Banks Are Behind the Rally

If you are wondering what lead the recovery of broad stockmarket indexes, look no further than the chart below (click to enlarge). A comparison of relative performance between S&P 500 (yellow line) and the KBW bank share index (black line), it shows that banks rose almost three times faster, since the market's nadir in early March 2009.

BKX +160% vs. SPX +60%

The reason for such outstanding performance is quite simple: Washington's credo of "too big to fail", i.e. trillions in public bailout money. Once it was fully understood just how far the Fed and Treasury were willing to go to prevent "our crowd" finance from going under (sorry Bear, sorry Lehman you weren't "in"), the rebound happened almost instantly.

And it's not only happening in the United States. In the same period bank shares have broadly outperformed in Europe, too: the DJ EURO STOXX (Banks) index is up 175%, whereas the broader index is up 60%.

DJ EURO STOXX (Banks): + 175%

DJ EURO STOXX 50: +60%

Charts: STOXX

Such nearly identical behaviour between American and European markets is not a coincidence, of course. Even though the EU does not possess a common Ministry of Finance (Dept. of Treasury), it does have one European Central Bank. And it is acting just like the Fed - at least as provider of ultra-cheap credit to banks in return for dodgy collateral.

As of last week, the ECB's own balance sheet has grown 50% to 1.8 trillion euro versus 1.2 trillion in the same week in 2007. The entire increase has come from long-term refinancing operations (i.e. term lending to banks against collateral) and "other" securities held for its own account.

Comments

[phdinsuntan...:]

any news?

Oct 19 10:03 AM

[Dave Wrixon:]

Not really true. The UK did let its banks fail or partially fail. Of course they had to be rescued, but at least the British Tax payer got most of the equity along with all the liabilities.

Oct 19 10:56 AM

[GMak:]

It will be very interesting to see how the FAS 166 and 167 unwind the toxic assets hiding inside the special vehicles among banks in 2010. But banks will probably do anything and everything to stop those rules from coming into reality. Those unhedged positions in derivatives with the Big Banks may just be transferred to the Fed (us) in many creative forms eventually...

Oct 19 11:35 AM

[Swashbuckler:]

Astonishing revelation.

Oct 19 11:37 AM

[JPDX:]

Then howcome none of the bank stocks are going up anymore. Seems they just tread water. I'd say emerging markets are behind the rally.

Oct 19 12:23 PM

[manya05:]

Remember, the "crisis" started with the realization that our banking system was built on a wooden foundation full of termites. During the Sep/Oct 2008 period and into Mar/09, banking stocks got pummeled. Extend your graph back in time and see what has happened with banking stock vs. the S&P and I am willing to bet that we are in line.

Concerning the similarities with Europe, remember that one of the big lessons of this last year is that the correlation of assets, all assets, hard assets, paper assets, commodities, emerging markets, non-emerging markets. Everything correlated, you were not safe anywhere. This is a HUGE lesson going forward. So, no surprise seeing Europe and US very well correlated on the way up.

Oct 20 08:35 AM

[michael rot...:]

everything is controlled through the bank for international settlements,
which is the central bank for central banks. i am not a conspiracy theorist. i am a realist. check out their website for yourself. bis.org
you will see that Bernanke and even Geitner are board members.
if you take the time to look around the site you will see they have special voting rights. the Federal Reserve is to BIS what Buick is to Chrysler. who owns the BIS or the FED is private,there is no way to really know.but if you know who was responsible for the U.S. congress creating the Federal Reserve Act, you can guess.
as far as stock prices according to a report given to Congress in 1963 "specialists" set stock prices,and drive prices up and down depending on their short and long term plans.
all of this is public information which i began learning about many years ago reading non-fiction books in a public library.
just follow the market,don´t think about politics,banks,or the U.S. Dollar. and remember....the trend is your friend......until it ends!

Oct 20 07:30 PM

[SeekingTruth:]

Add the comments by michael rot ,manya 05, GMak, Dave Wrixon, to the good and pithy article, taken altogether, I give this work high marks.
Thanks to all.

Oct 24 08:57 AM

[Graham and ...:]

Banks don't want FAS 166 and 167 to reveal how exposed they really are.

Until they transfer toxic assets to the U.S. Treasury, and ultimately to the U.S.. public.

Then they won't care.


On Oct 19 11:35 AM GMak wrote:

> It will be very interesting to see how the FAS 166 and 167 unwind
> the toxic assets hiding inside the special vehicles among banks in
> 2010. But banks will probably do anything and everything to stop
> those rules from coming into reality. Those unhedged positions in
> derivatives with the Big Banks may just be transferred to the Fed
> (us) in many creative forms eventually...

Nov 09 12:11 PM