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Why Have Bankers Become So Bearish?

April 28, 2017

Over the past few months, insider selling (the legal kind) by top bank executives has exploded. Insider activity is something I’ve monitored closely for about 20 years now. This sort of selling is legal because it is not based upon inside information. Presumably, it’s based upon information available to anyone paying attention.

One possible explanation is that they understand, better than anyone, that they really need a much larger increase in the yield curve to really make a significant difference in their bottom lines. The stocks have acted as if the yield curve were now at its widest levels in years. The reality is that it has only barely lifted off of its lows.

This begs the question, ‘why have the stocks run so far ahead of economic fundamentals?’ I think the main reason is investors’ hopes for financial deregulation have soared since the election. But I also think Main Street is starting to catch on to Wall Street’s game.

It’s going to be very difficult to make the case for deregulation so soon after the financial crisis and it appears politicians aren’t even willing to try. In fact, they have recently discussed bipartisan proposals for increased regulation. Employing one of the largest lobbying groups in D.C., bank insiders understand these cross currents better than anyone else.

It could also be that bank executives have a front row seat at the slowing consumer spending show. Today’s GDP report reveals what they have likely been privy to for months now: the fact that the consumer is not doing so hot.

One of the main reasons they have such a good feel for this is they are the reason consumers are able to spend in the first place. There have been all sorts of studies out recently showing the average American consumer has no savings. Spending has to come from debt and strains in consumer credit have been growing for months now.

Considering the consumer makes up two-thirds of economic activity it’s hard to avoid coming to the conclusion that the broader credit cycle is in late, if not extra, innings. This is far more important to both bank earnings and the overall economy than anything else.

Furthermore, the credit cycle and the stock market a very closely intertwined. Again, who understands these dynamics better than the bankers who have their hands in both?

Then again, maybe they’re not really bearish at all and it’s just a coincidence they all just decided to “divest” so much at the same time.

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