EC Will Derivatives Be The Next Black Swan?

“It’s déjà vu all over again.” – Yogi Berra

The stock market has long been classified by economists as a leading indicator of the economy. It tracks and reflects the nation’s economy and industry fundamentals. The market often seems able to anticipate positive or negative change before it happens. Since the beginning of the bear market in August of 2015, the prices of many bank stocks, especially European and Japanese banks, have declined steadily and precipitously. Deutsche Bank has lead the way by dropping below the level it reached in 2009. Shares of HSBC, Citibank, Bank of America, Credit Suisse, Goldman Sachs as well many other big banks have also taken a beating of 25-45%.

What are bank stocks trying to tell us?

Some analysts suggest low interest rates are a problem for the banks along with flattening yield curves that suppress their profitability; or slow economic growth together with the sharp decline in oil prices and drilling activities are placing pressure on the credit quality of banks’ loan portfolios. Upon closer examination, we think neither of these issues is creating monumental problems for banks. As a matter of fact, the banks are doing just fine at the moment. Earnings are coming in above expectations and anecdotal evidence suggests that all is well on Wall Street. Young bankers who live in the tri-state area continue to drive luxurious European cars, live in multi-million dollar houses, and earn high salaries and huge bonuses. There are no recent layoffs by banks and not even a scent of trouble being detected.

We think the banks are faced with two fundamental problems; both need to be fixed immediately. The first problem is philosophical: if the banks continue to treat their customers unjustly and unfairly by not paying out interest on deposits, they will surely lose their customers and hurt their businesses. Common sense dictates that they must follow the basic business principle of placing clients first and employees second. After all, over the last eight years, the banks have made billions of dollars on credit card loans, mortgages, consumer installment loans, commercial and industrial loans plus government bailouts. Why don’t banks start paying interest to their depositors? The banks in the U.S. alone withheld $1 trillion of interest payments from their customers. What‘s their excuse? None whatsoever.