Weekly Blather Jan. 25, 1931

No Journal was published Sunday, Jan. 25, 1931. A brief reflection on a more than usually familiar week.

While I see a fair amount of strangely familiar stuff every week, this past week had a couple of ongoing stories that went beyond the usual. First, the really eerie coincidence - at this time in 1931, just as now, the apparently done-deal confirmation of a Fed. Reserve head by the Senate is suddenly in doubt (Bernanke now, Meyer then). And in the slightly less eerie department, we have the Glass committee in 1931 focusing a lot of attention on the involvement of banks in speculation, and the undesirability of doing this with Fed. Reserve backing; and, at the same time now, we have the surprising and welcome return of the estimable Mr. Volcker from internal exile to prominence, and renewed consideration given to his proposals to limit involvement of banks in speculation.

Both of these stories in the current past week coincided with the first downward twitch for a while in the stock market's steady upward progress. Most of the commentary I've seen attributes the market decline to the first item, i.e. to doubt the Senate will confirm Bernanke. On that matter, I'll be content to point you to Steve Keen's really excellent opinion piece. However, on the question of what caused the slight market downdraft, I'm going to lean more toward the second item. This goes back to my Weekly Blather of Dec. 7, which speculated that market movements of the past few months might be largely driven by a return to speculative activity by banks rather than by economic fundamentals. To quote myself:

If this hypothesis is true, a couple of practical consequences follow. First, it suggests that when things do go into reverse, almost everything goes down at once; gold, commodities, non-dollar currencies, bonds, stocks etc. - nothing is a shelter from the storm and the only thing you want to be long is panic. ... Second, it's probably futile to try and figure out when things go into reverse based on economic predictions, since it depends more on when some significant part of the common liquidity pool feeding everything springs a leak. In fact, I wouldn't be surprised if the rallies continue on bad economic news and reverse when the economic news is looking better. The turn may come when some central banks decide to act, but I think the more likely possibility is that it's triggered by some fairly small looking default ... that causes a scramble to get out of linked assets or derivatives ... that causes a margin call or two ... and we're off to the races again.

Is it possible we got a little taste of that last week? In terms of fundamentals, I'm not going to claim I follow macroeconomic data comprehensively, but I have actually started to see some more decent reports recently. I mean, at this point I think earnings reports from some sectors like financials and homebuilders are not very meaningful, but, to pick a couple of companies out of a hat, Intel and Apple have businesses that are basically pretty straightforward (design stuff, make it or have it made, sell it). And both of those just gave reports that can only be called Pretty Good (not just Less Bad). So why the plunge? Might it be the collective result of bank traders across the US suddenly confronting the unexpected and horrifying possibility of losing their accustomed privilege of infinite leverage at infinitesimal personal risk?

To be clear, I don't think the past week's downdraft is likely to extend into a full correction - mainly because I think that the Volcker proposal, like the opposition to Bernanke, is ultimately unlikely to be successful. But I do think it may foreshadow what's to come ...