The rhetoric surrounding the so called Volcker Rule kicked up a notch yesterday when Dick Bove put out a lengthy which you can read here calling for a crash if this gets put into place. He later went on CNBC to recap his thoughts. Basically limiting the growth of banks will, in his opinion, be crash inducing.
As financial stocks were falling and falling for two years the question on CNBC was always about whether now was the time to buy financial stocks. I was on CNBC in March 2008 saying no. I’ve been saying no for a while and still feel that way.
Part of my thesis, as simplistic as it has been, is that if this was the worst financial crisis in 80 years then we should expect more shoes to drop. I don’t know if the Volcker Rule is another shoe or not because it has a long way to go before it can be possibly implemented. Between here and there it could be changed for the better, changed for the worse or simply disappear.
I would not argue with you if you think that the financial system is messed up but heavy handed fixing is going to bring problems because anything that might impede the flow of capital has consequences; how’d that short sale ban work out? I’m not saying things should not be changed or “fixed” just that the initial reaction could be unpleasant. If there is an unpleasant reaction then ok, the market will adjust and then move on. Fiddling with the financial system is different than options expensing (do you even remember that one?).
How complicated do you think this entire topic is? Do you think there are a lot of moving parts? How much of your money do you want to bet on getting this right?
One way to make navigating market cycles easier is avoiding the right things. This is where I am with the US financial system, choosing to avoid it. I was leery of the sector quite a few years ago as it flirted with being 20% of the SPX and then made a big stink later when the yield curve first inverted.
I’ve owned the same foreign banks for a long time (one from Australia, one from Chile and one from Canada), I also have a publicly traded exchange and just added an index provider. Fundamentally this combo avoids whatever might happen with the Volcker Rule. And if that is not another shoe, ok but I think there will be another one that will come and I don’t want to expose the portfolio it.
With a nod to Occam’s Razor, more problems ahead seems to be the simpler conclusion. To the extent you agree there are plenty of way to invest in the financial sector while still avoiding US and European banks. There are obviously plenty of stocks, and ETFs that allow access. iShares just launched several financial sector ETFs and one of them fits right in to the conversation. Decide for yourself if any are right for you, but beyond these new iShare funds there will be other products in the future if you are not comfortable picking individual stocks.