Well, the tide has certainly turned.
And, as renowned investor Warren Buffett once remarked, it’s not until the tide goes out that you see who’s been swimming naked.
Silicon Valley Bank, for sure: the second largest banking collapse in US history. Signature Bank, undoubtedly the third largest bank collapse in US history. Bank of the First Republic? Its shares are down 90% in a month and are still falling. So yes, I would say yes.
And of course Credit Suisse. The bank’s problems are long-standing, no doubt. But the current climate does not help. And just like that, he’s being led into the arms of the Swiss banking giant UBS.
Who is the next one? Where is it next?
With bank shares plummeting around the world, suspicion is everywhere.
2007, 2008, or something else?
Just a few weeks ago I was writing about the Footsie reaching an all-time high: for a few short days the FTSE 100 broke above the 8,000 level.
The decline since then has been precipitous: as I write, the Footsie is just above 7,200, a 10% drop. That’s what bank runs and bank collapses do for investor confidence.
So what does all this mean for us investors, in particular investors here in the UK?
A lot depends on where all this ends up and if there is a more general financial collapse and subsequent recession.
In other words, are we in 2007 (think Northern Rock collapsing and Bear Stearns liquidating two property-related hedge funds) and heading towards 2008 (the year everything else imploded)?
Or are we somewhere else: the 1990s, for example, with isolated financial events (think of the collapse of Long-Term Capital Management, for example) that made markets nervous for a few months, but didn’t lead to a crisis? more general?
At the moment, no one really knows.
1980 anyone?
And obviously, Yo I do not know either.
But I do think the knee-jerk parallels to 2007-2008 may be wrong. They are understandable (this is the most recent serious financial crisis, after all), but they are wrong.
Because essentially, 2007-2008, before it spilled over into the general economy, like a recession, it was all about property values and bad lending. The bubble inflated to the point where it could not be inflated any more and then it burst.
What we have today, on the other hand, is a situation of sharply rising interest rates. And in the 1980s, we had exactly the same situation, when Paul Volcker, head of the Federal Reserve, began raising interest rates in late 1979 in response to skyrocketing inflation.
bank busts
The result was the so-called ‘savings and loan crisis’ of the 1980s and early 1990s.
America’s savings and loan associations were modeled after UK building societies and operated in much the same way, except they would lend money not just for houses, but for anything.
And by the end of the savings and loan crisis, more than 30% of those institutions, some of them very important, had collapsed. In total, 1,043 of them closed: a mind-boggling number. The almost inevitable result: The recession, as the main source of borrowing, simply disappeared from the US economy.
conventional risk
In part, it is the lessons of the savings and loan crisis that underlie the fears being expressed about America’s regional banks right now.
Regional banks that you and I have never heard of, just like we only vaguely (if that) knew of Silicon Valley Bank or Signature Bank, but nonetheless create quite a stir if they go under.
And if the regional banks in the United States start to collapse, the impact on the real economy, Main Street, in other words, will be significant. These aren’t banks that primarily serve tech startups or crypto companies: they’re banks that serve major companies across the United States.
So what are investors to do?
Wait, and play a defensive game, is my point of view.
Forget the lure of so-called bargains in the banking sector to begin with: bank stocks are very difficult to value and bank bonds are just as opaque. (Ask investors who just lost £17bn on Credit Suisse ‘AT1’ bonds.)
An overly cautious view? Just ask renowned investor Terry Smith (of Fundsmith fame). A former star bank analyst, he categorically refuses to buy bank shares.
And be very, very careful about bargains elsewhere, especially if those bargains were triggered by current market turmoil. Going back to 2008 for a moment, the various bank bailouts and mergers on both sides of the Atlantic took place in early October of that year.
At the time, the Dow Jones index had to fall a further 37% before bottoming out. And the Footsie didn’t stop falling until February 2009.
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