MorningWord 2/4/16: History does not repeat itself, but it rhymes

by Dan February 4, 2016 9:39 am • Commentary

The following segment from yesterday CNBC’s Halftime Report nicely frames the disparity of thought relating to the health of financial markets and the global economy amongst the “smart money”:

In the montage, Larry Fink the founder and CEO of Blackrock, which manages $4.6 Trillion dollars in assets, Bill Miller long time stock guru from asset management firm Legg Mason and Lloyd Blankfein chairman and CEO of Goldman Sachs all think you should chill the heck out and stop worrying about falling risk asset prices. That makes sense from where they are all sit, and I’d expect nothing else from them because cautious market commentary from them risks intensified outflows from their firms, causing another leg lower in stocks and then….more outflows.  So all three see value in stocks at current levels and dismiss the factors that have caused volatility in risk assets globally for the last year or so as… contained.

And then on the FMHTR desk you have Rich Saperstein, founder of wealth management firm Hightower Treasury Partners, who disagrees. He is “very cautious and not buying right now” for the following reasons:

  1. global central banks engaged in divergent monetary policies
  2. commodity prices in free-fall resulting in global deflation
  3. dollar denominated debt coming due in emerging markets
  4. high yield markets causing stress in investment grade debt

Following Saperstein is commentary on the desk that can basically be summed up that if everyone stopped freaking out, the freak out would be over. I guess, but the whole “nothing to fear but fear itself” when it comes to the financial markets is far from an investment strategy.

I would add that Saperstein’s last comment that he is not concerned about European banks kind of surprised me, as all of the reasons he detailed for being cautious about long equity exposure globally (and he stated that his non U.S. equity exposure at 5% is at its lowest levels in nearly 20 years) are the same reasons why Deutsche Bank (DB) is trading at all time lows, and Credit Suisse (CS) and UBS are trading very near them.

Make no mistake, there is some fairly dire shit going down in Europe right now. And some of the smartest financial minds in the world are either casually dismissing it, or secretly scared to death about it and lying to the public as to not throw more fuel on the fire.

There is no logical reason that the extreme weakness into and out of the horrible results and guidance from the 3 banks listed above just this week should be contained to just European banks. It’s amazing to me that so many investors and market commentators have such a selective memory and believe that U.S Banks can somehow de-couple from the problems of European banks. Last decade there was no shortage of market participants and credible market pundits that suggested European banks could de-couple from U.S. Banks because the financial crisis started in U.S. based real estate and mortgage products. That was obviously not the case.

For all of you wondering if It Is  Like 2008, or This is Not Like 2008, remember, History does not repeat itself, but it rhymes. Things are obviously very different than 2008. But what is starting to sound like a rhyme is the chorus of disbelievers that it could happen again. I have no idea if any large European banks will fail, but the price action right now suggests that at the very least the equity of one or more of these banks are at risk of going the way of Bear Stearns, or Lehman Brothers stock, and if that is the case you tell me how our banks (who albeit are far better capitalized and less exposed) will act.

Today’s disaster du jour in Europe is Credit Suisse, the stock is down 12% as I write, trading at levels below the European Sovereign Debt Crisis, and our Financial crisis:

Credit Suisse 10 year chart from Bloomberg
Credit Suisse 10 year chart from Bloomberg

When companies like CS are lumping in a goodwill impairment charge from their DLJ acquisition from 2000, you know their is some funky stuff going on.  That’s some serious smoke and mirrors, as if they were saving this one for more than a decade to cover-up some freshly made disaster.

And I haven’t even mentioned Asian financial institutions, I’ll save that for another post.

Strange things are happening. You can either acknowledge, at least, the possibility of some sort of global economic weirdness visiting our shores and act accordingly or casually dismiss what is screaming in silence in front of your face.