I bethink the day Lehman Brothers failed.
I was in my home appointment in South Louisiana on that September morning in 2008, autograph for the Money & Advance area of The Wall Street Journal. Up popped account on CNBC that one of America’s a lot of acclaimed investment banks had succumbed to America’s debt-fueled apartment crisis. Oddly, the banal bazaar rose that day – admitting six months after it would be a abominable 40% lower.
Within days, Merrill Lynch and Washington Mutual would abort as well. America’s cyberbanking area was unraveling, and as a cyberbanking writer, I was on the foreground curve as it was happening.
It was at that moment that “too big to fail” became a civic catchphrase.
A decade later, that crisis seems an aeon removed from avant-garde America. “Too big to fail” is still tossed about a bit, but, by and large, Americans accept the crisis has anesthetized and (assuming anyone paid any absorption to assorted “stress tests” performed in contempo years) our banks are now fine.
If alone that were true…
Beware the Big Five
Back afore America’s apartment collapse plunged the apple into an bread-and-butter abyss, America’s top 5 banks (JPMorgan Chase, Bank of America, Wells Fargo, Citibank and U.S. Bancorp) controlled about 35% of the assets actuality at home.
Today, they ascendancy about bisected of America’s cyberbanking assets.
Back in the aboriginal ’90s, if I began my career autograph about and allegory accounts and investing, America’s “Big Five” captivated amid 10% and 15% of our country’s assets.
Over the years, these 5 accept become mega banks, so gargantuan in admeasurement that their heartbeats now adapt the physique abridgement of America.
What was already “too big to fail” is now so abundant bigger that it raises a adverse catechism in my mind: Are these banks so ample that they are now too big to save in the next cyberbanking crisis?
And accomplish no mistake… the next cyberbanking crisis isn’t an abandoned worry. It’s a actual absolute probability.
See, the affair is, while we’re a decade removed from the cyberbanking crisis that started us down this path, we are by no agency off the path. We’re just added into the woods, so absent at this point that there is no way out.
I don’t say that to be artificial or to alarm you. I say it because the facts abutment it.
Bank-held derivatives accept swelled to almost $200 abundance from about $155 abundance just afore the cyberbanking crisis hit, according to abstracts from the Appointment of the Comptroller of the Currency (the OCC), which advance this advice quarterly. One adeptness altercate that a growing abridgement (which implies a growing cyberbanking sector) by itself leads to advance in the derivatives market. But derivatives accept been growing 2.5 times faster than the abridgement – acceptation the accident central the cyberbanking area is growing asymmetrically.
And that’s a problem.
The Derivatives Nightmare
What scares me the a lot of is this statistic, aswell from the OCC: About 77% of those bank-held derivatives are angry to interest-rate movements.
We all apperceive that U.S. absorption ante are on an advancement arc now, and while banks adeptness be able to administer a chastened ascent, what happens if we get a atramentous swan accident that sends absorption ante spiking?
Derivatives are two-way bets with payoffs that are generally asymmetrical. There is a champ and a loser, and, in a atramentous swan moment, the champ can be on the angle for a sum of money so accidentally ample that it taxes or even destroys the loser’s adeptness to accommodated its obligations.
That is finer what acquired the cyberbanking crisis to activate with – derivatives began to acerb as absorption ante added and airtight U.S. homeowners who had been application their houses as ATMs. If ante spurted higher, mortgage payments on adjustable-rate mortgages and home disinterestedness curve of acclaim rose above consumer’s adeptness to pay… and the apple of bankers fell apart.
A agnate storm is potentially brewing…
A Customer Addicted to Debt
The U.S. consumer, afield admired as a breastwork of strength, is, in fact, a breakable accountability actual on the acceptable graces of American Express, MasterCard and mortgage bankers.
Consumer acclaim agenda debt is aback to precrisis levels of $1 trillion, and any access in the fed funds rate, the absorption amount the Fed pushes and pulls on to attune the economy, flows through as college absorption ante on all that acclaim agenda debt.
Meanwhile, homeowners are aback to application their houses as ATMs. Added than 40% of all home refinancing activity today includes cash-back of at atomic 5%, added than amateur the canal akin of a few years ago, says government-sponsored home lender Freddie Mac.
By the time 2016 abstracts is compiled, consumers – through cash-out refinancing and home disinterestedness curve of acclaim accumulated – will accept pulled something arctic of $80 billion out of their homes to accord acclaim cards and to use for added customer detritus. That’s a 50% access in borrowing from the trough.
Again, ascent absorption ante will chaw abounding of these borrowers. And if Trumponomics throttles the economy, apartment prices and application will abatement off, abrogation accretion numbers of consumers clumsy to accommodated their payments… and that will breeze through to the banks and abounding of the derivatives they own.
Protection From the Explosion
All of this accumulated is, to me, just one of the affidavit that accident runs boundless in the arrangement today.
We not alone accept an abstinent admiral with an abstinent administering now shepherding the country, but we aswell accept an awfully able dollar asthmatic American multinationals and a banal bazaar at awfully affluent valuations asthmatic for oxygen.
We skate forth the bend of a acceptable recession as Trumpian bread-and-butter and barter affairs yield shape; we accept Europe bottomward against autonomous leaders in key countries who could abet the end of the European Union and the euro.
And actuality are our banks sitting aloft a derivatives crumb keg that, if lit, would could cause magnitudes added damaging than what we saw in the endure crisis.
There are two courses of activity here:
- Own concrete gold – not as an investment, but as an allowance policy.
- And put stop-loss orders on all of your banal positions to bottle assets (or absolute losses) in the accident a atramentous swan lands.
Until next time, acceptable trading…