$465 billion. Billion with a B. That’s how much market value the 20 largest banks in the world have lost just since the start of the year, according to the research firm FactSet.
The list includes giant institutions in the U.S., like JPMorgan Chase (JPM) and Citigroup (C), as well as European behemoths such as HSBC Holdings (HSBC) and Deutsche Bank (DB), and Asian institutions like Industrial and Commercial Bank of China (IDCBY) and Mitsubishi UFJ Financial Group (MTU).
The Brexit vote hit many European banks particularly hard in late June and early July. Yet this isn’t just a Brexit issue. Shares of banks across Europe have been sliding for months on end because of concerns about credit losses, lousy economic growth, ill-fated overseas expansion efforts, and more.
But the single-biggest threat to institutions in Europe, Asia, and even here in the U.S. is interest rates. I know it seems counterintuitive.
The Federal Reserve is backtracking on plans to hike rates here, while central bankers all over the rest of the world are either slashing rates, boosting QE programs, or otherwise flooding their economies with cheap money.
Yet that’s actually the problem. Rather than help banks, all these rate cuts and hyperactive QE programs are causing longer-term interest rates to plunge. Almost $12 trillion worth of government bonds are now trading at such high prices, their yields have gone NEGATIVE.
When the difference between short-term yields and long-term yields collapses (called a “flattening yield curve” in industry jargon), it’s toxic for banks. The profit margin they earn on lending and investing activities plunges, and that crushes their bottom lines.
This is precisely why I have been urging my subscribers to stay the heck away from bank stocks for more than a year now. In my aggressive trading services, I’ve gone a step further – targeting vulnerable bank stocks with investment that rise in value as those stocks fall.
Several of those positions have worked out very well. You may want to check out my All Weather Trader service for more details on how you can get your hands on those kinds of profits.
Keep in mind that financials are a key Achilles heel for the broader market, too. Unless and until they find their footing, it’s going to make it harder for the major averages to break out convincingly to all-time highs.
Until next time,
Mike Larson is a Senior Analyst for Weiss Research, and is also the creator of the course “How to Profit From Rising Interest Rates”. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.