Bank credit analysts can see a financial market crash within weeks
Posted on 25 August 2011 with 3 comments from readers
The blow-out in the credit default swaps on major banks in Europe can point to only one thing say the bankers who spend their lives working with these instruments, a financial crash within weeks in September or October.
Bankers watching their video monitors have not seen this happen since this month in 2008, and that then forewarned of the global financial crash that was only forestalled by a $16 trillion tsumani of liquidity from the Federal Reserve.
Neutered Fed
Where it is going to be different this time is that the Fed has shot its bolt. Giving a third credit card to a person who has maxed out on two cards is less effective at boosting spending power. Besides the Fed’s reaction is already priced into these widening CDS spreads.
CDS are the cost of insuring debt, and it is rising for the top European banks as the eurozone crisis grows and banks become less and less sure of the credit risk. In short, they fear a sovereign default that will implode the system and leave the exposed banks with huge losses.
Inter-bank lending is also beginning to dry up causing a liquidity squeeze, part of the same process as the rise in the cost of CDS. Yet oddly bank stocks could still rally yesterday along with Wall Street, perhaps because equity analysts are turning a blind eye to the reality of the credit markets.
Japan downgraded
But whereas the stock market can be moved by animal spirits and loose money from the Fed, the credit markets tell a very different story. The downgrading of Japan by Moody’s to Aa3 was a far more significant event of the day and to be fair left the Nikkei down over one per cent.
Optimists are still hoping for a stock market rally after the speech by Fed chairman Ben Bernanke tomorrow. But whatever he says this is not going to change the deteriorating credit position in the European banks with their enormous contagion through to the US banking system.
That makes it even more difficult for the Fed to deal with the coming storm. Batten down the hatches and consider the ArabianMoney bear ETF portfolio that we present to our subscribers this month (click here). Bank credit anlaysts can see the storm approaching now like weather forecasters flagging up a hurricane season.
3 Comments posted by readers:
The on-going storm (i.e. in financial stocks) has been getting stronger with each passing week, although the “uninitiated” don’t see this because more and more CDSs are being issued by US banks and sold to Europe.
This is akin to putting a fresh coat of paint on rotten wood. Pretty soon, the underlying rot will show through. The big banks in the US and Europe have poor capital ratios; Tier 1 and Tangible Common Equity (TCE) are in the danger zone, yet all of these big banks are making recommendations to the public to buy each others’ stocks because they “represent good value” (a secret agreement among thieves).
Good value; yeah, right. The best play here, as the Ed. and I have been suggesting, is to short the bank stocks. But be careful if you are buying a leveraged ETF, because if there’s high volatility (and this is likely), it can wipe out most of your gains.
Here’s a “Must-Read” commentary about the very dangerous banking situation in Europe, courtesy of the UK Telegraph, written two days ago.
Link: http://www.telegraph.co.uk/finance/financialcrisis/8721151/Market-crash-could-hit-within-weeks-warn-bankers.html
As we have been saying for several months now, the EUR liquidity problem is only getting worse, and the cost to insure these bank debts, i.e. CDSs sold by US banks, is greatly increasing. Is it possible that, since the ECB can’t step in (because of Germany’s dissent), perhaps the FED’s Bernank will? Time will tell.
But one thing is for sure, the banking crisis is getting worse; if it doesn’t blow wide open in a few weeks, it certainly looks like it will by mid September.
Clear, ifnoramtvie, simple. Could I send you some e-hugs?