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Well, there are always ups and downs.
And, as famous investor Warren Buffett said, it’s not until the tide goes out that you can see who’s swimming naked.
Silicon Valley Bank, of course: the second largest bank collapse in US history. Signature Bank, of course – the third largest banking collapse in US history. First Republic Bank? Its stock dropped 90% in a month, and is still going down. So yeah, I’ll say that.
And, of course, Credit Suisse. Bank issues take longer, of course. But the current climate is not helping. So, it is being taken into the hands of the Swiss banking giant UBS.
Who’s next? Where next?
With bank stocks all over the world, suspicion is everywhere.
2007, 2008, or something else?
Just a few weeks ago I wrote about the Footsie hitting a record high: within days, the FTSE 100 surpassed the 8,000 level.
The fall since then has been precipitous: when I write, the Footsie is only above 7,200 – a fall of 10%. That’s what banks run and banks fall for investor confidence.
So what does all this mean for us investors – in particular, investors in the UK?
Much depends on where this all ends, and if a more general financial crash and subsequent recession occurs.
In other words, we are in 2007 (think the collapse of Northern Rock, and Bear Stearns liquidating two property-related hedge funds), and headed to 2008 (the year everything else imploded)?
Or was it elsewhere – in the 1990s, for example, with isolated financial events (think of the collapse of Long-Term Capital Management, say) that made markets jittery for months, but did not lead to a more general crisis?
At the moment, no one knows.
1980, who?
And of course, me don’t know, either.
But I think the kneejerk parallel to 2007-2008 might be wrong. They understand – this is the latest financial crisis, but they are wrong.
Because really, 2007-2008 – before it spilled over into the general economy, was a recession – about property values, and bad loans. The bubble suffocated until it could no longer burn, then burst.
What we have now, on the other hand, is a situation of very high interest rates. And in the 1980s, we had a similar situation, when Paul Volcker – the head of the Federal Reserve – began to raise interest rates in late 1979, in response to rising inflation.
Bank busts
The result was the so-called ‘savings and loan crisis’ of the 1980s and early 1990s.
American savings and loan associations were modeled on building societies in England, and operated in a similar fashion – except that 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 these institutions — some of them very large — had collapsed. In all, 1,043 were closed: a staggering number. The result was almost inevitable: a recession, as the main source of credit just disappeared from the American economy.
The main risk
In part, it’s the lessons of the savings and loan crisis that lie behind the fear expressed about America’s regional banks today.
Regional banks that you and I have never heard of – like we only know (if) Silicon Valley Bank or Signature Bank – but that make a big splash when they go down.
And if America’s regional banks begin to collapse, the splash on the real economy — Main Street, in other words — will be significant. This isn’t a bank catering primarily to tech startups or crypto companies: it’s a bank that caters to mainstream businesses across America.
So what should investors do?
Wait, and play a defensive game, that’s my view.
Forget the supposed lure of a bargain in the banking sector, for starters: bank stocks are hard to value, and bank bonds are just as opaque. (Ask the investors who just lost £17 billion on Credit Suisse ‘AT1’ bonds.)
A very watchful gaze? Ask renowned investor Terry Smith (of Fundsmith fame). A former star banking analyst, refused point blank to buy bank shares.
And be very careful about bargains elsewhere, especially if those bargains are brought about by the current market turmoil. Going back to 2008 for a moment, various bank bailouts and mergers on both sides of the Atlantic took place in early October of that year.
At that point, the Dow Jones index had a further 37% decline before reaching the bottom. And Footsie didn’t stop until February 2009.
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