was the Dean’s Professor of Financial Regulatory Policy at the Isenberg School of Management at the University of Massachusetts Amherst.
Someone who served as Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury. Was Senior Vice President for Government Relations of the New York Stock Exchange. Was a Commissioner and Acting Chair of the Commodity Futures Trading Commission, and who while she was an academic served on the FDIC’s Advisory Committee on Banking Policy.
In fact, it is the former Chairperson of the FDIC, the Federal Deposit Insurance Corporation, Sheila Bair.
The best part is, she’s available.
Sheila Bair would make an exceptional Federal Reserve Chair. As an architect and engineer of the bailout of America’s biggest banks (because they had to be bailed out, there was no other economic option at the time) during the 2008 crisis and tireless trooper fixing and closing busted banks across the country, knows everything there is to know about America’s banks.
And that’s what the Federal Reserve System is. It’s a private central bank.
She knows how the Fed coddles its constituent “Too Big to Fail” banks that own the Fed and how dangerous that is.
She’s an advocate of less-is-more regulation, not over-encumbering banks with thousands of pages of regulation designed for them to get around, but advocates black and white rules and regulations that by their simplicity make banks more transparent and safer.
Too Big a Job for a President
The Chairperson of the seven member Board of Governors of the Federal Reserve System, as are all the Governors, is nominated by the President of the United States and all have to be confirmed by the Senate.
While the Chair serves a four year term and is a Governor, Governors serve 14 year terms and can’t be “fired” by the President. But they can be persuaded to resign.
It wouldn’t be easy for a nominated and confirmed Sheila Bair to take control of the Board of Governors and enact the kind of changes the Fed should be subject to, but she could do it with the support of the American people.
What’s at stake is fixing what’s wrong with the American economy, making banks safe engines of capital allocation, rewarding entrepreneurship, creating jobs and careers, dramatically narrowing the income and wealth gap, and making a comfortable retirement possible again.
An American President can’t do that it’s too big a job. But they could with the backing of a strong, thoroughly qualified Federal Reserve Chair and its Board of Governors.
The next President of the United States will be the one who has the smarts to lay out their economic platform for the country to be architected and executed by their choice for who will set policy and the right American agenda at the Federal Reserve.
Next week, I’ll tell you what needs to be fixed, and the best way to go about fixing it.
If you read the 58-page draft of the Republican Party’s official party platform you’ll come across a surprising one-liner: “We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment.”
But before Republican big-bank haters get excited, everyone should know that’s not presidential candidate Donald Trump’s one-liner.
In fact, it just might turn out to be a joke.
Based on who Mr. Trump is reportedly considering for Treasury Secretary in his would-be cabinet, it’s highly unlikely, Republican platform rhetoric aside, a Trump Administration would be even remotely interested in resurrecting Glass-Steagall.
Frighteningly, but not surprisingly, there’s a huge Goldman Sachs nexus connecting the end of Glass-Steagall to the future prospect of reviving it, with Donald Trump squarely in the middle.
Here’s how a former Goldman Sachs operative murdered Glass-Steagall for $125 million, why another former Goldman Sachs Treasury Secretary would keep it buried, and what Donald Trump, if elected, should do about it.
Judging by the headline financial news these days, however, the big banks are back. They’ve almost all reported earnings beats this quarter, some by a good amount, and analysts are saying the hard row’s been hoed and they’ve planted fresh seeds. And when you look at their stock prices, some of the TBTF banks look like downright bargains.
But price doesn’t tell you anything. There’s a lot more to look at with the big banks.
And if you look really closely, well, you won’t believe what you really see…
Analysts Are in on the Game
The big banks are looking better, but they’re not exactly looking good.
Sure they are beating on their earnings, but that’s not a big deal. In fact, it’s a bad deal.
Banks are notorious for “working” the analyst community. How’s that, you wonder?
Think about it. Where do Wall Street analysts that you see on TV mostly come from? The big banks. They know the game, they all play it. The truth is, they invented it. I’m talking about the earnings beat game.
All the analysts know each other. It’s easy for them let each other know that their own bank’s earnings aren’t going to be great. That causes other analysts to start ratcheting down their earnings estimates.
Then when earnings come out – BANG – they beat “consensus analysts’ estimates.”
And their stocks usually enjoy a pop. It’s such a lame game that you’d think the investing public would have caught on by now.
But they haven’t – it just happened again.
If you want a clear view of banks’ earnings, you can’t look to the analysts because most of them are in the pocket of the TBTF banks. You have to look backwards.
Here’s what you’ll see if you look that way today…
Compared to 2015, the Q2 “Beats” Don’t Look so Hot
JPMorgan Chase & Co. (NYSE:JPM) beat analysts’ earnings and revenue estimates registering earnings per share (EPS) of $1.55, while estimates averaged $1.34. They beat consensus revenue estimates of $24.16 billion by registering revenues of $25.2 billion. So what, those are game numbers. Last year over the same period JPM EPS were $1.54, so that’s not much of a real gain. Their revenues last year were $24.3 billion, which means their revenue gain was only 3.7%. For the biggest bank in America that’s boasting how well it’s doing, that doesn’t move the needle.
Other banks are in the same boat.
Citigroup Inc. (NYSE:C) beat EPS estimates of $1.10 by coming in with $1.24. They beat on revenues too, but only by .004%. Compared to the same quarter last year, ESP was down almost 18% and revenues were down almost 8.5%.
Bank of America Corp. (NYSE:BAC), same thing. They beat EPS estimates of $0.33 by coming out with $0.36 per share. They beat analysts’ revenue estimates of $20.414 billion by coming in with revenues of $20.6 billion. The truth? Compared to last year’s second quarter, EPS were actually 20% lower and revenue was almost 8% lower.
Another reason EPS and revenue numbers are misleading in the big picture is that they can be grossly manipulated in ways the public, and other analysts really could never understand.
Yes, I’m saying they all manipulate their numbers almost all of the time.
Come on, they’re the banks, we know how they operate. Or have you forgotten?
To get the picture, I look at their stock charts. That tells me the real story.
And the story on the banks right now is that they’re nowhere and certainly not worth the risk they pose, no matter how their earnings have beaten consensus estimates, no matter how their revenues look this quarter.
The Goldman Sachs Group Inc.’s (NYSE:GS) recent chart action is telling us it’s range-bound. Here’s the three-month chart:
More importantly, in the bigger picture, it’s gotten below its three-year support, and broke down through the “neckline” of a head and shoulders pattern. I wouldn’t touch it. Here’s the five-year chart:
BAC looks awful. The stock has support at $15, crashed through that and now can’t get above that level. Even if it does, where’s it going? To $18? Who cares?
Except for Morgan Stanley, which is at least showing tiny signs of life, getting off the long sideways floor it’s been staggering along on, the rest of the big banks look the same.
They can’t get out of their own way – and even if they do, where are they going?
Digging past the headline numbers and into the various earnings reports is telling.
Banks are releasing loan-loss reserves to pump up their numbers. They’ve been cutting staff and lowering compensation expenses to make their numbers look better. But most of them are having worse years in 2016 than they did in 2015.
But because they passed the most recent stress tests and are buying back shares and talking about increasing dividends, investors think they’re starting to look good.
Don’t be fooled.
Banks’ net interest margins (NIM), a critical metric for them all, are still shrinking for the most part, not growing.
And the talk about how the Fed hiking rates will fatten their NIM, forget it.
If the Fed raises rates, and the jury’s out on that move, there’s no way banks can budge their net interest margins more than a couple of basis points, at most. That’s because the cost of money for them will rise commensurately, if not faster, than what they can charge on loans. There’s just too much money in the system and too much competition to lend to better borrowers.
There’s no reason to own any of the banks unless you’re in the mood to speculate, or you buy Wells Fargo & Co. (NYSE:WFC) for its dividend and are willing to add to your position there on dips, which isn’t a bad idea.
On Wednesday, I told you about the hack that drained $55 million in cryptocurrency from the crowdfunded Decentralized Autonomous Organization (DAO), and that a vote by members about how the handle the hack was forthcoming.
Voting by token holders on the future of the DAO wasn’t as exciting as the Brexit vote, but it may have mattered just as much.
Token holders in The DAO (who in a parallel universe known as reality would be called investors, since they converted dollars into a cryptocurrency known as ether and bought tokens, which in this parallel universe would be called capital voting shares) overwhelmingly voted to exit the would-be investment fund by reversing time in their digital Ethereum world, so it’s like the hack – and the $55 million theft – never happened.
Of course it was a no-brainer vote, right?
Who wouldn’t vote to get all their dough back from a hacker who stole $55 million worth of ether from the $155 million crowdfunded pool?
Not everyone. Some folks voted to let the hacker keep what he stole… for the sake of the future.
The DAO vote, like the Brexit, will have far-reaching consequences for your financial future.
Here’s what happened…
Breaking Down the DAO Vote
In the DAO world the vote was about a so-called “fork in the road.”
A “yes” vote to reverse the hack so everyone gets their ether tokens back is called a “hard fork,” while a “no” vote would have resulted in a “soft fork.”
Let’s take a look at each…
The Hard Fork
Proponents of the hard fork, including some of blockchain Ethereum’s founders (from which the cryptocurrency ether comes and was the basis of the “smart contract” upon which The DAO program was built) argued that reversing the chain of events that in the blockchain Ethereum world are supposed to be “immutable” wasn’t a knock on Ethereum, but an admission that the program based on Ethereum was fatally flawed.
That argument, which I agree with, postulates that Ethereum is kind of like the Internet and the DAO was a program running on it. If there’s a problem with a program on the Internet it doesn’t have anything to do with the Internet functioning normally.
Proponents of the hard fork also argued that by not returning what amounts to about 4% of all the ether in the Ethereum world, that “trapped” currency would impact future use of ether as a means of exchange.
The Soft Fork
On the other hand, soft fork proponents argued that in the reality of The DAO the hacker, the thief, did nothing wrong. In fact, he, she, they, were just being rewarded for their activities which were technically, in programming terms, within the rules set out in the DAO’s code.
In other words, if a smart contract is immutable, it should be immutable and irreversible, otherwise a precedent is being set that protects smart contract code mistakes with a full refund.
The hard fork was taken, overwhelmingly, and the hack was reversed.
What does it mean for blockchain technology?
What It All Means for the Future of Blockchain
Now, all blockchain technology and the promise of smart contracts are facing their own fork in the road.
Since it appears that no code is 100% safe, and we’ll never know if any code ever is because coding is a science – which means that its only proved until it’s disproved – will blockchain continue down the path it’s on and take over the world as we know it?
Will smart contracts, based on supposedly immutable code, that we know can potentially be mutated, fulfill their promise of changing how the world works?
Based on the DAO vote, the jury’s definitely still out.
But that’s not going to stop the blockchain and smart contract juggernaught that’s been unleashed.
It just means investors in blockchain technology, investors in cryptocurrencies, and investors who rely on smart contracts better know when they come to that proverbial fork in the road which one to take.
And that means this story is far from over. Stay with me at Wall Street Insights & Indictments as we cover the evolution of blockchain and smart contract technology – and how you can profit.
The concept of a leaderless non-entity entity – in effect a software program running what amounted to an investment fund based on a cryptocurrency called ether, hived off a blockchain platform known as the Ethereum – was a long-shot from the beginning.
While the idea that a decentralized autonomous organization could raise money, cryptocurrency actually, which investors in turn received “tokens” against, representing their investment capital, attracted over $150 million via “crowd-funding is fantastic.
Too bad The DAO, which was supposed to allow token holders to vote on funding other Ethereum-based programs and businesses and hopefully earn a return on those investments, got hacked – literally – to death.
Here’s what happened, and what investors need to know now…
There is a “Lehman” moment out there somewhere – just as sure as there are black swans in the world.
Brexit was scary for markets around the world… but it was not a Lehman moment.
It was, as I’ve said, a “Bear Stearns” moment, a terrible harbinger of impending financial disaster.
Once again, it’s about the banks…
Except this time, it’s not the big American banks – we’re not talking about the likes of JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp. (NYSE:BAC), or Citigroup Inc. (NYSE:C), though they won’t be immune from contagion effects.
On Wednesday, I told you that the next Lehman moment could be brought about by the irreparable insolvency of one or two big Italian banks, or even a few of the big British banks. Both the European Central Bank and the Bank of England have been scrambling to obfuscate just how dire things are in Western Europe. Of course, a look at their balance sheet tells a different story – the numbers just don’t add up.
But the more likely – and far more frightening scenario – is that the entire global financial system will be brought to its knees by a single bank.
Here’s what’s really going on, what to watch for, and what to do if world’s most dangerous bank continues to falter.
On the latest episode of Varney & Co., Shah takes on sobering reality: the markets are starting to look a lot like 2007-2008 again. After Brexit, European banks are in especially dire circumstances – but one country stands out. (Surprise: It’s not Germany.) Shah tells you which banks he’s watching right now – and why their situation frightens him so much.
Plus, find out how he’s playing Tesla, Comcast and Netflix… what Brexit means for Apple… and why Chipotle’s cutesy new ad won’t fix any of its problems.