Sometimes when I read the papers there is a disconnect between the reported stories and what seems to me to be obvious. Recently there is a lot of ink spilled about OPEC reaching an agreement about cutting production to raise the price. Every major oil producer is strapped for cash and the chance of these countries reaching a agreement to cut their cash flow voluntarily is non existent. The US-Iran deal allows Iran to sell their oil on the world markets putting pressure on Russia and Saudi Arabia who are  pumping oil with both hands because they need the money. If I was betting on a sustainable oil price increase I would be very nervous.

The Financial Times has an article this morning about the Italian banking system. Ever since the financial crisis in 2008 the worry about the banking system in Italy has been bubbling below the surface. I don't believe anyone has done anything about it and it seems ready to finally surface depending on the referendum next week. Throw an Italian banking crisis on top of Brexit and it might be time to turn on the fasten seat belt sign and strap in for a bumpy ride.

Why bank stocks in the US markets are up big since the election is a mystery to me. Traditionally a Republican administration is favorable to the industry, but the incoming President ran anything but a traditional campaign. There was a large component of populism in his victory and this will create a conflict between the financial industry and the voters who supported his election. Some direction about dealing with this dilemma will be indicated by whoever is appointed Secretary of the Treasury. Stay tuned.

Random thoughts coming into spring 2016

The world is awash with oil and will remain so for the foreseeable future. Major producers like Saudi Arabia and Russia will keep pumping as much as possible for one very simple reason, They need the money. Putin is trying to distract the Russian consumer from the disastrous domestic economy with his military based foreign policy, but invading countries is expensive. The Saudi's have been living fat dumb and happy on oil but now they are caught with no plan B for their economy. Look for the oil rally to fade soon.

Bob Dudley the CEO of BP received a raise last year from 16 million to 19 million. According to Bloomberg News "The bumper payout came despite an annual loss of $5.2 billion, a collapse in the group's share price, and plans to shed 7,000 jobs by the end of 2017." Since making 16 million per year should see you through the winter, an additional 3 million can't matter all that much. Isn't there one person at the company or on the board who might have suggested to Bob maybe a raise is a bad look this year since business sucks? If this CEO accepts a raise of this magnitude during a time the company is struggling, is he the kind of leader that puts himself or the company first?

Goldman Sachs is now offering saving accounts on line to individuals for as little as $1.00. What is wrong with this picture? Goldman who became a bank during the financial crises of 2008 is now trying to get funding directly from small investors. A year ago I doubt Goldman even knew there were people in the world with less than a million in ready cash is now reaching out for the "little guy". Do you think this is to help the "little guy" or Goldman? Let the buyer (depositor) beware!

Just in case anyone thinks Wall Street has any self perception, I was reading the Wall Street Journal this weekend during the NYC blizzard and came across an interesting article. The article stated that head of Goldman Sachs Lloyd Blankfein and head of Morgan Stanley James Gorman had taken a pay cut this year. It seems that poor Lloyd and James will have to struggle through the winter with only 23 and 21.5 million respectively, which was one million less than last year. In what parallel universe can this be described as a pay cut? Are we supposed to think that these men are being punished by their companies? "Yes that will teach them" "If you don't get better next year you will only get 20 million"

Additional random snow bound thoughts:

With the drop in commodities world wide it will be extremely hard for the Fed to raise interest rates according to the schedule everyone expected this year.

The rating agencies (Moody's and S&P) still don't get it. Case in point, Moody's finally figured out that oil was dropping like a rock so just last week they announced they were going to review oil credits. Where have they been for the last year?

The media / press is lazy. In today's world of the 24 hour news cycle there is more filler and idiotic opinion than any semblance of diligent fact based reporting. The current topic in the financial sector is when / whether the Federal Reserve will or won't raise interest rates. What is missing in all this chatter is the fact that anything the Fed does in the next four months is meaningless. If the Fed decides to raise rates...So What? It will have no effect on the economic activity of this country or any other. There will be some speculation in the currency markets but it will be over quickly. Nothing the Fed is contemplating will have any effect in the real world. At best whatever the Fed does is window dressing but if you listen to the talking heads on TV you would think that the fate of the world was being decided on September 17, 2015

The main reason the Fed would raise interest rates is to choke off the economy and kill inflation. Commodity prices are falling because China has finally owned up to being just one big Government spending binge. The world is running out of storage for all the oil sloshing around the globe. Combined with the  stock market performance last week, which was a huge deflationary event, there is no economic reason for the Fed to do anything. With the rest of the world slowing down economically the US economy looks OK. If there were any real journalists in the financial news business they would be out talking to business owners, contractors, bank lending officers, local merchants etc. and actually try to ascertain what the US economy is doing. Don't hold your breath

One hundred years ago in the run up to World War 1 the European powers had been dealing with continual diplomatic crises which were resolved with short regional wars or diplomatic solutions. As each event unfolded each country became a little more reluctant to compromise and the national governments started playing to the fears and prejudices of their respective populations. Eventually the world "sleepwalked" into an enormous war. As I look around the financial world and its recurring crises I can see similarities with 100 years ago. Every event creates a little hardening of the national positions (i.e. French comments in re Greece), countries try to use the crisis to enlarge their sphere of influence (i.e. Russia in Ukraine etc.), every country playing the martyr (i.e. Greek premier posturing for the local voters)  and the rest of the world thinking no matter what the crisis will be avoided at the last minute. In 1914 when the world went over the edge most leaders of Europe were on vacation. Catastrophes can happen by accident and the European and Greek positions seems to be moving in the wrong direction.

On Bloomberg radio this morning there was a news item about China cutting the bank reserve requirement. The radio host said the GDP growth in China is around 7%. These two items taken together make no sense to me. Cutting reserve requirements for banks is a massive stimulus move and a clear indication that the central banking authority is worried about growth. If China's growth was an honest 7% I doubt there would be need for an extreme measure such as this. Beware of any economic statistics coming out of China.

Just in case anyone thinks there is not enough media coverage of the financial world, take a moment to consider all the air time and discussion currently about whether or not the Federal Reserve will or will not include the word "Patience" in their press release today.  The fate of the Republic cannot possibly hang in the balance but you would be hard pressed to guess that from all the huffing and puffing on the business channels. Stop! The reality is that the US economy is doing better than it should since the meltdown of 2008. Clearly the recovery is uneven and it has a ways to go. Commodity prices are falling and that will keep inflation in check. Interest rates are low and will be at historic lows for the foreseeable future. In the age of instant communication the world expects instant results from everything.

One thing that would help the economy is a reasonable fiscal policy from Congress. The constant make believe crises about the debt limit combined with the reluctance to fund necessary agencies and trying to address social issues in defense bills etc. wears thin after a while. The best thing for business is a constant somewhat predictable approach to government regulation and spending. This enables businesses big and small to plan for the future. Most business people I have met do not care which political party is in control, all we want is a consistent approach to fiscal policy based on facts not ideology.  

The reality of American elections is that when power changes in Congress the supporters of the newly elected congressmen or Senators expect their voices will be heard concerning legislation. The greater the support (read money) the faster the new Congress will move legislation near and dear to their supporters hearts. Currently the new Congress is looking to reform / modify / gut the Dodd-Frank act concerning the regulation of Wall Street.This comes at a particularly bad time because bank earnings are under pressure from decreased trading revenues. 

In 2008 the the world banking system almost collapsed. The banks having been trying to sell the narrative than somehow it was lower income people buying a house they couldn't afford that was the problem. The truth was that banks and brokerage houses were trading products they either didn't understand or knew were bad and just didn't care because they made so much money from them. Since 2008 the banks have demonstrated no particular ability manage risk i.e. JP Morgan and the 6 billion dollar loss with the "London Whale".  Wall Street is pushing Congress to change the Dodd Frank Legislation to enable the banks to continue to trade derivatives. Derivatives were the basis of the toxic assets that the banks foisted on investors and necessitated the bail out. 

This confluence of events of banks looking for earnings, a Congress sympathetic to Wall Street, a very compliant Federal Reserve monetary policy and a short memory about just how bad 2008 was seems to me to be a recipe for disaster.