Before we go into trading strategies, which I'll cover tomorrow, let's set the stage for the reasons as to why the sudden shift in tactics I urgently clammored for on Friday.
On Thursday, President Obama did something I would have thought previously unthinkable: he took on the Wall Street Boys Club! The President called for sweeping reforms by preventing "banks", such as Goldman Sachs, JPMorganChase, Bank of America and Citicorp from running their own proprietary trading desks, sponsoring hedge funds and private equity funds. This is big. The "banks" won't be able to make any money unless they do what banks are supposed to do... LEND!
In addition, the President further surprised this pundit by distancing himself from Time's Man of the Year and current head of the Federal Reserve, Ben Bernanke. Standing behind Obama was none other than the looming presence of Paul Volcker, who I maintain is THE BEST FED CHAIRMAN OF ALL TIME!
The significance of Volcker is NOT that he will replace Bernanke when his term expires. Rather, it is Volcker"s presence ALONE which indicates that he will have significant input into the next FED chairman and the policies it employs now believed to be Vice Chairman Don Kohn.
Regardless of President Obama's motivations for these two moves, Marko's Take is KUDOS!
Now, let's go back a bit in history as to make it clear why Volcker's presence is such a critical piece of information. Volcker was first appointed to the FED chair in 1979 by Jimmy Carter and continued for two terms into 1987, when he was replaced by Mr. Asset Bubble Sr., Alan Greenspan, aka the "Maestro".
Volcker gave the economy some tough medicine, which successors Greenspan and Bernanke were loathe to do. Volcker's Fed is widely credited with ending the United States' stagflation crisis of the 1970s. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983. The federal funds rate, which had averaged 11.2% in 1979, was raised by Volcker to a peak of 20% in June 1981. The prime rate rose to 21.5% in '81 as well!
Needless to say, the stock market did NOT react well then and I expect it won't now. The Dow finally bottomed in 1982 before embarking on 20+ years of incredible wealth creation. Even more revealing is that once Volcker's measures began to take root, the Gold market was in its final mania phase. Gold topped in 1980 at $850 and went into a 20 year coma.
Therefore, as you may be gathering, we now have a game changer. I learned the hard way, while managing my own series of hedge funds, that getting wedded to a particular outlook is DANGEROUS. When one fails to acknowledge the significance of these sorts of events, one risks letting a cavity turn into a root canal.
The BEST loss is an early and QUICK loss. That way one can re-group, digest the information and proceed accordingly.
It is now believed that Bernanke's tenure is so tenuous that he may not even last until the next planned FED meeting next week, to be replaced by Kohn on an interim basis. Kohn's track record and views are not well known. However, if they are intended to reflect Volcker's desires, then frankly they don't matter.
Democrats on Friday could not wait to distance themselves from Bernanke. Defections included Barbara Boxer and Russ Feingold.
I don't know about you, but right now I feel pretty audacious! I have HOPE and you should, too, although the medicine will require a painful adjustment process. But without it, there was no doubt that we were cascading down a path for which there might become a point of no return.
Tomorrow, we'll discuss how to play "Obama's Big Swerve" in both the Stock and Gold Markets.
Disagree? TAKE ME ON!