"Blue Horseshoe Loves Anacott Steel"
Do you remember the line from the 1987 movie “Wall Street”?
The main character, Bud Fox, passes along a hot stock tip from a mysterious investor by repeating the line “Blue Horseshoe loves Anacott Steel.”
Within minutes, Anacott Steel stock began trading sharply higher as word got out and investors started buying shares hand over fist.
I was reminded of this Wall Street storyline yesterday as I watched Jerome Powell’s testimony before the Senate Banking Committee. (Jerome Powell — or “Jay” — is Trump’s nominee to be the next Federal Reserve Chairman.)
As I watched the market respond to Powell’s testimony, I had the distinct urge to call fellow Daily Edge editor Davis Ruzicka and in my best Bud Fox voice state:
“Pssst!! Jerome Powell Loves Goldman Sachs!”
Let’s take a look at why Jerome Powell is the best thing to happen to Goldman Sachs in ten years…
Wall Street Pulls for Powell
As Jerome Powell walks through the confirmation process for becoming the next Fed Chair, the big Wall Street bankers are privately cheering. After all, Powell has the ability to boost profits and make life much easier for these bankers.
Powell is expected to be confirmed by the Senate with very little resistance. After all, Powell is one of the more moderate candidates that Trump could have chosen. At this point, the Senate’s questioning is just a formality before Powell is sworn in as the United States’ 16th Fed President.
As this appointment process takes place, I expect shares of Goldman Sachs (GS), along with Morgan Stanley (MS), Bank of America (BAC), Citigroup (C) and other financial stocks to trade higher.
That’s because Powell is already committing to make two big changes that will drive bank profits sharply higher.
Change #1: Boost Market Interest Rates
At first blush, it looked like Powell was going to be one of the more “dovish” candidates to govern the Federal Reserve.
By “dovish”, I mean that Powell is not expected to aggressively raise the Fed’s target interest rate. Sure, the Fed will hike rates slowly over the next few years. But the Fed’s target rate should still remain well below historical levels.
Of course, you know that the Fed’s target interest rate doesn’t always line up with market interest rates. We’ve recently talked about how flat 10-year Treasury yields have kept market interest rates for CD’s, savings accounts, and mortgages holding steady.
But all of that is about to change.
Because while Powell may not aggressively hike the Fed’s target interest rate, he will reduce the Fed’s balance sheet.
Right now, the Fed holds about $4.5 trillion worth of bonds (including Treasury bonds, and mortgage-backed securities). By purchasing all of these bonds during and after the financial crisis, the Fed kept market interest rates exceptionally low.
But Powell is determined to reduce the Fed’s balance sheet by selling bonds or allowing existing bonds to mature. Yesterday, Powell told the Senate Banking Committee that he would like to see the Fed’s balance sheet between $2.5 and $3.0 trillion in the next few years.
By selling or allowing these bonds to mature (without buying new bonds), Powell will naturally cause market interest rates to rise. And in a higher interest rate environment, banks like Goldman Sachs will be able to make much higher returns on their capital.
Change #2: Reduce Banking Regulations
Powell ruffled some feathers when questioned by democratic Senator Elizabeth Warren. Warren asked for Powell’s thoughts on banking regulations. And much to her chagrin, Powell stated that current rules for banks are “tough enough.”2
The argument Powell went on to make is that if banks are forced to spend heavily to be in compliance with regulations, those costs will fall to customers.
Powell is on record as advocating a banking system that is both safe, and efficient.
Reading between the lines, this means that Powell will likely be in favor of reducing some of the more cumbersome regulations banks currently operate under. And that means big banks will soon be able to cut costs associated with regulatory compliance.
I also expect banks to have more latitude when it comes to investing their own capital. And for at least the time being, this means banks will have more opportunity to generate profit.
A Cheery Season for Investment Banks
With Powell’s confirmation likely to be in the news for the next several weeks, I expect banking stocks to move steadily higher.
If you’ve been holding shares of banks like Citigroup or Bank of America, you’re probably already sitting on some attractive profits. Both of these Wall Street banks are included in the Lifetime Income Report portfolio of dividend stocks. And both have accumulated attractive returns over the period we have held them.
Shares of these, and other Wall Street banks should move higher this holiday season as investors start to connect the dots and realize how Powell’s appointment should benefit Wall Street.
Make sure you in a position to profit from this move today. After all… “Jerome Powell loves Goldman Sachs!”
Here’s to growing and protecting your wealth!