The Volcker Effect
Conventional wisdom says the Dow jumped nearly 3% Friday on the following perverse logic: Awful unemployment numbers would spur Congress to speed up passage of the “stimulus” bill, and happy days would soon be here again.
I have an alternative theory: After a lull of a couple of months, Paul Volcker is back in the news.
And when Paul Volcker’s in the news, the market feels good. It’s the Volcker Effect. He shows up on TV, it’s market Prozac. A warm glass of milk. Endorphins flow as traders conjure fuzzy memories of the guy who put the inflation tiger back in its cage and sparked a secular bull market in stocks.
But don’t take my word for it. Just look at his “news reference volume” on Google starting late last fall and compare it with a chart of the Dow. You’ll find a rough but compelling correlation.
Think back to the final weeks of the election cycle last year. It appeared Obama would emerge the victor. For all the campaign contributions he got from the banksters, the prospect of “change” still unnerved the broader market. From mid-October the Dow lurched downward about 1000 points in the space of ten days.
But late in the month, Obama started convening pow-wows of assorted worthies to discuss the economy. And standing right next to the candidate in most of the photo ops was Paul Volcker. The Dow zoomed up about 1500 points by Election Day.
From there, the Dow fell about 2000 points as Volcker seemed to fade from the scene and attention focused on the overall makeup of Obama’s economic team. But late in November, as word filtered out that Volcker would be named chief of an “Economic Recovery Advisory Board,” the Dow spiked again — not to the Election Day high, we still haven’t been back to that level — but it was a noticeable movement.
Ever since, the Dow has been range-bound between 8000 and 9000. And Volcker has been nearly invisible. According to Bloomberg, he’s been caught up in office politics with Larry Summers, for whom office politics appears to be casual sport.
But on Friday, shortly after the jobless numbers came out, Obama and Volcker showed up on TV again, finally naming the members of Volcker’s panel. There’s your 3% pop in the Dow.
Not that this market confidence is particularly deserved. For a panel that’s billed as comprising “outsiders” providing a “fresh perspective,” some of the names look pretty inside and stale. There’s Bill Donaldson, who as SEC chairman in 2004 went along with Hank Paulson’s demand to let the investment banks jack up their leverage from 12:1 to as much as 40:1. That turned out well. There’s Jeff Immelt, who helped transform GE into a company whose primary business was lending money to its customers so they could buy stuff from its now-secondary businesses. That turned out well. And there’s Penny Pritzker, subprime lending pioneer who helped blow up Chicago’s Superior Bank years before subprime became front-page news.
Why Volcker wants to tarnish his reputation with this crowd so late in life, at a juncture when the chances he could take credit for a turnaround are so slim, I have no idea. But there you have it.
Already this morning it appears the Volcker Effect is wearing off because Treasury Secretary Tim Geithner’s scheduled announcement of “Son of TARP” has been put off from today till tomorrow. The official reason is the administration wants to keep the focus on getting the “stimulus” passed. But as the Wall Street Journal reports, “The administration hasn’t settled on exactly how [the plan] will work and intends to hash out the structure with the private sector over the next few weeks.”
Not exactly confidence-inspiring. As I said on Friday, Geithner has only one shot at this. If he comes back next week or next month to fine-tune or tinker with this thing, markets will write him off as Hank Paulson reincarnated, the Dow could easily slide 2000 points, and the Volcker Effect will be rendered irrelevant.