The Boys are Back in Town

When I think about Swedbank I can’t help thinking that, er, there’s something rotten in the state of Denmark.

Swedbank has one ugly chart. It’s broken down and it looks like there’s nothing below it but empty space.

And the noises off are none too good either. The Riksbank has been displaying some unusual behaviour of late. Two weeks ago it got together with the central banks of Denmark and Norway to bail out the Icelandic Central bank. Now, why would they do that? Unless they felt that a collapse in the Icelandic banks (whose balance sheets are over three times Iceland’s GDP) could set off a systemic crisis through the Scandinavian banking system. Perhaps there are some vulnerabilities among the Scandy banks that we are not, er, fully party to.

Then the Riksbank this week warned that Sweden’s banks may be affected by deteriorating global conditions. Severely affected. That is unusual talk for a central bank.

Charlie Munger likes to anticipate self-reinforcing trends. He’s got a name for the time when several good things kick-in all at once; the Lolapalooza effect. He’s also got a knack for getting at how bad management, bad culture and bad thinking can mess up a good business.

Bureaucrats in banks run relative risk. They follow the Maynard Keynes’ dictat that for them ‘it is better to fail conventionally than to succeed unconventionally’. They don’t do it deliberately. They just feel the pressure from their managers. And their managers feel pressure from their shareholders. To outperform their competitors, each quarter. To stay on the dance floor. To be like Chuck.

Now today has been a rough day for my book. I gave up in three hours all the returns of the past week. And those were good returns.

Two things happened. As I’m sure you know, Trichet said that the ECB would likely raise rates. And then Wal-mart’s sales beat expectations. So stocks rose, the dollar fell, and I got whacked.

My own reaction on the ECB was to get an uneasy October 1987 feeling. One day Bernanke goes out on a limb to suggest that the Fed needs to protect the dollar – in part to prevent excessive commodity price gains, and a potential escalation of inflationary expectations. Two days later Trichet ignores the rapid deterioration in Eurozone growth, and the weakened condition of the banks, threatens a rate hike, and precipitates a mini dollar rout.

Shades of Baker’s tête-à-tête with the Bundesbank prior to Black Monday.

What did the market do today in response to Trichet? It bid oil up by $5/bbl. Trichet’s remarks had the effect of raising inflationary pressure, and further risking Euro-area growth.

So, if you ask me, it’s Wal-Mart Schmal-mart. This is the most dangerous time to own stocks since the Bundesbank boys gave Baker a good kicking, one sunny Frankfurt morning in October.