Mainstream commentary will continue to harp on the unemployment rate as if it were some kind of lucky charm for protection against an increasingly unrecognizable and frightening (to the orthodoxy) world around it. That appeal dominates even where it has so little if any bearing, as in negative swap spreads that were in truth an easy and simple warning about liquidity that didn’t really require much sophistication or familiarity with interest rate swaps at all. The very fact of negative (highly so) swap spreads renders the informational content moot, leaving only the increasingly inarguable suggestion that “something” is very wrong even if it isn’t immediately understood exactly what. The unemployment rate at or near “full employment”, however, leaves no room for such disagreement; therefore there must be, for the inclined, a benign explanation for them no matter how absurd a form it must take to square the circle.
The naked withdrawal of balance sheet capacity in “dollar” terms instead becoming increasingly obvious leaves the search for harmlessness to also increasing generality. It’s no longer just swap markets and opaque but partial capacities in banking, we are now seeing grave concerns about banking itself. Not just overseas, either, though Deutsche Bank and Credit Suisse deserve their place on the front pages and at the vanguard of the firing squad. Increasingly, domestic banks are being driven toward “contagion”
As with swap spread, that just can’t be either as the unemployment rate has only improved while bank stocks have started to crash. Thus, revisions are necessary to contemplate the discrepancy as none at all.
The group’s underperformance — not to mention its current low valuation at 0.85 times book value — reflects fears that a recession is looming (an argument under much debate now). As these fears heighten, investors are moving into safer asset classes, and banks — typically seen as a proxy for risk tolerance — are feeling even more pain. Sovereign wealth funds are among those offloading these investments after being especially hurt by low oil prices.
Some Wall Street watchers have said that fear-induced selling in banks could itself pressure lending patterns and the economic system. But Wells Fargo equity strategist Gina Martin Adams doesn’t think this self-fulfilling recession prophecy will play out. When looking at underlying financial conditions, she said she’s not concerned…
Adams pointed out that bank stocks have historically been very sensitive to changes in the yield curve, which shows interest rates across different contract lengths. As quantitative easing ended, for example, bank stocks were battered, selling off 18% at the end of the first round in 2010 and down 16% after the end of the second round of quantitative easing in 2011.
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