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Check out the stats in a Financial Times story from earlier this week:
* Between Jan. 4 and Feb. 15, the S&P 500 lost around 7.5%. But the bank-stock benchmark dropped 16.1%.
* In Europe, the FTSE Eurofirst broad-stock index dropped 9.5%. But the benchmark index for European bank stocks plunged 19.5%.
* The story goes on to note that the S&P 500 remains about 23% above where it traded in July 2007, the peak of the last bull market and the top of the last major credit cycle. But the banking sector is still trading for 51% less than it was back then.
* In Europe, the benchmark stock average is still 21% below where it traded in mid-2007. But the banking sector is going for a whopping 71% less than it did back then.
In other words, bank stocks rebounded less than the broader market after the LAST credit-cycle crisis. And they’re finding themselves in the bulls-eye of THIS credit-cycle crisis, too.
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| Bank stocks are finding themselves in the bull’s-eye of the current credit-cycle crisis. |
Why? There are several reasons …
First, banks and other financial firms are among the most-levered to the performance of credit markets. That’s because credit is their business. They make loans, invest in and underwrite bonds, advise on corporate takeovers and stock sales, and otherwise make or lose money depending on the health of the credit markets.
Second, banks are highly leveraged, or reliant on borrowed money to enhance returns. As the FT story notes, “If one ignores the vanishing trick of risk-weighting, the true leverage of many large banks remains at more than 20 to one.”
The problem is that leverage cuts both ways. You can make more money than the average, lightly leveraged company in bull cycles, but you stand to lose much more in bear cycles.
Third, banks have been doing all kinds of foolish things lately, egged on by central bankers and their NIRP/ZIRP/QE programs worldwide. Between 2010 and 2015, we saw a huge boom in subprime auto lending, a huge boom in commercial-real-estate lending, a huge boom in junk-bond underwriting, a huge boom in leveraged corporate takeovers, and more.
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Now with those bubbles popping, it’s going to drive up loan defaults and drive down investment and underwriting revenue. Declines in inflated asset values will put even more pressure on financial stocks.
Fourth, banks are suffering from the ill effects of post-crisis regulations. They’re facing restrictions on several activities. They’re burdened by huge compliance costs. And they’re getting buried under multibillion-dollar lawsuits around the world.
Finally, in an effort to avoid future government bailouts, regulators instituted so-called “bail-in” policies after the crisis. Those measures stick more bondholders and equity holders with the bill for financial failures.
That’s morally defensible and better than hitting up taxpayers. But it has the perverse side effect of helping intensify electronic “runs on the bank” in bank shares and bonds during times of crisis.
Bottom line: During the housing and mortgage crisis of 2007-2009, banks and other financial firms got crushed. Now, that process is playing out again in 2016, with foreign banks getting hit particularly hard.
That provides me with more evidence that another great credit-cycle turn is at hand, and that the consequences will be both widespread and severe. So make sure you keep that in mind when making choices about which sectors and stocks to invest in or which to avoid.
Until next time,
Mike Larson
P.S. The death of the American dream is coming. Nothing will ever be the same again for you or for your family. The America we know and love will be no more. The fallout of this historic event will be horrific for the unprepared. It will trigger all-out panic — first in the U.S. bond market … and later in the stock market. It will destroy millions of jobs … sentence most Americans to a “dark age” of depression and poverty … send gold and silver prices careening higher … and push the U.S. government to the brink of collapse. Click here to learn how to protect you and your family in the upcoming crisis!
Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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The irony of it is that the banks were put in the bull’s-eye of the credit cycle crisis by: ….. Central Banks and politicians, and further compounded by the greed of their own people. This is the result of falsified interest rates. Unfortunately, it will affect the innocent as well; very broadly, as in the case of an A bomb.
Totally agree. The large banks can handle (to some degree) the massive regulatory BS. The small ones have no largess to do so. MOST are in trouble. Just look at the Weiss ratings and other real evaluations. We really need to cut/simplify taxes and cut regulations big time or this economy is a lost cause. I fear it is too late and nothing will be done. Dems like regs and taxes….Repubs just go along for the ride.
My problem is I’m 89 and I remember well when my uncle got 5 cents a dozen for his eggs and 25 cents a bushel for his wheat.
I’m a perpetual bear and I get burned in the rallies that are thr result of listening to guys like you. Idiots like Obama manage to pull the fat out of the fire. Will they do it again?
I’m 87, and have an old paperback diet book, I think from the 1950s, that advises, “never pay more than sixteen cents a pound for produce” LOL! That was before Nixon took the buck off gold backing, of course. Politicians!!!
i bought my first house exactly 40 years ago for $9,000. it recently sold for $160,000. i expect it to go up in price again over the next 40 years to a price i can’t even imagine. ya know what, old guy. i expect the stock market to do even better. i’m still a bull.
you got to realize chuck every reaction has a consequence yes Nixon took us off the gold standard but there was a reason first of all gold was cheap back then real cheap , the government held the price per ounce of gold at 35 dollars an ounce till august 15th 1971 and after that date the u.s. would no longer convert gold to dollars at a fixed rate thus completely taking us off the gold standard and the reason why was countries like france and others were depleting the gold reserves from fort knox at a blinding pace since all they had to do was to convert our dollars to gold
before nixon took us off the gold standard, questions abound about why do that?, and why do that now? none of the answers sounded like compelling reasons, except one. smart money simply wanted to profit from gold’s rise in value during the inflationary times of the 70s – a reason that made sense then and still makes sense in retrospect.
Here I disagree entirely. Like others here, I am an old timer, and I remember what really happened. Under the terms of the Bretton-Woods agreement, there was no such thing as a trade deficit, all trade imbalances between nations had to be normalized at years end. Nominally the settlement was in dollars which, then as now, were the reserve currency. However, under the Bretton-Woods Treaty, nations were allowed to exchange “excess†dollars for gold bullion through the so-called gold window. The problem is that a lot of nations did exactly that. The outflow began during the closing years of the Eisenhower presidency, and picked up speed rapidly thereafter. It is important to realize that this was hardly a secret at the time. You could find newspaper articles about it. However, until 1974 Americans were barred from owning gold except as jewelry and so could not relate to the information.
In February 1961 newly inaugurated President John Kennedy admitted in a speech to a joint session of Congress that the gold outflow in 1958 and 1959 alone was equal to 3000 metric tons. It got worse after that. Nixon closed the conversion window in 1971 because we could no longer bear it.
What this country needs is a good five cent cigar.
you can still get a good $2 cigar. arturo fuente curly head natural. (don’t get the deluxe.) same exact tobacco as fuente’s $20 cigars. apprentice rollers use remnants cut of the by the master rollers making the hemingways and don carlos fuentes. you won’t find a better cigar at any price. and since it’s made with the smaller pieces, it will burn better.
I recommend you buy SKF, the untrashort financial ETF. Buy on a strong day for the market. I’m sitting on an 18% gain, plan to add more.
For dividends buy the tanker stocks, especially the LNG tankers, DLNG, GLOP AND GMLP.
the fed should do four rate hikes this year. if the fed waits any longer there’s a risk of having to raise rates too high too fast putting the economy in recession. better a little pain now than a lot of pain later.
technicals:
take a good hard look at a chart of the s&p. a big ol’ inverted head formed on february 11, with a nice left shoulder and a possible right shoulder forming now.
fundamentals:
industrial manufacturing finally took a badly needed upturn and the economy is still creating about twice as many jobs as we’re losing through attrition.
i think i’m the last bull left in america.
huhhh you got to be kidding me first of all over 300,000 young people age 18 become of age every month to start working our recent unemployment rate is 239,000 on a weekly basis then throw in there that 300,000 baby boomers are retiring every month and all we can come up with monthly jobs data is 139,000 jobs created I think you lost something along the way
you’re right. about 139,000 net new jobs are created every month. that’s well over a million jobs per year. i know the millennials would like to see a faster job growth rate, and i don’t blame them, but the faster we reach full employment the sooner we have a recession. the newly hired would just get laid off at a time hope was being restored. the fed want to keep them employed as long as possible.
hawk, go to the below link. contrary to what most people think, it is full employment that puts us in recession, not the other way around. as you can see by the fed’s chart, we’re heading for a recession. the fed has a dual mandate of regulation the unrate and gdp.
https://research.stlouisfed.org/fred2/graph/?g=3mAg
The first rate hike made the dollar more expensive in terms of other currencies. that made American exports more expensive for foreigners. Result: big layoffs for GE, Caterpillar, Cummins and other exporters who lost business to foreign makers of things. American banks like it though. Foreign money comes here to get interest, instead of staying at home and paying the banks to hold it. American businesses are bought by foreign companies.
the transition to a stronger dollar will be hard, but rate increases will actually benefit emerging markets in the long run as demand for imports to america increases. boris schlossberg is the go-to guy on this debate.
the cheaper imports a strong dollar creates will also benefit america – a win-win situation that’s been going on for decades.
But if American workers lose their jobs to foreign makers-of-things, who is going to buy those imports?
Foreign workers get richer – American workers get poorer.
you’re right chuck. china has become america’s factory. all those chinese factory jobs used to belong to americans. but the flip side is america’s standard of living improved because cheap chinese walmart products also leave more money to spend on american-made products, enhancing our standard of living both ways.
so, can you see how eventually cheap saudi oil will benefit america’s economy in a similar fashion? money that once went there will now stay here. give it time to work its magic.
america’s future looks extremely bright.
Bernie sanders plans on giving 30 trillion to everbody on more programs so I guess the democrats are paying………………… lets all party
I completely agree. In addition to that, with business lost from foreign imports companies will start defaulting on their loans due to lost revenue and profits, which will only make the problem of NPLs worse.
Gee old guys above, I ain’t quite there but I remember back in the early 1970’s the car companies were giving cash back on new car purchases, about the same as a couple of months mortgage payments. People were buying cars to get the money for the house payments. The dealers were giving generous trade in allowances up to fifteen percent of the sticker price for anything with wheels, a skate board, a wheel barrel, a tonka toy,worn out old car. Nobody ever learns, they just keep looking at the bottom line, ignoring the roadblocks own the page. Business runs in cycles, so does stupidity. Like kollath wrote years ago in Bible, there is nothing new under the Sun.
i was a teenager in the early 1970s renting a house next door to the first home (ramshackle) i eventually bought. the 70s was a miserable recession. i would buy a slab of velveta cheese, a loaf of bread, and cans of cambell’s soup – a week’s worth of toasted cheese sandwiches. my wardrobe consisted of 3 white t-shirts, 3 levi’s, one pair of work boots and one winter coat. i didn’t understand anything about the economy or recessions, so i blamed myself for my predicament. i can relate to what the millennials are going through today, and hope they don’t blame themselves like i did for a situation they have no control over. i know there frustration well.
Bailouts equal negative rates. Any bank taking bailouts should have their board replaced and appointed by regulators for at lease two years. If China manufacturing is slowing, who is picking market share? Has the Dow suffered less than other international markets because of the large number of investment veichles
available in the US?
Banks are better off than the U.S. debt, and all I’ve read in this article is about prices, vis-a-vis the market. Large, multinational banks have billions in market cap, however, the U.S.A. is trillions of dollars in debt. Obviously, we as investors have a great deal at stake regarding share prices and the ups/downs of the stock markets, yet our real concern and the root of the problem should be the national debt and how to remedy that debacle. … I say cut corporate taxes, and cut the budget to start with and provide tax incentives to corporations who add jobs over the median level. We need “real employment, followed by consumer spending, and ultimately providing corporate america with increased revenues. Ultimately, the increased revenues will lead to increased margins thus adding real value to share prices.
Today the FXY has reached 86.15 am I at a point were I should consider selling? What is your suggestion for a play to short the S&P 500.
The solution is very complicated since America is in massive debt. Yes, I remember the 70’s. Automobiles were cheap then, since the EPA emission standards did not yet go into full effect. Remove all that EPA mandated garbage on the engine and exhaust and the price of a vehicle would drop more than 40%. Industry would return to America and not be forced to operate in 3rd world counties. We could then purchase those wonderfully dependable Diesel Toyota trucks that Japan now provides to ISIS terrorists.
It was printed in Barron’s that Lloyd Blankfein is now a billionaire. Ain’t that nice! Banks losses are only ledger entries. The TO BIG TO fail were saved by the liberal Demo’s who blame the Republicans who both through legislation and regulation have damaged and discarded the middle class. You will not save America buy putting even more money into the wallets of the likes of Blankfein, through CDSs, IPOs, Mergers and corporate offerings. Greenspan and Bernanke really did a job on the American economy and this damage will last forever.
So many people want to excuse their party and blame the other one. In the case of the FED and congress saving the banks, except 2, it was the Bush administration. The economy started unraveling in the fall of ’08 – before the presidential election. Read Hank Paulson’s book to get some insight about what was really going on. the first year of Oboma’s term they followed the same path with one stimulus bill. I believe we would be in a huge depression still if they had had not done so. I also believe that they didn’t go far enough to tame the big banks, and the bankers. The focus was on the corporation – not the officer. A corporation is a data entry in a data base of corporation data. It doesn’t make decisions. The officers made the decisions that pushed beyond the limits of prudence for personal gain. You doubt it? Follow the money!!! Bottom line – the FED saved us and we would be in better shape if Congress had provided better and more stimulus early on (not now).
You erred greatly on highlighting C of C!
The big cost problem starts and end with overpaid management.
As I recall when living/studying in Boston an outstanding result(s) in a company resulted in
the top management receiving NOT MORE than 20 TIMES the lowest paid employee.
The health (and strength) of a country is not measured by the power of its military or by the heights of its stock markets. The true health and strength of a country is measured by the strength of its money. In the long run, strong money is the best option for governments and individuals.
The bad loans belong to the banks.
Bad loans belong to all of us. Even with bail-ins (imposing extra costs on bondholders to relieve the burden on taxpayers in theory)the end result is that we will all be bearing the burden, because bondholders will require a higher return which has to be offset by higher cost of credit for all of us.
“The future is so bright, I gotta wear shades! Get some shiny gold and silver coin”
everything goes in waves…but in the long run it goes higher. I don’t have the numbers but I’m pretty sure the Dow is a lot higher than it was in 1929. We now talk about trillions like they used to talk about millions. Everyone used to want to marry a millionaire, now its a billionaire. I’m 66, and wondering if they will start wanting to marry a trillionaire in my life time! I’m not worried.
I am 66 years old…and have never seen it this bad. Yes, we had double digit inflation in the 1970s…..Jimmy Carter helped guide the economy away from foreign oil when we had the oil embargo….solar power was encouraged and helped by tax breaks.
Toady with $19 trillion in debt and fools in Washington ( and out and out crooks….read the book ” throw them all out”…for the thievery of Pelosi, Reid, Obumma and others)..I don’t see any hope. The Republicans wanted to get power in the Congress and they are just wasting more time and letting the Demoncrats rape and pillage the country.
Russia and China realize we have a wimp for President and are making their moves. If we get a bigger fool and thief in as President ( gee,.. aren’t those Hillarys qualification’s?) I predict there will be a war…because they know Hillary has no agenda…nor morals..other than feed the Clinton Association more cash and power.
So, if you don’t have your second passport and your island retreat ready…I suggest you get going…..before its too late.
The poor and weak leadership in the US is unfortunately mirrored in Europe. Merkel the German Chancellor invited Syria’s masses to seek sanctuary in Germany and got over a million. Hollander the French President is an economic disaster who pontificates about everything. Cameron the English Prime Minister has a reputation for spin and U-turns second to non, and is way out of his depth dealing with the EU monolith. The EU in/out referendum in the UK is going to put a rocket under it all, because they have underestimated the Brits concerns and the time to leave the EU gets ever closer. Be aware of the backwash it will generate.