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Sometimes we just don't learn from the past


Five Wood

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A very interesting thing happened last week that may affect investments in the American banking sector. We’ve all seen the collapse of oil prices in the past few months and in general I think it’s a good thing for American consumers and American business as a whole.

 

The problem is that the price change in oil was too large and too fast. In the near future as oil derivative contracts (futures & options) come due there will be massive losses for anyone who was on the wrong side of those contracts.

Under the 2010 Dodd-Frank financial regulation bill, banks had to separate their federally insured deposits from their riskier trading operations — the ones that deal in derivatives. This was a lesson that was learned all too well in the market crash of 2008.

 

“But last week, at the behest of bank lobbyists, the House slipped into a must-pass spending bill a repeal of the divide between traditional banks and derivatives trading. Banks say the move will preserve their ability to help farmers and businesses hedge against risks.” Quote taken from an AP article.

 

What this means is that banks can once again use federally insured deposits to offset losses in their derivative trading. These contracts are coming due and I fear that many of the banks know they won’t have the resources in their trading units to make good on their losses. Hence the rush to amend the bill last week.

 

I normally don’t trade on “what if” thoughts but this one has me worried enough that I closed a position on XLF until the oil markets calm down and most of the present contracts are worked out of the system.

 

 

Jim

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Since we work in the oil field, abit at the bottom of the pole, I've followed the downward spiral and all the "Hypothetical Guesses" at what's causing it.

My little ole opinion, is that the US government and Saudi's are intentionally dropping prices to break the Russian and Iranian economies forcing them to toe the line or be bankrupt with millions of mouth to feed.

As far as having investments in the oil market. If you didn't sell back in June or July, I'd just hold and wait. It will come back in this consumer driven economy.

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Jim, you make a very interesting post here. I usually follow such news but missed that one. I just did a search and found a couple of places that have the article you reference. I am going to have to chew on this one and think about it before I comment very much on the subject of the article.

Memories of financial crisis fading as risks rise

 

I do think that the current oil price situation is also going to make some major impact on the commodities traders. To me that type of trading is very little different from what day traders do. The futures market has always made money for one person on the losses of others but this time it could be astronomical if it stay low for very long. I doubt that the US government plays much part in the current trends since the oil industry in this country is all privately owned, but it could well be international politics in the way that some other countries are pumping oil in spite of the decline in prices. I have also heard speculation that it is due to efforts by OPEC to stop the Keystone Pipeline project from happening.

 

On another front, there is a lot of concern in the oil related businesses in this country about jobs which the current energy boom here has created. I know some folks who work in businesses that supply equipment to the drilling companies that are gearing up for a major slowdown. That could rattle all of the way through the economy of our country.

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Kirk, We are already seeing cutbacks here in the Fayette County area. 2 rigs have left and 1 rig will be released at the end of its current lease.

To dig back a little further, there was some oil manipulation in the early 1980's that Reagan did with OPEC. They say it was to finally end the Cold War. Oil prices along with the sheer amount of military spending that the Soviet economy couldn't keep up with.

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I think that some of us learn from the past. The people who allowed the banks to do that by putting in in a required spending bill

are in the pockets of the big banks. Not to hard to see where the banks contributions go. As for the slow down in the oil and gas

industry, there will be losses of good paying jobs but most of it is because of the increased US production of oil and gas due to fracking,

shale oil and tar sands oil. The US economy has always experienced job growth and job losses in different industries. Here in Texas

there will be job losses but will the extra money from much lower fuel prices be spent in ways that will create new jobs elsewhere?

That is the way that capitalism works.

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If we have to bail out the banks again, that will be the 3rd one since the 80's. You remember the S/L, 2008, and shall we say 2016?

They get bonus's, we get recession.

 

Duke, I guess I should be careful how I respond as it could easily become a political discussion and Escapees would rather I not go there.

 

From an investment standpoint though I was very annoyed that the safety of my investment was quietly changed overnight and everyone involved hoped no one would notice. The Dodd - Frank bill was a much publicized action that greatly enhanced the safety of an investment in private sector banking after the crash of 2008. Every investment has inherent risk involved and every investor knows that. But this event just seemed underhanded to me.

 

Jim

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Too late, already passed. Anyway, unless you contact them with a note written on the back of a $100k check they won't hear you anyway.

So can you give us a bill number? Passed by both houses and signed into law? The article only says a "must pass bill" and none of the stories I can find point to the bill nor tell us what bill and when passed?

 

As to the contacting Congress, I can't speak for those you have but I fairly frequently am in contact with my elected representatives and have had a very different experience than you imply. If enough voters take up an issue, most Congressmen will respond.

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So can you give us a bill number? Passed by both houses and signed into law? The article only says a "must pass bill" and none of the stories I can find point to the bill nor tell us what bill and when passed?

 

As to the contacting Congress, I can't speak for those you have but I fairly frequently am in contact with my elected representatives and have had a very different experience than you imply. If enough voters take up an issue, most Congressmen will respond.

 

Kirk,

 

The first article explains the general situation quite well. The second article is an interesting statement Senator Warren made on the subject. And the third is an article posted from a site I'm not familiar with but seems to explain rather well how this may affect banks with the drop in oil price.

 

http://www.cnn.com/2014/12/17/opinion/mcgahey-dodd-frank/index.html

 

http://www.warren.senate.gov/?p=press_release&id=667

 

http://www.truthdig.com/report/item/russian_roulette_taxpayers_could_be_on_the_hook_for_trillions_in_20141226

 

I am certainly not an expert on banking regulation and this is a very complex subject. I am only looking at this from the angle of someone who sometimes invests in bank stocks and the results the repeal may have on the derivative trading at some banks and subsequent hidden risk this may add to owning those stocks.

 

Jim

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So can you give us a bill number? Passed by both houses and signed into law? The article only says a "must pass bill" and none of the stories I can find point to the bill nor tell us what bill and when passed?

 

As to the contacting Congress, I can't speak for those you have but I fairly frequently am in contact with my elected representatives and have had a very different experience than you imply. If enough voters take up an issue, most Congressmen will respond.

 

My check comment was somewhat tongue in cheek.

 

The bill has passed both houses, not sure if the Pres has signed yet, but he said he would.

 

http://www.npr.org/blogs/thetwo-way/2014/12/11/370132039/house-poised-to-vote-on-controversial-cromnibus-spending-bill

 

http://www.huffingtonpost.com/erik-ose/after-congress-secretly-v_b_6330644.html

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The bill was the one keeping the money flowing to the next 11 or 12 months.

It is usually called The Spending Bill.

 

Another item in it allows pension funds that go across multiple companies (usually Union pensions but there are some other ones) to reduce the pensions for the younger or newly retirees. Too much exceptions to go into it here.

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  • 2 weeks later...

I don't know if anyone noticed what happened with the Swiss Franc this week but it sure is interesting. The following quote is taken from the Business Insider.

 

"Global currency markets are roiling after Thursday's surprise decision by Switzerland's central bank to end a three-year-old policy that limited the franc from appreciating too much against the euro. The move sent the franc soaring, triggering hundreds of millions of dollars of losses at banks including Barclays and Deutsche Bank and bankrupting several currency brokers overnight. Many financial observers have lambasted the Swiss central bank for failing to signal the move was coming."

Read more: http://uk.businessinsider.com/jim-rogers-i-predicted-the-swiss-franc-shocker-2015-1#ixzz3P2wpQDCL

 

Currency markets, like the oil market, depend heavily on the use of derivatives (futures & options) to function. The reason I'm posting this here is because this is an excellent example of what can happen when there is a rapid and extreme swing in the price of the underlying instrument (currency, commodity, or stock). Which goes back to my original post on the rapid drop in the price of oil. If the oil price stays down, as these contracts come due there may be problems for any banks that have heavy exposure to the oil market.

 

I'm not trying to say the financial world is coming to an end. Nothing of the sort. My only point is that as I originally posted we had a regulation in our banking industry that prohibited the banks from co-mingling depositor funds with the banks derivative operations and this regulation was quietly changed as the price of oil was crashing.

 

If the price of oil remains low it will be very interesting to see how this plays out.

 

Jim

 


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