Change is a coming

Well I never figured that Obama would be the catalyst for things to turn a lot less rosy. The "Yes We Can!" man is applying this motivational phrase to changing the banking industry. Paul Volker seems to have gotten the ear of the US President and based on Volker's uncompromising stature and previous actions to save the USA from a high inflation, the banking industry must be getting a tad nervous.

Volcker chaired the Federal Reserve from August 1979 through August 1987, during which period the U.S. inflation rate was brought down from 13% to 4%. He managed to do this by hiking interest rates aggressively and showed he was not afraid to take unpopular decisions. The current decision to drop prop trading and hedge funds at banks and possibly break up these "To big to fail" financial behemoths might actually make him very POPULAR! There is a growing tone of resentment taking hold in the general populace as the average tax payer reads stories of Goldman Sachs paying out record bonuses after being bailed out by their Sugar Daddy the FED (aka the tax payer). The Banks seem to have a wonderfully loaded coin to play with - heads you win, tails you get bailed out... Therefore with Obama's ratings dropping and more and more people turning against banks and there unsavoury practices, Obama's has turned to a man not afraid of stepping on any toes.

This was the fist salvo fired over the Banks bows and mark my words - this is the beginning of a financial storm. Banks have exposure in derivatives running in the trillions. JP Morgan alone has notional exposure of 80 Trillion! Banks are so interconnected nowadays that if one folds they all go down.

Banks have evolved from being vehicles for simply allowing depositors easy access to their funds and providing loans to purchase large assets such as homes to incredible complex entities which are increasingly difficult to regulate. Entering the financial industry in the past few years was the place to be, the place where the moneys at, the place where innovation in all sorts of financial products happened. Products which have become increasingly difficult to understand or measure risk. The brightest of the bright streamed to this industry in hope of earning millions rand bonuses, where fortunes can be made (or lost) in a matter of minutes. When you are trading 50 or 100 million rand positions it all seems quite surreal - kind of like the "de-association" effect converting hard earned cash for casino chips. For me the stand out(or let down) of this industry is it has added nothing to the production of physical goods, tangibles so to speak. No physical plants have been built, no manufacturing of goods, nothing but financial engineering and leveraging up real money to 100-200-X times its value.Taking on increasingly large risks, all to chase the almighty buck. Forgetting their ultimate role as the custodian of peoples hard earned money.

Jim Rodgers, the legendary investor which used to (still does?) run the Quantum Fund with George Soros remarked a while ago - "I see young bankers in there twenties driving Lamborghini's - something is not right with this picture...." Do you agree? I sure do. He sees farming as the next industry of the future and farmers will be the ones driving the Lambo's. I for one would agree - tilling land, producing food and making a success in this uncompromising industry seems to me a lot more beneficial to us as human beings.

If your teenager/student is aiming for the banking industry be warned this industry is heading for alot of pain and is about to be dumbed down to it true purpose. Financial products are about to be simplified to levels that most can understand, obfuscated exotic financial products will be heading for the dust heap and the mathematical geniuses of our time which spend their time engineering financial products will rather move to more productive pursuits.

Good Trading