Tuesday, August 23, 2011

Banking system like 2008? What about 1998 and LTCM?

Recently there has been some discussion about the stress showing up in the banking system. Cullen Roche at Pragmatic Capitalism pointed out that the CDS market in the selected European banks is showing higher levels of stress than 2008:

Don Fishbach pointed out that the average CDS level for US banks is higher than levels seen in March 2008, which is worse than the Bear Stearns peak but lower than the worse stress seen during the Lehman Crisis:

I wrote about this indicator in May 2011. My own indicator of the BKX relative the the market is now in freefall. There were two occasions in the past when this indicator was in freefall after breaking down through a relative support level. The first time was in 1998 just before the Russia Crisis took down Long Term Capital Management. The second occasion was more benign, as the stock market outperformed the banks during the 1999 run-up to the NASDAQ peak of March 2000.

Right now, we have the stock price of Bank of America in a waterfall decline and European banks teetering at the edge. If the real stress in the financial system lies with Europe, which I believe it is, then we have real trouble as the ECB and EU have shown that they are paralyzed and anything that Bernanke Fed announces Friday at Jackson Hole is likely to be a sideshow.

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