With the bank run and subsequent failure of SVB Financial Group (NASDAQ:SIVB), one would expect legendary hedge fund manager Michael Burry to sound off with a bearish prognostication. After all, Burry represented one of the main protagonists of the book and film, “The Big Short.” In contrast to his not entirely fair reputation as a permabear, the investor offered an optimistic view about bank stocks.
Recently, Michael Burry tweeted that “[i]n October 1907, Knickerbocker Trust failed due to risky bets, sparking a panic. Two others soon failed, and it spread. When a run began on a healthy Trust, J.P. Morgan made a stand. 3 weeks later the Panic resolved & markets bottomed.”
For emphasis, Burry noted that “[a] stand was made this past weekend.”
Essentially, the market expert believes that the U.S. government’s extraordinary measures to undergird depositors’ funds at SVB and failed peer Signature Bank (NASDAQ:SBNY) should be enough to resolve the current crisis in bank stocks. As well, regulators’ actions should stabilize the financial markets.
According to CNBC, “[m]ore than a century ago, the financial crisis known as the ‘Panic of 1907’ took place where there were numerous runs on banks, including Knickerbocker Trust. The crisis was over in just three weeks after J.P. Morgan, founder of the bank that bears his name, pooled money with other financiers to bail out the banking system.”
In a now-deleted tweet, Michael Burry said, “[t]his crisis could resolve very quickly. I am not seeing true danger here.”
Bank Stocks Still Face Significant Pressures Despite Optimism
To be sure, the immediacy and the magnitude of regulators’ actions offer fundamental confidence to bank stocks. In a joint statement by the Treasury, Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC), the U.S. government committed to securing SVB and Signature depositors’ funds.
In contrast, during the early catalyzing events of the Panic of 1907, J.P. Morgan initially refused aid to Knickerbocker. However, Federal Reserve History notes that after Knickerbocker suspended operations, leading to a full-scale financial crisis in New York City, Morgan changed his mind and quickly released aid. With the present crisis in bank stocks, the government responded almost instantly.
Reuters also reports that analysts anticipate the Fed will be reluctant to hike interest rates next week. If so, such a tactical shift would effectively contradict its aggressively hawkish monetary policy. Theoretically, this should bolster confidence in bank stocks and the broader equity ecosystem.
Unfortunately, the market doesn’t feel the same. For instance, the severity of the decline in iShares U.S. Regional Banks ETF (NYSEARCA:IAT) broadly matches the coronavirus pandemic-fueled panic of early 2020. The same can be said about the SPDR S&P Bank ETF (NYSEARCA:KBE).
Also, no investor should take a cavalier approach to the Panic of 1907. Fundamentally, the shock of the crisis sparked the creation of the Federal Reserve System. What’s problematic about bank stocks today, then, is that modern society benefits from the Fed. Despite the myriad regulations imposed on the sector, SVB and Signature still failed.
This realization may be fueling present fears of the broader financial ecosystem.
Why It Matters
Although Michael Burry has a reputation for pessimism, he went long on arguably the most popular meme stock before the Covid-19 pandemic. Therefore, it’s not entirely fair to dismiss his rarer optimistic viewpoints.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.