There have been a lot of casualties in the stock market so far in 2016. The more prominent casualties are oil companies, with banks and financial institutions next in line. While it’s tempting to mock the calamity of industries that seem to specialize in kicking consumers while they’re down, a meltdown in the financial sector could turn 2016 into 2008 recession territory all over again. In some ways, we’re already there.
If you remember back to the Great Recession, not even ten years behind us at this point, it wasn’t the collapse of the housing sector that caused the recession. Sure, that was bad and anyone who stretched too far to buy more house than they could genuinely afford (or who lost their job in the ensuing mayhem) got a hard lesson in basic economics. But the real economic disaster, the thing that really plunged the country into recession, was the seizing of the credit markets. No one could borrow money, for anything, even if that person or company had a healthy balance sheet.
Getting What’s Coming to Them
When oil was $110 a barrel, Exxon was making more profit in a quarter than many small countries’ entire GDP. But it’s that same energy sector that’s now constituting a threat to big banks and financial institutions due to their exposure to oil and gas industry debt, a peril aggravated by slowing global growth. In some cases this two-pronged fear has pushed bank and financial stocks to lower valuations than they experienced in 2008. European banks are trading at levels we haven’t seen since the 1990s.
Not Just Here
Slowing global growth and negative interest rates in Europe and Japan have turned into the perfect storm for bank stocks. Japanese stocks are down in concert with the rest of the stock market and are dragging along the anchor of negative interest rates.
The last time financial stock valuations were this low we were talking about an implosion of the world banking system. Probably the strangest element to the current banking crisis is that banks had a record year in 2014 and solid earnings in 2015. Banks are coming off some great years and are still melting down.
There’s Nothing We Can Fix
During the meltdown in 2008, there was a solution and that was for the government to put billions of dollars in the coffers of big banks and get the credit markets working again. Perversely we rewarded banks for being greedy and crooked by giving them virtual truckloads of money. That taught them a lesson, just not the one we intended. The strange thing about this meltdown is there isn’t anything to fix. Banks and investment houses aren’t misbehaving this time, at least not any worse than a normal day. This time banks are melting down basically because the investing world has lost faith in them as an institution.
What It Means For You
Negative interest rates, banks and investment houses on the brink of collapse, plus an energy sector that could seize up any day, all spell trouble ahead for 2016; trouble that could be much worse than any of us are anticipating right now. While defensive investing has been the rule since mid-2015, the current climate might make increasing the amount of your wealth in liquid hard assets, like investment-grade gold and silver coins, a prudent move. Moving to cash offers little safety when banks are already awash in cash, our financial system is drowning in it, and Janet Yellen is still mulling whether the Fed can and should deploy negative interest rates to vacuum out the last few pennies of our life savings.
This is not the time to take chances with your future or to place your faith in paper—any kind of paper.
Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.