Ad Hoc Commentary – death of proprietary trading

JP Morgan’s exit from commodities trading will probably be remembered as the beginning of the true exit from proprietary trading by big banks.

Cynics are probably right for alleging that, until recently, the closing down of proprietary trading desks were superficial. Cynics allege that proprietary traders were simply renamed to market-making desks on the veneer, but actual roles of risk taking remains largely untouched. The modus operandi is to blame the occasional failures of proprietary trading on rogue trading.

Senator Elizabeth Warren (D-MA) had, for some time, been pushing for the reinstatement of Glass Steagall. It probably does not matter. Even if the political elites want to, there will likely be neither political nor financial capital left to bailout the banks in the next crisis. Big banks will be on their own when the sovereign debt crisis hits at the end of this US dollar strength.

Some pundits claim that JP Morgan’s exit signals that the commodity boom is over. Saying that the commodity boom is ending is tantamount to saying that US dollars will be strong over the next two years. Yours truly agree on US dollar strength. But the link to JP Morgan’s exit is tenuous. The best can make money in both bull and bear markets. But the best can’t generate profits when capital costs are high due to Dodd-Frank, and where there are no Bernanke-put to heap trading losses on.

Thus, we can expect more big banks to exit capital hungry businesses like commodities. Ms Yellen, the most likely successor to Uncle Ben, will not be providing Yellen-puts that socializes trading losses on taxpayers.

Good luck in the markets.