Topic/Theme Reports

BREXIT & DFAST: Breakfast of Champions for Stakeholder Stack

dhendler@viola-risk.com, Twitter: @PhatSpock

June 26, 2016

This past Friday was a double-witching hour day as both the BREXIT referendum outcome and the DFAST U.S. banks supervisory stress test results were announced within hours.  I would ask the Stakeholder Stack audience (composed of debt & equity investors, risk managers and regulatory supervisors/examiners) as to how many talking heads on the Wall Street research shop sides or from the mainstream media discussed both of these topics within a cogent context? For those comfortable with the Twitter ecosystem, I have been tweeting on these joint BREXIT/DFAST topics since early Friday morning, see:@PhatSpock. Also, I will be posting snapshots of my Viola Risk reports on LinkedIn @ linkedin.com/in/david-hendler-4abb9410.

The “Establishment” Thought Leaders v. The “Citizen Voters/Investors/Risk Managers”
I believe that both of these events are related as to how we as “citizen voter” & company Stakeholders view the dynamics of “group-think/Establishment-driven” notions of how things work versus “individual citizen voter/Stakeholder” desires to influence the process. Over the last year, the “Establishment” view and the “citizen voter/investor/risk management view” have been in a rope-pulling “tug-of-war” across the political and financial market spectrums.

For example over the last month, we have been hearing from the mainstream Wall Street research shops as to how the BREXIT vote, whereby the UK citizen voters would decide whether their country would remain or leave the EU, was a definite slam-dunk “Vote-Yes” for the maintenance of their EU membership. Not only that, the mainstream “talking head” media types were mirroring that sentiment. This tag-team approach pushed the Stakeholder Stack sentiment, expressed in market levels across stock/bonds, to lean heavily toward the “Remain” outcome. Pre-referendum bullish equity and debt markets fed off the tag-team talking heads verbiage where they were convinced the “Remain” vote was for the “greater good” of the EU region politically and more importantly for the stability of the global financial markets.

The “Establishment-types” on the investor/counterparty risk management sides were lecturing to the global eyeballs audience that the “UK-in-the-EU” was good for the UK, the EU, and related Stakeholders interests, and that the chances of it being voted down (“Leave”) were de-minimus. With the “thought-police” Establishment stoking these sentiments so far to the “Remain” vote, I believe that the financial markets were caught-off-guard by the slim ~52% ”Leave” outcome that subsequently punished global financial markets. As a result of this wrong-way sentiment and trading, on Friday, panicked equity investor selling led the Dow Jones to plummet 610 points (-3.4%), the S&P 500 (-3.6%), the NASDAQ (-4.1%). And falling values across the Eurozone with the FTSE 100 (-3.2%), the DAX (-6.8%); and similarly in Asia: the Nikkei (-7.9%), and the Hang Seng (-2.9%).

I find it interesting that similar to the unexpected windfall voting for the U.S. presidential candidates Donald Trump and Bernie Sanders that caught the Republican and Democrat Establishments by surprise, that the voters in the UK have spoken and were largely deaf to the UK and EU/USA leaderships’ recommendation/dictation to vote “Remain” in the EU. Over the weekend, the “after-the-fact” media/Wall Street talking heads have come around to the common person’s views by noting how commoners are sick-and-tired of listening to the “Establishment/so-called better educated/privileged class” dictating political terms regarding the government agenda.

DFAST Trending Similar to BREXIT
Getting back to the recently released 2016 DFAST U.S. bank stress tests, I believe that the regulatory takeover of the banking/financial markets by the so-called “better educated/academic/impartial supervisory class” is still being worshipped by most all of the Stakeholder Stack. So, the bond markets, stock markets, counterparty risk management worlds continue to take their marching orders from the regulatory edict carpet bombing supervisory “establishment” class. The latest edict is in the form of the annual “Dodd-Frank Act Stress Test version 2016 that was released Thursday afternoon. While I will have more specific commentary on it in a follow-up note, basically this report was another Federal Reserve attempt to inoculate the financial system with its view that it has everything under control. By using this stress test methodology and results as a sort of “supervisory-opioid”, it is doping the system into believing its rosy-lens view that the banking system is fine as it is on the surface well capitalized, has strong liquidity and is not an investor/risk manager exposure problem.

Over the course of my last 18 months of Viola Risk Advisor travels, I have seen these “supervisory establishment opioid” report-inoculations promote an investor/analyst lackadaisical haze view. This “purple rain/group think” haze largely reminds me of the investor/risk manager mind-set that pervaded the bond/equity/risk management markets circa 2004-2006. At that period of time, the markets thought banks/brokers/finance companies were “credit/event boring” with little apparent risk and trading too tight in the credit markets and not worth much surveillance in the supervisory realms.

As we all know, with the onset of the “2000s Financial/Credit Crisis,” risk catapulted out-of-control during that 2007-2009 time-frame which severely punished bondholder/stockholder valuations, and led to ultra-enhanced risk management procedures on the counterparty risk side as well. So, while the Federal Reserve “Wizards of Oz” may be waving the checkered flag declaring all stress-tested U.S. banks are winners, we are not so convinced. Instead, risk build is rising especially in the Commercial real estate/Credit card/Counterparty risk exposure management sectors. We believe that this “CCC” risk threat needs to be understood and monitored better.  Especially before the “CCC” components rear their ugly hydra heads over the course of the next 12-18 months.

Stay tuned for more commentary on my Viola Risk Advisors take on the DFAST concerns in soon to be released follow-up reports.

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