The last few days have brought some good news for both Main Street and Wall Street. The House passed a budget deal, so we can avoid the uncertainty of a government shutdown for at least two more years. Regulators finally agreed on rules that reduce the potential of banks making risky trading bets that spill over into the larger financial system—like those that exacerbated the financial crisis of 2008. Finally, a good jobs report increases the likelihood that the economy finally is reaching escape velocity, a term coined by Mohammed El-Erian to describe conditions where the economy can sustain itself without stimulus.
U.S. Budget passes House by large majority. The House overwhelmingly approved a budget deal, lifting the cloud of political dysfunction that has hung over the U.S. economy. In a 332-94 bipartisan vote, the House passed a budget compromise that sets spending levels for two years and is aimed at preventing any government shutdown in that time frame. The measure would blunt the effect of automatic spending cuts previously enacted by Congress. However, the compromise would not reduce the budget deficit or reform U.S. tax law. Senator Corker of Tennessee was quoted as saying, “To me, a real bipartisan deal is when both sides really get into the crux of solving a problem. Let’s face it—this was a skate-by solution.” The Senate is expected to approve the deal, and the President is expected to sign it.
U.S. Curbs Risky Trading by Banks as it Finalizes ‘Volker’ Rule. “U.S. banks will no longer be able to make big trading bets with their own money after regulators finalized a rule shutting down speculative trading that was a huge business for Wall Street before the credit crisis. The ‘Volcker rule’ seeks to ensure banks can’t make speculative trades that are so large and risky that they threaten individual firms or the wider financial system. Former Federal Reserve Chairman Paul Volcker had promoted the restriction as a simple measure to reduce risk which helped cause the financial crisis in 2008.” Proprietary trade, as it is called, is notorious for creating quick, large losses. The Volker rule will help restore banking to one of its core functions—lending to households and businesses.
Jobs report is even better than you think. The U.S. unemployment rate fell to 7% in November—its lowest level in five years. The Labor Department said employers hired 203,000 workers last month, on the heels of 200,000 in October. “For once this decline was not due in part to lower labor force participation. Instead, both the labor participation rate and employment-population rate went up…in sum, the employment report is really good news for Main Street. It is also good news for risk assets.”
And in case you missed it, click here to read last week’s blog post which gives us some insights into diversification.
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