Nearly as soon as we sent out yesterday’s Daily Insights where I said that the banking system is far less leveraged today than it was in 2008 (click here for the article), I saw this article in the New York Times: ‘As Worries Mount, European Banks Face Sell-Off More Savage Than 2008’ (click here for the article, though a subscription may be required).
The article says that European banks are off more than 25 percent so far this year and credit default swaps, which essentially represents the market cost of insuring corporate bonds, have soared, meaning that the bank issued bonds have become riskier (like regular insurance, higher premiums reflect higher risks to the insurer).
Deutsche Bank’s CEO said that they are ‘rock-solid,’ which is a bad sign – it’s like the police standing in front of the yellow tape telling people that ‘there is nothing to see here, move along.’ Dick Fuld, the former CEO of Lehman Brothers, said the same thing right before they went bankrupt.
Despite all of this, however, I still don’t believe that the current selloff is going to be as bad as it was in 2008.
While some of our large banks, especially the ones that used to be investment banks, will suffer, our overall banking system is much stronger than it was back then. There is less debt in the private sector than there was then (although there is more public sector debt and so the total debt is about the same).
Even though the European banking system is worse off than I realized yesterday, my thesis is still the same. That said, I also know that any prediction is tough and you should take mine with a big grain of salt.
In that vain, I saw yesterday that Goldman Sachs has abandoned five of their six ‘Best Ideas for 2016’ even though we aren’t even a third of the way through February.
I don’t mention that to bang on Goldman, they are very smart folks. I mention it because the prediction business is really, really hard, if not impossible.