"Fortress balance sheets?"... "It's different this time"... "Greatest economy ever."
If all of that is true, then why are the stocks of the most systemically important banks in the world collapsing? ...if this reminds you of 2008, it should, because that is precisely what we witnessed back then. Banking stocks collapsed as fear gripped the marketplace, and ultimately many large global banks had to be bailed out either directly or indirectly by their national governments as they failed one after another. The health of the banking system is absolutely paramount, because the flow of money is our economic lifeblood. When the flow of money tightens up during a credit crunch, the consequences can be rapid and dramatic just like we witnessed in 2008.
So let’s keep a very close eye on banking stocks. Global systemically important bank stocks surged in the aftermath of Trump’s victory in 2016, but now they are absolutely plunging. They are now down a whopping 27 percent from the peak, and that puts them solidly in bear market territory.
U.S. banking stocks are not officially in bear market territory yet, but they are getting close.
At this point, they are now down 17 percent from the peak…
Monday early afternoon, the US KBW Bank index, which tracks large US banks and serves as a benchmark for the banking sector, is down 2.5% at the moment. It has dropped 17% from its post-Financial Crisis high on January 29.
As Wolf Richter notes, while that may be a nerve-wracking decline for those who have not experienced bank-stock declines, it comes after a huge surge that followed the collapse during the Financial Crisis:
I wish that we didn’t have a global economic system that was so dependent on the “too big to fail” banks, but we do.
If they aren’t healthy, nobody is going to be healthy for long, and it is starting to look and feel a whole lot like 2008. As Wolf Richter concludes,
It’s not exactly a propitious sign that the banks in the US, after nearly recovering to their pre-Financial Crisis highs – “Close, but no cigar!” – are once again turning around and heading south as the Fed is “gradually” removing accommodation, which results in higher funding costs for banks and greater credit risks on outstanding loans.
And the European banks remain a mess and have an excellent chance of getting still get messier.
We are entering a time when the economy was likely to slow down anyway, but if stocks continue to crash and global banking woes escalate, that is going to spread fear and panic like wildfire.
And when there is fear and panic in the air, lending tends to really tighten up, and a major credit crunch is just about the last thing that we need right now.
It’s been a really bad October for global markets so far, and more trouble is brewing. Hold on to your hats, because it looks like it is going to be a bumpy ride ahead.