By William Davis


According to the Orwellian-sounding Financial Stability Board, “shadow banking” is credit inter-mediation involving entities and activities outside the regular banking system – lending, in other words, done by anything other than a bank. Gee, what could possibly go wrong with that.

“There can be no doubt that besides the regular types of the circulating medium, forms of credit spring up without being subject to any central control.”  Friedrich Hayek, European economist and philosopher

A lot actually. More than a few among us will remember how off-the-books lending schemes like collateralized debt obligations, credit default swaps, and other ill-omened credit devices annihilated the markets back in 2008. But, hey, what are the chances that malevolence of the sort will ever happen again now that we’ve a heroic outfit like the Financial Stability Board watching out for us?

“As the shadow banking system expanded, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible.” Paul Krugman, former Enron adviser

Pretty good actually. Seems there’s been an epic surge in investments by otherwise conservative investors into not-so-conservative asset managers that lend to firms that can’t get traditional financing. Story goes that pension funds and life insurers – desperate in this low-yield environment to match their long-dated liabilities – are throwing so much cash into the private darkness that these managers can’t “invest” it fast enough. Wanna’ bet the fearless folks on the Financial Stability Board are ready to protect the innocent?

These packaged securities are then sliced into various tranches, with the subordinate tranches going to the more ‘adventurous’ investors.” Hervé Hannoun, Bank for International Settlements

Uh, no, actually. These specialist firms are already building up leverage and adding complexity to safe-labeled investments to increase their returns. Worse, there’s been a proliferation of new outfits with little capability and no track record – and they’re raising gobs of precious capital. So who knows what evil lurks in the hearts of these private credit men? The Shadow? Maybe. The Financial Stability Board? Probably not.

What the markets have been doing…

It was a mixed period to say the least. The Dow moved ahead nicely, the S&P 500 went nowhere, and the NASDAQ went backwards, the Composite weighted down the by a sell-off in mega-cap technology shares. The market’s new-favorite acronym – the FAANG (Facebook, Amazon, Apple, Netflix, and Google – sold off several times across the stretch with much of the money moving into defensive segments. One of the A’s – Amazon – jumped nicely on Friday following the surprise announcement of its Whole Foods Market acquisition. Unsurprisingly, the news sent other food retailer stocks into the tank.

Equity traders mostly yawned when the Fed raised rates as expected and maintained its projection for another rate hike in 2017. By all appearance, despite the FAANG sell-off and the Amazon/Whole Foods story, the market has gradually slipped into summer vacation mode.


INDEX Friday’s Close One-Week Point Change Year-to-Date Change
DJIA 21384.28 +304.00 +8.21%
S&P 500 2433.15 +7.33 +8.68%
NASDAQ 6210.19 -(58.43) +14.28%


Treasuries, meanwhile, fell on news of the Fed’s plans to unwind the central bank’s $4.5 trillion balance sheet – a legacy of the 2008 financial crisis – only to retrace most of their decline the next day. Along the way, yield on the 10-year Treasury note fell to a new post-election low. In the end, fixed income securities of all stripe – government, corporate, and municipal – finished just about where they started. Bond traders take vacation too, apparently.


FIXED INCOME Period YTD 12 Months Yield
U.S. Treasuries
2.4% -(1.3)% 2.2%
U.S. Investment Grade -(0.1)% 4.1% 3.3% 3.1%
U.S. High Yield NC 5.0% 13.8% 5.5%
U.S. Municipals NC 4.1% 0.4% 2.2%
Non-U.S. Developed +0.3% 6.2% -(2.9)% 0.7%


What the pundits have been saying…

“One of the scariest charts to look at currently is the number of announced mergers and acquisition deals over the past year or two. In the past, there has been some correlation with the S&P 500 and thus it could generate more legitimate fears than some of the other excuses that are put forth for not wanting to buy American equities.”

Tobias Levkovich, chief U.S. equity strategist at Citi

What the numbers are saying…


The number of managers who will collectively take the reins at Uber during CEO Travis Kalanick’s leave of absence.

What people have been saying…

“They (Amazon and Whole Foods) will be blended. It won’t happen in three months, but in two or three years it will.”

Tom Furphy, CEO of Consumer Equity Partners and former head of Amazon’s consumables and Fresh divisions

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