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If you think markets are crazy, they’re going to get crazier

For the past week you could be forgiven for thinking the world was going up the spout.  Not only do we have our own insular riots in Britain – for which Iranian leader President Mahmoud Ahmadinejad calls on the UN to intervene over the UK’s “violent suppression” of opposition forces or be accused of being hypocritical – but we’ve also had markets in turmoil.

The market turmoil has been going on for months – stemming back to the first Greek bailout in 2010, or some would say years back to the Northern Rock collapse of 2007 and the subprime before – and it’s not getting any better.

In the past week, we’ve seen the double-wahmmy of US debt crisis combined with the European sovereign debt fears bubbling not panic.

This is not just another mild week, but a second meltdown of markets and I predict it’s going to get worse.

Why?

Because the Bear Stearns crash of 2008 led to the Lehmans crash and, before, the jitters in the markets during August led to the Northern Rock crash.

Much of this is driven by short selling hedge fund strategies, and some is based on hedge fund managers sitting on beaches with Blackberries stimulating market fear and craziness.

What this means is that markets that are traditionally under liquidised, under utilised and under staffed in August, are artificially volatile.  Any volume plays the hedgies put into these markets can therefore swing the markets wildly.

This all became obvious yesterday when the French bank shares went into a violent swing lower.

Worries that France might lose its Triple-A credit rating combined with fears over French bank exposure to sovereign debt across Europe meant that Société Générale, BNP Paribas, Crédit Agricole and more all took a beating.  At one point, Dennis Berman tweeted that SocGen  was down -14,34%, BNP -9,86%, Crédit Agricole -9,02%, Natixis -7,08% yesterday. 

Why so high and particularly for SocGen?

Could it be due to scaremongering, with some newspapers making scurrilous claims.  From today’s Daily Mail:

In an article that appeared in the print edition and online version of the Mail on Sunday on 7 August 2011, it was suggested that according to Mail on Sunday sources Société Générale, one of Europe's largest banks, was in a 'perilous' state and possibly on the 'brink of disaster'.  We now accept that this was not true and we unreservedly apologise to Société Générale for any embarrassment caused.

For the truth Simon Maughan, a banking analyst at MF Global, is saying that it’s a message from the markets to France to say they cannot afford to bailout Spain and Italy, so what’s the European plan?

The Financial Times concurs, saying that SocGen was routed because a French insurer was rumoured to have been forced to liquidate positions in the French bank because of financial difficulties, along with the fears over French debt and credit overall.

The trouble is that this fear spreads to other French banks – overall on Wednesday, Crédit Agricole closed down 12%, BNP Paribas lost 10% – and also to the rest of the Eurozone – Italian banks lost 14% of value at Intesa Sanpaolo, 10% at Monte dei Paschi and 9% at UniCredit, whilst UK banks felt the same impact with RBS shares down 4% yesterday to 26.2p.

RBS is a particular case in point as it has over £1 billion exposure to Greek sovereign debt which contributed to the reasons why it has lost a quarter of its value in the past two weeks and is around half the level at which the Government bought the shares to take an 83% ownership.

This wasn’t just confined  to Europe though, as the US still has issues and this hit US bank shares yesterday too.  Goldman lost 10.1% of its value yesterday, while Morgan Stanley shed 9.7%. Even the mighty JP Morgan fell 5.6%.

Is it all doom and gloom?

Yes, for the moment.

I think August will continue to see major bank shares volatility as the US and EU governments try to get to grips with bringing confidence around their abilities to handle their debt.

There is no confidence there right now, and it’s why their banks’ share prices are plummeting.

However, bearing in mind that all the banks mentioned are too big to fail, it tells me that at some point the shares will bounce back so I’m listening to Warren Buffett's advice to buy when everyone else sells: “We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend … Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.”

 

 

 

 

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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  • Rik Coeckelbergs

    That is strange, what I (in Belgium) eard was that the major reason for the collapse of shares of SOc Gen was a misunderstanding by the British.
    Apparently there was an imaginary story in ‘Le Monde’ simulating the fact that in 2012 Germany was suggesting they would leave the euro and go back to the Mark. And this lead IN 2012 to a major fall of French bank shares.
    It will be hard to understand since it is in Dutch, but here is the Belgian source on this: http://www.demorgen.be/dm/nl/3324/Financiele-crisis/article/detail/1303880/2011/08/12/Blunder-krant-nekt-Societe-Generale.dhtml

  • tonyw

    Just some thoughts on European banks:-)
    Spain and Italy are paying close to 6% for ten-year money. So it doesn’t make much sense to give credits to Greece at 3.5% when they are paying so much more.
    The rules of the EFSF imply that countries that themselves need financing or have high borrowing costs should no longer provide guarantees for the EFSF. Thus the larger the EFSF becomes the more the funding countries will have to step aside and leave the burden to the remaining countries and the more their funding levels will increase, see France / vicious circle.
    It would be difficult for a bank’s credit rating to be above that of their own country since they usually hold large amounts of government debt.
    Today Market Watch observes, “France’s economy, the second largest in the euro zone after Germany, recorded no growth in the second quarter, heightening concerns about the nation’s ability to achieve its deficit-reduction plan.
    Still, blame it all on rumours and evil speculators and ban short selling. On September 18 2008, the SEC banned the shorting of all financials in the US. The end result was a 48% drop in under a month.
    Today US consumer confidence just plummeted to the lowest since May 1980.

  • None of this is ’caused’ by hedge fund managers on the beach on BB’s, silliest stereotypical piece of journalism ever..
    It is caused by chronic global imbalances brought about by a massively extended economic cycle courtesy of ever lower rates and ever higher debt levels.. taken to the point of no return..
    Investment managers and hedge funds recognise this as do the behaviour of many HNW individuals and they re-allocate their resources accoredingly… out of the ponzi schemes into safer asset classes.. and no that is not US T-Bills!

  • Chris Skinner

    Thank you for your very informed opinion Francis
    Just a small correction.
    First, I commentate and am not a journalist.
    Second, it is well known that the issues of August 2007 that triggered the subprime crises were typified as hedgies with blackberries running scared on their beach holidays.
    Third, everyone is aware that shorting the markets is also the favourite past time of spread betters, hedgies and HNW today: http://pogoblog.typepad.com/pogo/2011/06/hedge-funds-private-dick-gives-pogo-a-jingle-.html.
    So I refute most of your input, but do accept that there are global imbalances. However, the ups and downs of today’s markets have little to do with that, and far more to do with casino capitalism games of betting for and against Europe’s banks.
    Chris

  • On the credibility of the banks, I wonder if there is a continuing credibility problem arising from the banks (non) response to the lessons of the credit crunch and what followed. Banks, following rescue by taxpayers, have continued on the merrie olde way – not least with the bonus culture.
    (They also, incidentally, continue to take a predatory perspective on their retail customers).
    Their collective wish, and in-denial-practices, seem to be for a return to ‘normal’ as soon as possible. The rest of us who have been already forced to adapt and contend with a new and difficult ‘normal’, must commonly be concluding that the banks et al have simply, still, have not ‘got it’.
    If they still don’t ‘get it’, they hardly inspire confidence that they are capable of ever recognising the new normal, never mind adapting and contending with it. Perhaps that goes some way to explaining the kind of reportage you have cited, such as with the Daily Mail.

  • tonyw

    Edward, of course there is a continuing credibility problem, when the response of troubled banks is to threaten to sue (a British tabloid!) and blame their woes on evil speculators instead of countering with details of solvency and leverage.
    Fortunately Jean-Pierre Chevallier – who certainly does not sound like an Anglo-Saxon speculator has this weekend posted on his blog the fact the SocGen is leveraged 50x.
    http://chevallier.biz/2011/08/societe-generale-leveraged-50/
    I guess our friends over in Basel aren’t too happy about this. Still SocGen can surely fix it by just issuing a bit more equity can’t they, how hard can it be to print a few more shares? Well unfortunately their shares have dropped and they would have to raise
    several times their current capitalistion.
    Anyway, look, look, over there Italy is the problem this week so nothing to see here, move along.