Was The Banking Sector In Crisis In 2020?

We catch a lot of criticism on Twitter for saying the banking system is in great shape. It’s easy to reply that the exact same thing was said in 2007. Of course, just because many people were wrong before the greatest financial crisis in a century, doesn’t mean we were wrong in 2020. The facts are different. There are tougher regulations and the banks have learned from their mistakes. The proof is in the chart below.

In 2020 there were only four bank failures even though there was a deep recession. This is exactly what you’d expect. Recessions are never caused by the same thing consecutively. For example, housing has been very strong in the past few quarters after its bubble burst caused the last recession. Furthermore, tech stocks were very strong in the last cycle, and this one so far after being weak in the early 2000s. They led the market lower in the dot com crash.

Usually, buying companies after they experienced a traumatic macro shock is a winning strategy. It’s not as hard to find the winners after the crash as is it was during the bubble because reality sets in and the new rules are made. It’s easier to see what’s wrong with the companies after the shock because everyone is talking about it. One of the best examples of this was buying the ratings agency stocks after the financial crisis. The current sector that is being left in droves is energy. Finding the best fossil fuel stocks now isn’t a bad bet, depending on your time horizon. That’s not to say fossil fuel winners will do well for as long as tech stocks or ratings agencies did. Generally, the commodities cycle is quicker and these aren’t secular growth stories. However, we don’t think people will complain if they earn massive gains in a short amount of time.

The ESG Bubble

ESG stands for environment, social, and governance. It seems like lately the market is throwing out the last two and focusing heavily on the environmental side with renewable stocks. We don’t see how the massive fees involved with SPACs signal good governance. On Wall Street, anything can be a bubble even supposedly good governance. This is why many describe the stock market as a fashion show. Areas get overhyped and then they crater. Even the internet was overhyped in the late 1990s which is impressive because the internet is one of the most important innovations in human history. Specifically, the stocks to play this megatrend were overhyped. The innovations proved to be important.

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