Changing My Stance - Financial Systemic Risk
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The lesson to be learned here is that rules are only important if they are enforced.
For those of you who read my stuff, I changed my stance on the stock market and banks earlier this year. I became increasingly bearish. At present, I think that perhaps that stance does not take into account what amounts to a shift in the rules. If you play by the rules what you have is insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks. It's a continuous loop that effectively measures up to a vendor financing ponzi scheme. Pragmatic investors, myself included, have been watching these developments starry-eyed anticipating the largest financial crash in the world's history. Deleveraging by European banks would impact not only the eurozone but also the US shadow banking system, especially the banks in this article, as well as destroy the capital flows to emerging economies.
The balance sheets and reporting standards for banks have gotten more cloudy and obscure in the last several years. If things were to play out according to the rules that theoretically the financial markets play by, you have to put on apocalyptic tinted glasses. More recently, I have come to terms with my new opinion that fraud is only systemic when it cannot be bailed out. Thus, the housing crisis of 2008 was systemic because you can't bail out a world of people that all pay far more to own a home than they'll ever be worth. Can you bail out the banks and the sovereigns? Maybe you can't, but can they keep bailing each other out? It seems to be the case. Effectively this only increases the systemic risk of the weakest link. Will the entire system implode? I don't think so. Lots of people with power and money have a vested interest in the banking system not imploding. Welcome to the decade of currency wars.
So, how did we get here?
In Europe a large vendor financing ponzi scheme has subsidized German exports for years at the expense of the periphery. Nations and banks can and will be bailed out, by each other. To not do so would be disadvantageous for everyone. Thus, it will be done. Combine that with Chinese liquid fraud statistics and their command economy that can be ordered to increase GDP at the expense of the average citizen and then you begin to see why the banking system probably isn't as bad as it should be.
Here in the USA, we have a system of arguably insolvent banks that, if forced to mark to market and unload home inventories onto the market, would be worth far less than they are today. Will this happen? Probably not. Is this me getting behind banks and saying that they are worthwhile investments? No, but I would highly recommend not shorting them at this point and because of that, long positions may be warranted. Personally, I won't be opening up any long positions in potential insolvency. Let's take a look at the banks with the highest systemic risk rankings according to NYU Stern. These are the banks that, in my opinion, are the riskiest as well as have the most upside in the more than likely event that the global systemic risk is avoided by those who actually make the decisions.
|Bank Of America||1|
|JP Morgan Chase||2|
|American International Group||9|
|Hartford Financial Services||10|
In a nutshell, I'm deciding that: "Sure, if they ever stop kicking the can they all lose, which is why they all will keep kicking the can indefinitely." Might as well place your bets accordingly. If you're short, reconsider being short. If you're long or looking to go long, understand that there is real systemic risk here. I don't think that all of the risk is priced in, yet, but these prices don't take into account the ability of those who make the rules to change the rules to preserve their power. Those that make the rules appear to be breaking the rules. I expect this to continue.
Glen and his clients do not hold positions in Bank of America (NYSE: BAC), JP Morgan Chase (NYSE: JPM), Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), MetLife (NYSE: MET), Wells Fargo (NYSE: WFC), Prudential Financial (NYSE: PRU), American International Group, Hartford Financial Services (NYSE: HIG) or Bank of New York Mellon (NYSE: BNY).