“He’s strong, he’s committed, and he’s smart…”

That’s what President Trump said about Jerome Powell last month in the White House Rose Garden. Powell is his nominee to replace Janet Yellen as Fed chair.

Trump chose Powell for one thing and one thing only—to roll back financial regulations.

And Powell aims to do just that…

During his confirmation hearing last week, Powell told the Senate Banking Committee that he would cut regulations and raise interest rates.

“I can’t really think of a place where we’re lacking,” he said of regulations… adding that they were already “tough enough.”

Powell’s confirmation is all but in the bag. The committee voted 22–1 on December 5 to advance his nomination to the full Senate floor.

And bank investors are celebrating. The week after the hearing, bank stocks shot up 6.1%. That’s a very large weekly move for normally stable financials.

If you followed our advice back in February (here and here), you’d be celebrating as well.

Back then, we told you that financials had three tailwinds pushing them higher: decreasing regulations, a booming economy, and rising interest rates.

Powell is going to put these trends into overdrive.

Powell’s Plan

Powell wants to make regulations more efficient… while still protecting consumer safety.

To do that, he plans to “tailor” regulations for banks based on their size.

That means stricter regulations on large institutions like Chase and Citibank and less stringent regulations on smaller regional and community banks.

Today, regulations favor large banks. They have enough profits to absorb compliance costs. But regulatory burdens crush the little guys.

Powell would allow small and regional banks more latitude to trade securities and make other investments. He’d also subject them to less stringent “stress tests” than what’s required for larger financial institutions.

That’s why regional bank stocks rose higher than big banks after Powell’s hearing.

When Powell rolls back regulations, expect them to soar even higher.

The Big Banks Will Profit, Too

Powell also wants to reduce regulations on big banks by rewriting the so-called Volcker Rule. The Obama administration wrote the rule in 2010.

The rule restricts big U.S. banks from making “risky” speculative bets with funds from their own accounts through proprietary trading. The goal was to keep banks from the kind of hedging that endangered customers during the 2008 banking crisis.

The problem is that no one can define what’s “risky.” So, to avoid penalties, banks err on the side of caution. This might sound like a good thing, but it’s not.

Here’s why…

Because the Volker Rule is so broad, anything but the safest investments can be viewed as risky. So, all banks crowd into the same lower-yielding investments.

This rule costs the banking industry hundreds of millions of dollars in lost interest. So, large banks will also get a boost when Powell rewrites it.

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Raising Rates

Powell will likely continue Yellen’s plan to raise interest rates as the economy improves. He’s said that an interest rate hike in December is necessary.

As we told you back in February, higher interest rates are good for banks. It increases their net interest margin—the spread between what they charge in interest on loans… and what they pay in interest on savings accounts.

A higher net interest margin helps all banks.

The Perfect Trifecta for Financials

As we’ve said, there’s a perfect storm for large gains in financials over the next couple years.

Reduced regulations, higher interest rates, and a growing economy almost guarantee higher prices for these stocks.

For conservative investors, you can still get into the SPDR Financial Select Sector ETF (XLF), which tracks large banks.

If you want to be a little more aggressive, the SPDR S&P Regional Banking ETF (KRE) gets you more exposure to mid-sized banks. KRE has more potential to pop as Powell rolls back burdensome regulations.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

BIG T’s 3-MINUTE MARKET MINDER

The Great Gold-Crypto Debate

Every year, investment firm Katusa Research invites the most coveted speakers in the natural resource space—and a few special guests from other trending sectors—to its annual conference.

Last month, Katusa held a “Cryptocurrency vs. Gold” debate in San Francisco. And the fireworks were something else…

In one corner sat Jim Rickards, author of The New Case for Gold and three New York Times bestsellers. In the other sat former hedge fund manager and world-renowned crypto expert Teeka Tiwari.

Add in legendary gold speculator (and recent bitcoin convert) Doug Casey, and you have a battle royale for the ages.

Nick’s Note: Tell us who you think won the debate, and why, right here.

CHART WATCH

Global Index Could Set a Record This Month

Global stocks are one month away from reaching a milestone…

The MSCI All-Country World Index tracks stock performance across the globe. It has posted positive monthly gains for every month in 2017.

If the index posts a positive gain in December, it would be the first time in its three-decade history that the index goes through an entire year without a monthly decline.

Daily readers know we’re bullish on global stocks. In fact, we alerted you to this opportunity in September.

This bull market doesn’t show any signs of stopping. You need to be invested in stocks… in the U.S. and around the world.

Nick Rokke

IN CASE YOU MISSED IT…

Legendary speculator Doug Casey has seen gains as high as 721%, 928%, and even 2,154%.

But he recently told us about what could be “the biggest speculation in history.” Doug gives all the details in a free masterclass training seminar this Thursday. Reserve your spot here.