Fisher Investments Editorial Staff

And In Other News…

By, 03/04/2013

While it seems “sequestration” still has most folks’ attention, there’s plenty of news elsewhere. Here’s what caught our eyes Friday.

The Unwritten Rule(s)

In what we call the opposite of news, it appears the so-called “Volcker” rule will be delayed again. Banks had been given until July 14, 2014 to comply—but that may prove tough since the rule still isn’t written and may not be for some time.

The Volcker rule, proposed under the Dodd-Frank reform law and named for former Fed-head Paul Volcker (who later distanced himself from the concept), is meant to ban banks from engaging in “too-risky” proprietary trades. A fine enough idea with the noble purpose of protecting customers. But when it comes down to brass tacks, often the too-risky behavior legislators want to ban doesn’t look very different in form and function from normal banking operations meant to hedge risk, or even the normal process of making a market in a security. (Never mind the fact there’s scant evidence bank proprietary trading contributed to or exacerbated the 2008 credit crisis.)

But one shouldn’t be surprised anything springing from Dodd-Frank remains unresolved. In this enlightening report, we find as of February 2013 (two and a half years after Dodd-Frank’s passage), 279 rulemaking deadlines have passed—63.1% of them have been missed. Of 398 total new rules required under Dodd Frank, only 37.2%—148 rules—have been finalized, and 32.4% haven’t even been proposed yet. Understandably, Congress has been very busy doing things like coming to accord on the sequester. Oh. Wait.

Trading in Opinions

Friday morning, Gallup published a poll perhaps illustrating the public’s opinion as it pertains to US involvement in global trade. Over the course of February 7-10, Gallup surveyed just over 1,000 adults nationwide and asked them the following:

What do you think foreign trade means for America? Do you see foreign trade more as – an opportunity for economic growth through increased U.S. exports or a threat to the economy from foreign imports? 

57% of Americans—the highest tally in the survey’s 21-year existence—said foreign trade presents an opportunity, versus 35% who said it’s more of a threat. The remaining eight percentage points were divided among those who felt it’s either both, neither or had no opinion. But it isn’t so much these findings that are telling—they’re rather unsurprising. What we note is the continued existence of the common us-against-them approach to trade.

In our view, it makes little sense to view global trade in such a polarized fashion. After all, few major exports are produced without some globally sourced components—intermediate goods. As such, an effort to boost US exports is highly likely to boost US imports as well. For example, consider that’s top 10 ranking of automobiles by US-produced content, none are wholly, 100% American made. Five of these 10 were produced by Japan-based firms, including the Toyota Camry—the most American car by percentage of American-made components for four years running.

But beyond this, consumers are the direct beneficiaries of the competition and increased choice imports provide. Yet altogether too often global trade is thought of as “exporters win, importers lose.” While some can be dislocated in the near term by that competition, the economy at large and in totality benefits from freer global trade.


After a recent currency devaluation, rumors began circulating the Venezuelan government may allow its citizens and businesses to purchase US dollars “above the official exchange rate,” currently set at 6.3 bolivars to a dollar. It’s likely this is at least partly an attempt to level the official rate with the considerably weaker bolivar on the black market (currently about 23 bolivars to the dollar).

All this seems designed to help cure the government’s self-inflicted monetary wounds, like pegging the currency in 2003, devaluing five times since and tightly controlling its currency and private property—including declaring dollar purchases illegal unless purchased through the state. These policies are largely responsible for creating a shortage of dollars in the private sector—not to mention the aforementioned black market for currencies and hot inflation.

But even if one considers the incremental opening a plus, in Chavismo Venezuela, we doubt many will openly declare their preference for the dollar at any price. Which means most who are inclined to favor the dollar won’t alter their behavior much if the state opens up dollar purchases, as long as dollars can be more freely purchased elsewhere (albeit illegally). Meaning, unfortunately and unsurprisingly, Chavez’s latest fix likely doesn’t help much at all.

EU Vs. Banks, Round 3,957

EU regulators continued their assault on financial services this week, announcing a new cap on bankers’ bonuses. Beginning in 2014, bonuses will be capped at the level of annual salary, or double if shareholders approve. If a bank’s headquartered in the EU, the cap will apply to all of its global operations. It’ll also apply to EU-based operations of non-EU banks.

As we’d expect, the UK (home to 144,000 banking staff) denounced the move—London Mayor Boris Johnson, with the most colorful statement, called it “possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire.” And we rather agree: No doubt the industry’s suffered occasional skullduggery, but this seems the wrong way to combat bad behavior—it doesn’t incentivize good practices or prudent management. Rather, it introduces myriad unintended consequences.

For one, it incentivizes EU-based banks to move headquarters to New York, Hong Kong, Singapore, or other friendlier shores—bonuses would be capped in the EU, but global pay would otherwise stay status quo, allowing them to better compete for top talent. This exodus would hollow out London’s banking industry, to the detriment of the entire UK economy.

And those banks remaining in the EU would find other ways to keep pay high in order to prevent an industry talent drain. For example, they’d likely start paying higher base salaries, which reduces banker accountability. Bonuses aren’t automatically awarded—they’re performance based. If performance isn’t up to par, bonuses get dinged. If less of a banker’s total compensation is performance-based, there’s less incentive to perform well.

In order to remain globally competitive, the EU needs a robust financial sector. Instead of hollowing it out with bonus caps and the financial transactions tax, regulators should concentrate on supporting the industry so it, in turn, can support economic growth.

Brazil’s Capital Courtship Road Trip

Brazil President Dilma Rousseff and Finance Minister Guido Mantega hit the road this week, seeking to drum up private capital for infrastructure investments. Latin America’s largest economy is trying to bolster its somewhat disappointing 2012 economic performance, which saw growth slow to 0.9% (down from 2.7% growth in 2011 and an impressive 7.5% in 2010). While reacceleration is broadly expected in 2013 (the government expects Brazil to experience 4.5% growth this year, others a more conservative 3.5%), it’s still pretty far removed from the heady growth of recent years.

The Brazilian government’s private capital “recruiting” effort is a response to the lackluster results of Rousseff’s recent policies. Ironically, it was Rousseff’s rampant use of capital controls and insistence on having her hand in economic policy (such as aggressively cutting interest rates, capping certain prices and taxing some industries) that largely shook investors’ confidence and drove them away in the first place. So even though the government extended tax cuts and pressured banks to lower lending costs (to name a few stimulating attempts), Brazil’s economy did not respond as desired—government intervention tends to have that effect.

Thus, highlighted by meetings with billionaires and heads of banks and trips to New York and London, the government is again courting private investors to improve growth. Now while we’d prefer that the government outright amend the offending policies, we do applaud the government’s recognition that the private sector is the way to go.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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