It is worth mentioning here that the historical record of bull markets expanding without a well-performing Financial Sector is a mighty thin one. It is almost impossible for the major stock indexes to make solid, sustainable forward-progress with broken banks. And while these indexes were all banked up for too long, the weighting of the sector has fortunately begun to shrink. That said, there’s still work to do and this will be an annoying and painfully slow process. Financials are still about 14% of the S&P 500 versus a long-term average of being only 12% – and once again, it is unlikely that we simply hit that historical trendline and pause, it is more likely that this “meanest of reversions” takes us through to the downside for a time. This puts a fairly substantial hurdle in front of any kind of “new bull market”.
The FHFA’s landmark lawsuit, announced late Friday against 17 financial institutions who’ve sold $196 billion in mortgage products to Fannie and Freddie, certainly won’t be helping matters but will hasten the shrinkage of our banking sector one way or the other.
Finally, the European horror show has become something much more than just a Black Swan…it is an accident in progress that we are watching from afar. We are watching the participants flail about for solutions and consensus when both are impossible. We know that defaults of ad hoc bailouts and interventions will be a continuing feature of the next year as the pace of destruction speeds up. One does not need to be a macroeconomics expert to understand that a Pan-European bank and sovereign debt meltdown has the potential to become quite possibly the contagion risk of all contagion risks.
Without getting into superfluous detail, I’ll simply mention that Europe started off the week without us in dramatic fashion – with a continent-wide crash.
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