Monday, July 11, 2016
Things that keep me up at night ....
Interest rates continue to march lower, yet banks are in worse financial shape since rates have turned negative. Banks can pass stress tests but the market is saying that their value is deeply declining. The recipe for helping an economy has always been to lower rates and thus help banks through allowing for wider spreads and cheaper funds. That does not seem to be working. Now, it could be an issue of false causality, but banks are in bad shape and rates will not solve the problem. Of course, policy is at cross purposes. The monetary authority side of central banks are lowering rates to stimulate economies while the regulatory side is trying to reduce bank leverage and control any "excessive" lending. These goals are in conflict.
The gates on UK property funds are ominous. Gates on mortgage funds were one of the first signs of the Financial Crisis. Yes, this is a different situation, but when liquid investments turn illiquid, investors will start to take note and search for safe solutions.
The "bubble-like" levels for utilities is fully expected but still startling. A safe utility has a higher average P/E than risky tech firms and the market as a whole. Of course, low energy prices have helped utilities, but this is a recipe for investor disappointment.
The US may not be as big an energy importer, but it may now be a big importer of lower rates.