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-biggest bank collapse in US history. Signature Bank, certainly — the third-biggest such banking collapse in US history. First Republic Bank? Its shares are down 90% in a month, and are still falling. So yes, I’d say so.
And, of course, Credit Suisse. The bank’s problems are longer-standing, to be sure. But the present climate doesn’t help. And so, it is being ushered into the arms of fellow Swiss banking giant UBS.
Who’s next? Where next?
With bank shares cratering around the world, suspicion is everywhere.
2007, 2008, or something else?
It’s only a few weeks ago that I was writing about the Footsie hitting a record high: for a few brief days, the FTSE 100 exceeded a level of 8,000.
The fall since then has been precipitous: as I write, the Footsie is just above 7,200 — a fall of 10%. That’s what bank runs and bank collapses do for investor confidence.
So what does all this mean for us investors — particularly, investors here in the UK?
Much depends on where all this ends up, and if a more general financial crash and ensuing recession occurs.
In other words, are we in 2007 (think the collapse of Northern Rock, 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 instance, with isolated financial events (think the collapse of Long-Term Capital Management, say) that made markets nervous for a few months, but which didn’t bring about a more general crisis?
At the moment, no one really knows.
1980, anyone?
And obviously, I don’t know, either.
But I do think that kneejerk parallels with 2007-2008 are perhaps mistaken. They’re understandable — it’s the most recent severe financial crisis, after all — but mistaken.
Because essentially, 2007-2008 — before it spilled over into the general economy, as a recession — was about property values, and poor lending. The bubble inflated to the point where it could inflate no longer, then burst.
What we have today, on the other hand, is a situation of sharply rising interest rates. And back 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 soaring 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 modelled on the UK’s building societies, and operated in a very similar way — except that they’d lend money not just on houses, but anything.
And by the end of the savings and loan crisis, over 30% of those institutions — some of them very sizeable — had collapsed. In all, 1,043 of them closed down: a mind-boggling number. The almost-inevitable result: recession, as a major lending source simply disappeared from the American economy.
Mainstream risk
In part, it’s the lessons of the savings and loan crisis that lie behind the fears being expressed about America’s regional banks right now.
Regional banks that you and I have never heard of — just like we were only dimly aware (if that) of Silicon Valley Bank or Signature Bank — but which nevertheless create a big splash if they go under.
And if America’s regional banks start collapsing, the splash in the real economy — Main Street, in other words — will be significant. These aren’t banks catering primarily for tech start-ups or crypto firms: these are banks catering for mainstream businesses across America.
So what should investors do?
Wait, and play a defensive game, is my view.
Forget the lure of supposed bargains in the banking sector, for a start: bank stocks are hugely difficult to value, and bank bonds just as opaque. (Ask the investors who just lost £17 billion in Credit Suisse ‘AT1’ bonds.)
Too cautious a view? Ask renowned investor Terry Smith (of Fundsmith fame). A former star banking analyst, he refuses point blank to buy bank shares.
And be very, very cautious about bargains elsewhere, especially if those bargains were brought about by today’s market turmoil. Harking back to 2008 for a moment, the various bank bailouts and mergers on both sides of the Atlantic took place in early October that year.
At which point, the Dow Jones index had a further 37% to fall before hitting rock bottom. And the Footsie didn’t stop falling until February 2009.
