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I’ve been discouraged for some time by Obama’s apparent reliance for advice on two of the architects of the transfer of wealth and power to the mega investment banks. Larry Summers, who is the economic adviser on whom Obama relies most heavily, led the push for repeal of the Glass-Steagall Act in the Clinton Administration. The repeal of this act allowed the big investment banks to swallow up commercial banks and was instrumental in their growth in the ensuing decade. Tim Geithner was the NY banks representative on the Federal Reserve Bank before becoming Treasury Secretary. The Federal Reserve is run by the banking system for the benefit, first, for the biggest banks and only second, for the benefit of corporations.

There is absolutely no one in the inner circle of Obama’s economic advisors who doesn’t believe fully in that the current financial/corporate, free market economy. There is no one within the administration to tell Obama of the pressing need for fundamental changes in the management and operation of our economy and in the political economy of power. Even Paul Volcker, who is no radical thinker, has apparently been pushed to the sidelines.

When you add to Bernanke to Summers and Geithner, you have a trio seemingly hell-bent on transferring whatever the required amount of wealth from savers and taxpayers to the financial institutions to reinflate them to the bloated size they were before the meltdown. The biggest banks are being made whole while the rest of us are living with our wealth reduced by one-third to one-half, or more for many unlucky enough to buy and mortgage houses at the top of the bubble.

When I read a number of news items last week, my sense of discouragement grew. The biggest investment banks, led by Goldman Sachs, the biggest, baddest, and most successful, are upping bonuses, ramping up speculation, and using all of their political clout (which is massive) to water down the gentle regulatory reforms proposed by Obama.

As a hopeful investor, I was particularly struck by news that Goldman Sachs and Credit Suisse had both mightily expanded their “program trading” activities. Program trading is minute by minute trading in massive quantities, using computers and sophisticated programs to profit from discrepancies in the pricing of securities – and also to profit from inside information and from their abilities to move the market. The numbers are staggering. In the week ended June 19, 2009, 40 percent of all trades on the NY Stock Exchange were program trades. This was an increase from 30 percent the prior week. As Zero Hedge said in reporting these numbers:

Virtually every broker saw their Principal PT operations double week over week: seems like everyone is brokering those ETF trades now. Poor SPY and IWM [popular ETFs] are being mangled 10 ways from Sunday nowadays.

The absolute numbers are equally staggering. Goldman Sachs’ program trades were almost a billion shares in the week, and Credit Suisse’s were half a billion.

With this amount of domination in the market by the investment banks, it makes me wonder what are the odds against me in the market?

The resurgence of the investment banks is not just in the US, but in Europe, too – where governments are equally dedicated to bailing them out. Reuter columnist Paul Taylor wrote on June 24, 2009:

No sooner has the financial system begun to stabilize than Big Finance is reverting to its old ways — aggressive hiring, remuneration on steroids, wriggling out of regulation or threatening to decamp to evade tougher supervision.

These are is not the rantings of some crypto-Marxist City-basher, but the considered view of one of Europe’s most thoughtful financial regulators.

Today’s Der Spiegel has a lengthy article, “A Real Free Lunch” detailing the extent of the transfer of wealth to investment banks in Germany, and their use of the low-interest loans from the central bank to make safe, profitable investments and speculations, rather than to loan to businesses – the ostensible, public justification for the bank bailouts.

The extent to which speculation appears to be driving the markets is indicated by how closely all asset classes –stocks, currencies, and commodities – have been moving together. I’ve noted that there is an almost perfect correlation between the price of the Australian dollar and the S&P 500! This seem completely bizarre.

In the chart below, the blue line is the S&P 500 index. The weekly ups and downs tracked very closely, though the change in the Australian dollar was generally more muted.

The close correlation in prices has been widely noted, and taken by some as a warning sign. A recent article in Bloomberg spelled out:

Cash Best as Record Correlation Hints Herd Collapse (Update3)

By Eric Martin and Michael Tsang

June 29 (Bloomberg) — Investors are moving in lockstep like never before, driving up stocks, commodities and emerging markets and risking a replay of last year, when they all plunged the most since World War II.

The Standard & Poor’s 500 Index, whose increase in the past three months was the steepest in seven decades, is rallying in tandem with benchmark measures for raw materials, developing- country equities and hedge funds. The so-called correlation coefficient that measures how closely markets rise and fall together has reached the highest levels ever, according to data compiled by Bloomberg.

…

The gains [in all markets’ pushed correlations between the indexes to 0.74 this month, based on percentage changes over the past 60 days. That’s the highest in at least five decades, data compiled by Bloomberg show. A reading of 1 means two assets move in tandem, while zero means no relationship.

The correlation never rose above 0.66 before this month.

Gains in U.S. stocks have mirrored those in crude oil as never before, with correlations above 0.7 this month, according to data compiled by Bloomberg.

Full Article

David Rosenberg, of Gluskin Schiff, a Canadian economist whose insights I respect, pointed out the correlation and warned of its implications:

June 4, 2009
Everyone is back in the same trade

• Buy stocks (massive multiple expansion – S&P 500 priced for $75 operating EPS)
• Buy commodities (still long-term bullish but a pullback is definitely overdue)
• Buy non-Treasury bonds (same story as commodities – long-term bullish on corporates, but supply is now coming in droves and being gobbled up – this is NOT the contrarian trade of six-months ago)
• Buy gold (again, in a secular bull phase, but the dollar is not going to zero and being bearish on the greenback has become far too fashionable – especially in the wake of Bill Gross’s latest missive; the Euro is saddled with problems at least as deep as the USD, if not deeper)
• And of course, sell Treasuries (that was a good trade coming off the 2% lows on the 10-year note, but what we just saw crammed into six months, which took 48 months to accomplish in the last bear market in govie bonds, was yields soaring 175bps from the low). Sentiment on government bonds is exceedingly bearish and inflation views have become too extreme for my liking. I believe there is a lack of appreciation from what history tells us about the aftershocks that occur after a cycle that was dominated by a credit collapse and asset deflation, as opposed to a garden-variety inventory-led recession. In five words: economic fragility, lingering deflation pressure.

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What we are seeing is the re-creation of a finance-dominated economy, with the hedge funds and investment banks using easy money to play with our futures. This is not a pretty picture, and it is not one that seems likely to get any better. The central banks, which are creatures of the banks, are calling the tune around the world. Most politicians, even if not in the pay of the banks, appear to see no alternative for “saving the economy” to pumping up credit through the banking system.

I have more reasons for being discouraged, but I’ll save those for another day.