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Finally, there it is, the finance bill has been agreed upon, but what do I do with my portfolio?
The answer is not obvious, unfortunately. The finalized bill takes away the uncertainty of surprises, a good thing for markets. Uncertainty is always traded at a discount, so we can expect a very short term spike in stocks. Additionally, taking away risk-taking from banks is definitely a good thing, back to good ol' banking: deposits and lending. Investment banks will still play the information asymmetry game, but CFOs will get smarter.
Indeed, all the prop trading and hedge funds within banks will have to be carved out, or simply closed.We can therefore expect new hedge funds to be created, and some of these so called top-notch traders to join CFO offices in the industry. This knowledge transfer to the industry is both good and bad. It is good because companies will be able to benefit from more financial knowledge, better hedging, and they won't be easily screwed by investment banks. Unfortunately, it also means that risk taking will now slowly move to the industry. Expect some high profile blow-ups in the industry in 5 to 10 years from now.
Coming back to the investment banks, they will massively migrate to emerging markets. The information asymmetry game is still alive in emerging markets, were selling exotic products under the name 'no risk - sure win' umbrella still works. Debt-fueled growth will now shift to emerging markets.
However, in terms of good ol' banking, growth will not be fueled by banks and debt in developed economies. Banks are being reined in, lending standards are toughened, and anyway, banks are not in the mood for lending, simple. Medium term will therefore see a very slow economic recovery, don't expect the S&P to reach 1400 anytime soon.
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