Banking: Proceeding Down the Road to Boredom…
Markets have a tendency to move in generational cycles, so — with amusing irony — each generation has the opportunity to repeat the follies of their fathers and grandfathers before them. One of the greatest possible follies recently gripped the world; the passion for the production of credit. Since the bubble in credit production (and so banking stocks) peaked out in 2007, the mood of the market has gone through several of the stages of grief. We’ve denied the subsequent fall from greatness; we’ve got angry about it; we’ve even got depressed, irritated and frustrated by it; however we are yet to become apathetic towards it. This last stage requires the passage of a long period of time. Indeed, it requires an environment where the business of banking becomes … well … boring.
Shifting Emotions Towards Banking Stocks:
After having lived through a long-period where banking stocks were great, the investment community found it extremely difficult to let go. From the peak in mid-2007 to the trough in early-2009, large and small investors alike were desperate to buy the downward moves. The idea was that – if those stocks were to regain most of their ground – they would hit a home run. Indeed, perhaps a decent proportion of those buyers thought that the price declines witnessed during that period were the ‘dips’ that they needed to execute.
Of course, the price action since those execution decisions (in 2007-2009) has completely blown those expectations out of the water. As time has passed, it has become clear that the price charts of banking stocks will probably end up like that of the South Sea Company in the 18th Century (see chart below). Insofar as the price trend continues downward, investors will ultimately become well and truly apathetic towards the task of speculating in banking stocks (which — ironically — will be the time to look at them).
As I have mentioned previously on greshams-law.com, this has brought about an environment of widespread bubble watching. Put bluntly, people got screwed by the series of bubbles in the 2000s, and are intent on calling and timing the next one.
How we get there:
We are quite far along the road to boredom. The public tide against bankers and finance has got politicians looking to clamp down on them. Today, the BBC news reported that banking institutions will have to ‘ring-fence’ their retail operations from their investment banking operations:
In a speech on Wednesday he will say banks must be set up so that their branches and public savings and loans would not be damaged if their trading arms ran into trouble.
The legal separation of the functions of big banks was recommended by the Independent Commission on Banking.
He will also announce the privatization of Northern Rock.
The former mutual was nationalized in February 2008, in the early stages of the financial crisis.
The BBC’s business editor, Robert Peston, said the changes represent “the most significant reform to our banking system since Big Bang in 1986 made it much easier for our giant banks to buy stock brokers and become huge in investment banking”.
The idea is — somehow — to safeguard the inherently speculative instrument of the bank deposit. Amusing as this may be, it does take away a big chunk of the excitement in the credit production industry. If we continue to see periods of financial distress in the coming 10 years (as I expect), one can only expect such regulations to proliferate. The result will be an investment community that has a faint reminder of their previous follies when looking at their portfolios, and no interest in trading in banking stocks.
So, with the above noted, how can one play the coming years? For one, by focusing on assets that are in a positive, long-term price trend. And secondly, by speculating on a continuation of this decline in banking (i.e. by positioning oneself for a future where banking stocks become an extremely small proportion of major global equity indices).
The rising tide against bankers, finance, investment, speculation and anything finance-y is likely to squeeze the fun out of the industry. Combined with unresponsive equity performances, the sentiment towards banking in 10-20 years time could be characterized by apathy and boredom.