Why Portugal’s Bad Bank Won’t be a Mortal Blow for Stocks

For months we’ve laughed at all the fake crises.

We’ve poured scorn.

We’ve chalked another line on the tally.

And each time we’ve told you it wouldn’t matter…it was so unimportant that it didn’t even rate as a storm in a teacup. We told you to keep buying stocks.

But what about this time? There’s trouble in Portugal with a potentially dodgy bank. Is this the crisis everyone has been waiting for?

That’s more like it…

Let’s get something straight about the mainstream’s fascination with picking a crisis.

The reason they do it is simple: they completely and utterly failed to predict the 2008 financial meltdown. So now, to avoid further embarrassment they’re jumping at anything that looks like a crisis.

The trouble is they’ve got a terrible record. Furthermore, they don’t know how investors and markets work. The world economy and financial markets were never going to crash because of Iraq.

They were never going to crash due to Russia’s invasion of Ukraine. And they certainly were never going to crash due to whatever the problem was in Turkey this year or last year. (We can’t even remember what that ‘crisis’ was all about it was so irrelevant.)

When it comes to predicting the next market crash there’s only one thing you need to look for — how close is the crisis to the ‘heart’ of the world economy?

This isn’t a 1929 repeat

This is important.

Much of the mainstream commentary on the problem in Portugal has centred on the fact that a bank is part of the problem.

Commentators are immediately thinking back to the 2008 meltdown, when banks around the world went bust — especially here in the US. By the way, after spending a few days in Baltimore, your editor is now down in Orlando, Florida, for the World Future 2014 conference. We got here just in time to enjoy the huge thunderstorm passing overhead.

It’s an exciting looking event. We’ll give you the details next week on what we learn over the weekend.

Florida, of course, was the centre of the US housing market crash. Property prices here fell by more than half in some areas.

We won’t cover old ground by reliving that period. You know what happened. There’s no point going over it again.

The one thing we’ll say is that it was an important event because the crisis went right through the heart of the global financial system. It impacted some of the world’s biggest banks. It directly impacted the world’s biggest economy.

And most importantly, it directly impacted the world’s reserve currency — the US dollar.

It was a similar story with the Great Depression. Although some argue that the 1929 stock market crash was due to the collapse of an obscure European bank, it wasn’t so much the bank itself that was the problem, but rather the impact it had on the demand for the reserve ‘currency’ of the time — gold.

So, just how close to the heart of the financial system is Portugal and the supposedly dodgy bank, Banco Espírito Santo?

Unfortunately, if you’ve got your heart set on a crash, this most likely isn’t the crash you’ve been looking for…

The markets knew this was coming

For a start, the news of the bank’s woes didn’t come out of the blue.

No. We’re not saying we knew all about it. We’d never even heard of the bloomin’ bank until yesterday. But that’s not important. Because those in the know — those who trade big money on European banks — knew all about the problems last year.

And if you look at the bank’s stock chart you can hardly say that it was trading at a sky-high valuation before news of further problems with the bank came out overnight:

The stock is down a whopping 98% since 2000.

But again, that’s nothing new. If you go back to mid-2012, two years ago, the bank was down 98% from the 2000 low too.

We’re not talking Citigroup [NYSE:C] or Bank of America [NYSE:BAC] here. When those stocks crashed in 2008 they had fallen about 50% from the 2007 peak. That was a big move. But those banks still had much further to fall.

Bank of America ended up falling around 74% from peak to trough, while Citigroup fell 94%.

But that’s the difference. Those banks were right at the centre of the US financial markets. They were big dealers in securities. They had huge numbers in terms of deposits and loans. And they had their fingers well and truly wedged into the murky world of leveraged and complex derivatives.

As for the Portuguese bank? Well, sure it has a problem with a potentially big bad loan on its books. But really, does anyone think the European Central Bank won’t tip in the money and security to back the bank?

Right idea, wrong story

Look, we’re not saying this is a complete no deal.

This isn’t like Iraq, Turkey or one of those other non-stories.

At least the mainstream has got one thing right. There is only one event that will cause a wholesale crash in markets — it will be to do with money stocks, specifically bank stocks. And even more specifically, banks directly related to the US dollar.

But we won’t give the mainstream press too much praise. After all, they were bound to as they had thrown the kitchen sink at every ‘crisis’ possible over the past five years.

But we still don’t see it as a major crisis that will send global markets crashing. For the simple fact that Portugal is too far removed from the heart of the financial markets.

That’s why we’ll continue to see these events as buying opportunities rather than selling opportunities. Some of our favourite stocks are trading at a discount thanks to this sort of junk.

Not only that, but it gives us even more reason to turn our nose up at the debt and welfare state ridden ‘developed world’ economies. We’ll focus on the innovation and growth that we’re seeing in the developing economies.

If you want to make big stock returns, look at the developing markets and give the developed world a miss.

Cheers,
Kris

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