The biggest banks in the country . . . the biggest banks in the world . . . struck what I’d call a cautiously confident tone. They’re wary. They admit to threats but they don’t admit defeat.
If you’re too big to fail, they’re saying, you aren’t failing. And that means there’s no Lehman Brothers style systemic collapse underway. Ask yourself: who has a better sense of blood in the water than the CEOs who actually dictate which of their rival institutions are safe trading partners and which need to be shunned into Lehman-scale oblivion?
JPM, WFC and Citi aren’t doing any shunning and they aren’t feeling any extreme strain. They aren’t pounding the panic button demanding a bailout before it’s too late.
These three banks add up to about 14% of the entire U.S. financial sector by market weight. They’re a big deal. When BAC chimes in, that’s another 4% and then you’ve got Warren Buffett sitting on a mountain of bank stock within Berkshire Hathaway for another 13% of the sector.
Buffett isn’t balking. He lived through the 2008 crash and saw it as a profound buying opportunity, a chance to lock in unimaginable (i.e., reasonable) yields on companies that were literally in the cash machine business but really had little strategic growth vision.
In short, they were the perfect Buffett buys at the right deep discount price. Anyway, as long as BAC holds the line, we’re looking at over 30% of the financial sector . . . and the biggest institutions in the mix . . . saying there’s no existential crisis at work as far as they can see.
If a big bank crisis doesn’t actually affect the big banks, who hears it but the people the bears want to make nervous? Don’t get me wrong, these are challenging times for bankers lower on the food chain who made bad choices in the zero-rate era. There’s going to be blood.
But there’s always going to be a bigger fish to feast on those wounded competitors. Consolidation is coming. Jamie Dimon is licking his lips. The bottom of the food chain is going to suffer. The banks that reported today are going to get bigger and stronger.
And that’s the way the world works. It’s not the end of the world unless you’re one of the bankers in trouble. It definitely isn’t the end of the world for investors.
We had to be open to that possibility after SVB imploded. We needed to see how far the rot went, gauge the contagion. Now we know it didn’t go to the top. That’s a big, big revelation.
What do you do when you were braced for the end of the world and it doesn’t happen? You have to live your life. You get back to work. You focus on incremental wins and losses, seizing opportunities and resolving challenges.
You shift out of crisis all-or-nothing mode. Suddenly there aren’t just two diametrically opposed outcomes: survival or extermination, feast or famine, “risk on” or “risk off.” That’s a stupid way to live, promoted by shrill media outlets looking to keep viewers on the edge of their seats as long as they can.
We spend most of our time in the real world somewhere in between the extremes. That’s basic statistics. Extremes are unstable. Sooner or later, every phenomenon reverts to the mean, to something like “average.”
This is why we sell stocks that get too hot to handle and buy those that have gotten so cold that probability dictates that they’ll go up at least enough to be worth our attention. It’s the heart of my options trading framework: buy puts when there’s too much greed and buy calls when there’s too much fear.
Warren Buffett knows about that last part. And people like him who can’t find anything cheap enough to buy need to manufacture a little extra fear in order to get people like us to sell them our stock at a discount.
They want us to fold so they can take the pot. I am not saying things are perfect in the banking world. I wouldn’t go near most of those stocks with a 10-foot pole, but that’s because I find them boring, not because they’re teetering on the brink of oblivion.
Most of the banks on the scene today were around before the Lehman crash. They’ll be around for years, even decades to come. They just won’t go anywhere exciting enough to justify these moments of existential angst.
