Historic volatility in regional banking … a live event tonight with Louis Navellier to discuss what’s happening … be wary of banking today … the ongoing yield curve inversion problem
Since March 1, PacWest Bank investors have lost 80% of their capital.
Chart showing PacWest dropping 805 since March 1
Source: StockCharts.com
But you see that little rally on the chart over the last couple of days? That small “V”?
It turns out, that’s not “small” at all…
From bottom-to-top, that was a surge of more than 130% (using intraday prices, not opening/closing prices).
But before you cannonball into a regional bank stock trade, MarketWatch just reported on a study suggesting that “stocks and real estate are vulnerable to a systemic banking crisis that could last months, if not years.”
Six weeks ago, a study from the National Bureau of Economic Research concluded that the FDIC bailout of Silicon Valley Bank was almost certainly not an isolated event. Instead, the study suggested it was symptomatic of a far bigger issue.
The academics behind the study evaluated nearly 2,000 historical government interventions of the banking sector from 138 countries, dating back to the 13th century.
Here’s the bottom-line takeaway from one of the researchers:
We don’t directly know how bad things really are right now in the banking system. But we can look at the behavior of the regulators who presumably know a lot more than we do about how bad it is.
And the pattern of their responses most closely matches that of 57 prior crises that tended to more severe than average.
Keep in mind, this conclusion came out before the First Republic Bank collapse. In a follow-up interview with the researchers after that collapse, they concluded “the current banking crisis is much more severe than many investors realize even now.”
Here’s the bottom-line from MarketWatch:
The professors’ specific prediction is that we’re in the beginning stages of what they call a “systemic bank-distress episode.”
And here’s The New York Times from a few days ago:
Yes, you should be worried about a potential bank crisis…
Our nation’s banking system is at a critical juncture. The recent fragility and collapse of several high-profile banks are most likely not an isolated phenomenon.
In the near term, a damaging combination of fast-rising interest rates, major changes in work patterns and the potential of a recession could prompt a credit crunch not seen since the 2008 financial crisis.
To better understand the dynamics behind this distress, as well as what to do about it, legendary investor Louis Navellier is holding a live, private briefing tonight at 7 PM ET
You see, right now, my system is pointing to an $8.3 trillion market shock as soon as September 20th. I’ll cover all the details this evening.
Plus, as an added bonus, you’ll be able to submit any questions you may have for me live during an interactive Q&A session.
While I can’t begin to cover everything Louis will reveal, I can tell you to be careful before wading into the regional banking sector right now.
Yes, if you’re an accomplished day trader, this heightened sector volatility presents a market environment ripe for making quick gains (or eye-watering losses if you bet wrong).
But if you’re thinking that now is a good long-term entry point for a buy-and-hold investor, let me share with you Louis’ big-picture takeaway.
For context, Louis has a perspective on this topic that most investors don’t. That’s because he’s an ex-banking regulator – he was an industry development analyst at the Federal Home Loan Bank of San Francisco.
Here’s his quick take about the banking situation today:
I’ve said it before and I’ll say it again: I’m not a fan of the banks. The reason is simple: I am an ex-banking regulator.
Today’s banking crisis brings back some memories.
Back in the late ’70s and early ’80s, the yield curve was severely inverted.
I spent my days merging losing financial institutions together to make them qualify for Federal Savings and Loan Insurance Corp. of insurance (now the FDIC handles this). Essentially, I would take the larger financial institution and merge it into the smaller, but would re-amortize its assets (e.g., its loan portfolio) to make the combined financial institution look better.
Even though I could never fix the combined institution’s cash flow, I helped them kick the can down the road because an inverted yield curve is lethal for banks.
I used to “put lipstick on a pig” – and the experience scarred me for life.
We’re in a similar situation to the late 1970s and early 1980s, in that the yield curve has been inverted since July 2022, meaning short-term interest rates are higher than long-term interest rates.
It’s no surprise that regional banks like First Republic Bank ran into problems.
The fact is, as long as the yield curve remains inverted, there is risk that other banks could fail the Federal Reserve’s capital requirements.
That spells disaster for smaller banking stocks.
Let’s fill in a few details about the inverted yield curve to make sure we’re all on the same page
A yield curve is a graphical representation of the yields of all currently available bonds – from short-term to long-term
In normal times, the longer you tie up your money in a bond, the higher the yield you would demand for it. So, you’d expect less yield from a two-year bond and more yield from a 10-year bond.
Given this, in healthy market conditions, we usually see a “lower-left” to “upper-right” yield curve.
Chart showing what a normal yield curve looks like
But when economic conditions become murky and investors aren’t sure what’s on the way, this can change. Specifically, uncertain economic times tends to flatten the yield curve.
And if the yield curve actually inverts, history has shown that it serves as a highly-accurate predictor of recessions, though the timing of those recessions is varied.
Charts showing how a normal and an inverted yield curve appears
Now, when investors talk about a yield curve inversion, they’re generally discussing when the two-year Treasury yield climbs above the 10-year Treasury yield.
It turns out, this “10-2” inversion has been in effect since last July. Worse, earlier this spring, the gap reached 110 basis points, which is the deepest inversion since 1981.
Here’s a three-year chart of the differential between the 10-year and two-year yields to show you the inversion and its scope.
Chart showing the 10-2 spread being in effect since last summer and reaching a historic depth a few months ago
Source: YCharts.com
The impact of a yield curve on regional banks
Typically, banks make money by charging borrowers higher long-term interest rates while paying smaller interest rates to depositors. The spread between these rates is their profit.
But when the yield curve inverts, or settles around the same level, there isn’t a huge spread for the banks to make their usual money. This leads to a decline in earnings, which is bad for bank investors.
This is, in part, why Louis remains wary of banking stocks right now:
While PacWest and the other regionals have rebounded in recent days, banks have been suffering much more than just a tough week…
In fact, it’s been disaster after disaster over the last few months. I don’t anticipate it getting better in the near future.
A Fed rate hike pause is not set in stone… the yield curve remains inverted.
We may not be in a full-on banking crisis, but we’re awfully close to one.
Join Louis tonight at 7 PM ET for more details, as well as what to do right now
Also, as mentioned earlier, bring your questions. Louis will be answering some live on air.
One question out there today is “how long have similar banking crises lasted in the past?”
Well, while CEOs like JPMorgan’s Jamie Dimon are saying that this part of the crisis is now over, the study we highlighted at the beginning of today’s Digest begs otherwise.
Back to MarketWatch:
A key feature of a systemic banking crisis is the length of time it takes to be resolved. [One of the study’s creators] told me that, on average, the 57 prior banking crises most analogous to the current one lasted months, if not years.
That’s an ominous prospect, since the current crisis is less than two months old.
As [the study’s creator] put it: “It’s far too early for investors to say that the crisis is over.”
Bottom-line: This is an anxious time for bank depositors, and a risky time for bank investors. If you’re looking for guidance on how to navigate today’s banking crisis from both perspectives, join Louis tonight.
Here’s he is with the final word:
During the last banking crisis in 2008, I remember it was hell on earth for those who didn’t prepare.
I can’t let that happen to my readers.
During tonight’s livestream, I will reveal the 3 things you can do today to make sure your cash is protected from any future bank failures…
And give you my entire blueprint, completely free of charge.
