Below is a new interview with Jim Bianco, published in a recent issue of the Swiss Business newspaper Finanz und Wirtschaft by editor Christoph Gisiger. Excerpts from the interview re-printed with permission.
Interview with Jim Bianco: «The Risk Of An Accident Is Very High»
So what are the consequences of negative interest rates?
In a negative interest rate world currencies yield zero and that’s actually a high yield. As a matter of fact, according to former Fed-chief Ben Bernanke the Federal Reserve did a very interesting study that looked at the volume of all of the vault space at the major banks in the US and they calculated a break-even. They calculated that if the Fed Funds Rate ever got below -35 basis points, the banks would be better off by stacking in the volume of their vault space with $100 bills yielding zero as opposed to taking a Funds Rate at -35. There is no such study for European banks. But Bernanke believes that their break-even would be even closer to zero, something like -20 or -15 basis points because they have a 500 Euro note which is six times the monetary value of a $100 bill and roughly the same size. Yet, we’re seeing no movement out of the European banks to stack 500 Euro notes in their vaults. That means they’re acting irrationally. They’re not acting that way because they don’t believe it or they don’t understand it. So we’re still all trying to feel around in the dark as to what this means. And that means that the chance of an accident is very high.
Also (ALSN 68.25 1.56%), when you look at the poor performance of European bank stocks, negative interest rates seem to cause severe concerns among investors in the financial sector.
Deutsche Bank’s share price is under its 2009 low. That was the level at which we thought the world was ending. So what does it mean that Deutsche Bank’s share price is lower than that? Does it mean the world is ending for the largest European bank by assets? And by the way, Credit Suisse (CSGN 14.57 -4.08%) is not far behind. Of course, Deutsche Bank’s on the hook for a lot of other things, too. They’ve missed on regulation, they’ve missed on capital, they’re in the wrong line of business and they have significant risk. Deutsche Bank (DBK 16.47 -5.13%) is the largest holder of Euro denominated derivatives. So what happens if it comes to a Brexit or if it comes to a Grexit? The problems in Greece never went away. We’ve just decided that we got bored to talk about it.
And what about the big banks in the United States. The performance of US bank stocks is pretty disappointing as well.
Coming out of the financial crisis, the five largest financial institutions in the United States now have a higher concentration of financial assets. Not only do they have a higher concentration of assets than they did before the financial crisis but it’s the largest concentration ever. So we’ve made the too-big-to-fail-problem worse because we have bigger, more systemically important financial institutions now than we did in 2007 – and nobody seems to know what to do about it.
But regulators claim that the financial system has become much safer since the financial crisis.
At our offices, we laugh about a running joke: Every time when somebody talks about large financial institutions there are only two answers to any question: Either you respond: »I don’t understand it because it’s too complicated» or you’re lying. Therein lies the problem. When people start picking through JP Morgan’s balance sheet nobody understands it. I don’t know if even Jamie Dimon understands it. The complexity of these institutions is beyond the comprehension of the human mind. So am I concerned about the financial system? Yes, with respect to more concentrated and more complicated banks. Am I concerned that there’s an imminent accident coming? In one additional respect: Energy.
Energy could be the tripwire because low oil prices heighten the likelihood of a credit event. It looks a lot like the housing problem in 2007. At that time people said: «Housing never goes down, and if it goes down it’s a buying opportunity. Don’t worry about this stuff, it’s all going to work itself out.» Today, crude oil prices are very important for financial markets. If we get a plunge in crude oil prices then that’s bad, as it means the bankruptcies come, the write downs come, investors run away and losses pile up. And then we’re back looking at financial institutions and asking ourselves: How much of those energy loans do they have? The banks will tell you that they’re not exposed and there’s no problem – just like in 2007, when they claimed that they had no exposure to subprime lending. But that wasn’t quite the way it worked out. So maybe we have to do the whole exercise again that we had to do during the financial crisis and listing out all the write downs of the banks.
How bad could it get?
It’s not going to be the level of the housing market, it’s not going to produce another great recession. But it is going to hurt. There are going to be some real problems as we move forward from here. The Bank for International Settlements estimates that there are about 3 trillion dollars worth of energy lending world wide. So we’ve got a market of 3 trillion dollars worth of loans and the primary pricing of that market has fallen apart: the world wide price of oil. And the price doesn’t even need to go down much lower. It just needs to go back down to around $35 and we’re going to start looking at those 3 trillion dollars worth of lending and all of the investments in oil. And if investors see how much it really is, it’s going to be bad.