EC When Banks Get Beat, Who Wins?

The chair of the Federal Reserve is one of the most powerful human beings on the planet. For one thing, he/she exerts an inordinate amount of influence on the cost of capital. Consumers, businesses and governments make critical decisions based on the attractiveness as well as the ability to borrow money.

For another, financial markets hang on both the specific actions as well as the verbal guidance of the Fed chair. Currencies, commodities, bonds, stocks. The movement of each market-based asset is often a function of central bank monetary policy.

Janet Yellen served as the chair of the Federal Reserve last year. And when asked about the possibility of a financial crisis on par with 2008’s systemic breakdown, Ms. Yellen said that she didn’t expect to see one happen “in our lifetimes.” Her reasoning? The financial system had become safer due to several factors, including annual stress testing of banks.

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Flash forward from 2017 to 2018. Now Ms. Yellen opines that the Fed does not have the tools to deal with emerging problems. In particular, she is worried about leveraged loans causing a catastrophe in global finance.

This is not merely a case of flip-flopping. This borders on the absurd. Either an exceptionally intelligent person was less than truthful last year or the former chair lacked a rudimentary understanding of the explosive growth in leveraged loans, shadow banking and quasi-investment grade rated corporate debt (BBB).

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Yellen’s recent comments come on the heels of U.S. bank stocks closing at 15-month lows. As of Tuesday, December 11’s close, the SPDR S&P Bank ETF (KBE) is down 15% year-to-date. It is down 23% from a high set back in March.

A bear market in bank stocks? Where have we seen that before?

(Click on image to enlarge)

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Ironically, banks are supposed to perform well in a strong economy. For that matter, they’re supposed to perform admirably in a rising rate environment.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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Gary Anderson 5 months ago Contributor's comment

Everybody says real estate is no longer important. So, those must be the same people who think banks are no longer important. But with credit growth declining across the board, you wonder what will drive the economy going forward.

Sandra Sinclaire 5 months ago Member's comment

Lots to ponder!