A recent article in the Financial Times by Terry Smith made me laugh because it read, Why I never invest in bank shares - Silicon Valley Bank and Credit Suisse collapses prove my point. [Terry Smith was the Number 1-rated banking analyst in the Reuters and Institutional Investor surveys 1984-8.] In other words, here we have a banking analyst who himself would never buy a bank stock. Sounds like a driving teacher who does not drive, a politician who does not take bribes and a hooker who is a virgin.
To be fair, Terry makes a number of good points as to why he doesn’t invest in banks. He notes among others that, “The average return on equity (ROE) in the S&P banks sector over the past five years is just 10.9 per cent. This compares with the ROE on the S&P consumer staples sector over the same period of 17.9 per cent. These poor fundamental returns unsurprisingly translate into poor share price performance. The total return on the S&P banks sector over the past five years was -15.1 per cent a year, whereas consumer staples returned +12.1 per cent annually.”
MF: This is indeed correct. Banks have not performed well over the last five years but the comparison provided is not entirely conclusive since the post 2008/09 GFC years were not particularly favorable for banks unlike the 1980s and 1990s. In Japan, one of the strongest sectors during the bubble years 1982 – 1990 were banking shares.
The failure of both the KBW Regional Bank Index and the KBW Bank Index to rebound strongly following a more than 25% decline within just a few days leads me to consider that banks might have other problems, which they will have to face aside from a mismatch in the maturity between their security holdings and their deposits.
Economists and strategists applauded until recently central banks’ free money (zero, negative, or next to zero interest rate), and they never warned that the asset inflation these policies were causing would lead to a collapse in affordability. I was also dumbfounded by the fact that while in many areas, residential and commercial property prices were more than twice as high as during the last property bubble in 2006/08, hardly any economist and absolutely no central banker for sure, ever discussed the subject of inflated real estate prices.
Tightening lending conditions by the banks long before the SVB Crisis occurred, suggests that their senior officers were well aware of weakening economic conditions and of developing problems in the residential and commercial property markets. But surprise, surprise, about the only people who weren’t aware of these potential problems were the academic morons at the offices of the Federal Reserve banks. A friend of mine recently wrote: “And Mary Daly, the woke head of the San Francisco Fed (according to Daly's bio, her commitments include ‘understanding the economic and financial risks of climate change and inequities’), has zero experience in banking or managing risk, and entirely missed everything going on at SVB.” [She was the ‘first openly gay’ regional Fed bank chief.]
As an aside, Daly called Yellen an “important mentor in my life. [S]he made my career kind of explode.” Another Daly supporter was Greg Becker, the chief executive who presided over collapsed SVB. Until his most recent ouster, he conveniently also sat on SF Fed’s board. It was one big happy woke family, as the New York Post stated.
As Frank Herbert said, “Bureaucracy elevates conformity, make that 'elevates fatal stupidity', to the status of religion.”]
Of great concern for investors should be the break-down of bank stocks. Usually (but not always), banks lead the market. Investors should be in particular concerned about the large exposure regional banks have to commercial and residential real estate loans.
It is unlikely that the current western left-leaning bureaucratic governments are favorable for asset prices including equities. As the “dean of science fiction” author Robert Heinlein (1907 – 1988) wrote in Stranger in a Strange Land, “Government! Three fourths parasitic and the other fourth Stupid fumbling.” [We have now the opportunity to see this right in front of our eyes.]
In March, the S&P 500 Index bottomed out at 3808. Around that time, I received a large number of emails from investors who were deeply concerned about just about everything. I agree. There is little to be cheerful about. However, about one condition we should never despair. The preparedness of central banks to print and print and print money.
Everything considered (dollar depreciation, store of value, performance during economic and financial crises, etc.), I still believe that gold and precious metals and related stocks are the most desirable asset class.
The controversial philosopher, mystic, and political activist Simone made a good point when she wrote that, “Whether the mask is labeled fascism, democracy, or dictatorship of the proletariat, our great adversary remains the apparatus—the bureaucracy, the police, the military. Not the one facing us across the frontier of the battle lines, which is not so much our enemy as our brothers' enemy, but the one that calls itself our protector and makes us its slaves. No matter what the circumstances, the worst betrayal will always be to subordinate ourselves to this apparatus and to trample underfoot, in its service, all human values in ourselves and in others.”
I wish our readers a wonderful Easter holiday and remain
With kind regards
Yours sincerely
Marc Faber
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