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Winter is coming


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Private Markets 360° | Episode 8: Powering the Global Private Markets (with Adam Kansler of S&P Global Market Intelligence)


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Winter is coming

Nancy Bush is a veteran bank analyst. The following does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

I cannot tell you how lonely I feel every Monday morning when I awake and realize that I am the only person on the face of the Earth who did not watch "Game of Thrones" the night before.

It's like being marooned on a desert island and having only a volleyball with a smiley face painted on it to talk to — a la Tom Hanks in the wonderful movie "Cast Away," which was surely one of the best depictions ever of the ability of a man to adapt to a life of solitude. And on Mondays, as "Game of Thrones" plot points fill my Twitter feed, and even the bespectacled and bowtied Tom Keene (of "Bloomberg Surveillance" fame) makes references to the "Game of Thrones" developments of the night before, I feel an urge to flee to the nearest Wal-Mart in search of my own personal Wilson.

It's not that I'm totally ignorant of the basic plot of "Game of Thrones" — it's practically impossible to live in our society (and indeed, in the global society) without knowing something about it. For those who may be in need of a primer, let me suggest the scathingly funny (and often profane) synopsis by actor Samuel L. Jackson that was recorded in 2016 and is available on YouTube (""Game of Thrones" Beginners Guide: Uncensored") which gives a seven-minute-plus look at the show's themes. Safe to say that one must view this video with both a sense of humor and an ability to suspend one's sense of reality — as well as a strong stomach in some scenes, because "Harry Potter" this ain't.

I'm sure there are a lot of reasons that "Game of Thrones" is so popular — plot development and strong production values seem to be two of them — but the reasons that I don't watch are that I don't need to absorb more violence (I get plenty of that on the local Atlanta news) and that the struggle for the Iron Throne of Westeros seems to me to eerily reflect the daily news from Washington. ("Game of Drones," perhaps?) The steady White House drip-drip-drip of angry tweets, palace intrigue, failed policy bids, family infighting and collegial backstabbing must be providing story lines to the show's writers at this point.

As anyone who is vaguely familiar with "Game of Thrones" knows, danger is lurking just beyond The Wall (sound familiar?) in the form of the White Walkers, a race of really ugly murdering machines, who will presumably advance into the Seven Kingdoms and start killing off the feuding families, thus ending their dreary rivalries. The series began with an episode titled "Winter Is Coming" — a phrase that was meant to evoke a sense of dread right from the outset — and that looming menace seems to be the ingredient that brings millions of viewers back week after week to make "Game of Thrones" one of the most widely viewed franchises ever.

Winter is coming. It's hard for someone like me — who has watched markets and banks for 35 years now (as of Aug. 2, officially) — to not understand the implications of those words. To be a bank analyst is to be always looking over one's shoulder, waiting for the coming of the next disaster and the havoc it will wreak upon the industry and my stocks.

I gave a speech to a group of bankers at Furman University recently — the well-known and well-attended Executive Banking School of the Consumer Bankers Association — and I put up a slide showing the banking crises that have ensued since the stock market crash of 1987. (Remember that one?) The commercial real estate implosion in Texas and New England of the late 1980s, the liquidity crisis of the mid-1990s, the bursting of the tech bubble in 2000, and on and on — I was there for every one of them, so please forgive me for being borderline paranoid at this late stage of my career.

One of the attendees at my CBA presentation asked the inevitable question — what was worrying me right now? — but I must admit that I was hard-pressed to provide him with an answer.

The banking industry has just come through another reporting period that was generally satisfactory and mostly provided positive earnings surprises. There was general optimism about trends in the remainder of this year and next, although there were also some clear warnings about the yield curve and its impact on net interest margins and interest revenues. But there remains a fair degree of optimism about the ability of this administration to deliver on corporate tax cuts and regulatory reform, with the result that the economy and bank balance sheets will grow faster.

Well, maybe. I certainly do not have the ominous "gut feel" that I had in 2008, when my concerns about the housing market led me to shed one of the two homes that I owned at the time. (Please do not ascribe to me any special insight — I had NO idea that things would get as bad as they did.) But it's hard not to confront Dow 22,000 and the high level of stock valuations, the general disarray in American politics, the increasingly ominous international situation and the general air of dismissal on Wall Street of the situation on the ground. Yes, I know that bull markets climb a wall of worry, but I stubbornly hold that they do not necessarily climb the wall of a Federal Reserve that is ready to make big changes in a monetary stance that has had no historical precedents.

I'm not the only one worried, apparently, and I take heart that both bankers and banking regulators seem to be ahead of the game. Jamie Dimon (who should DEFINITELY be a character on "Game of Thrones") sent the pointed message a few weeks ago that dislocations may be coming as the Fed changes its stance, and I took note of a recent Financial Times article ("US regulators issue warning over 'aggressive' lending") that detailed the issuance of a warning from the Fed, OCC and FDIC on excesses they perceive in the leveraged lending sector.

The warning of "ineffective covenants, liberal repayment terms and incremental debt provisions that allow for increased debt, which may inhibit deleveraging capacity" pretty much echoes discussions on the second-quarter earnings calls of some of the extreme competitive conditions that we're seeing here in the Southeast. Is forewarned going to be forearmed this time around?

But it's a pretty reliable axiom that the thing that we worry about is not usually the thing that comes back to bite us.

I'm actually less worried about the impact of aggressive bank practices on bank stocks and the stock market (and thereby on the financial system) than I am about the reverse — the weird structure of the stock market presently and its ability to damage the economy and therefore the banks.

It is a dense topic, but I would strongly recommend reading another FT article, titled "Index trackers break basic rules of prudent portfolio management," that details the risks inherent in a market that has come to be dominated by index funds and ETFs. It's a subject of personal interest to me, as I found out in the "Flash Crash" of 2010 that in a time of market turbulence ETFs do not trade like stocks — and indeed, as I so painfully discovered, they sometimes do not trade at all; they just plummet.

Yes, winter is coming, but that does not mean that summer cannot heat up further and that autumn may not be gloriously warm and pleasant. But the White Walkers — whether they be the North Koreans, or the Russians, or the Iranians, or a president with increasingly self-destructive tendencies, or investors who just begin to throw money at ever-more-expensive assets — remain just beyond The Wall. Be careful out there, and be sure to remember that liquidity is the best defense.