I'm Bearish on Banks

The Canadian financial sector XFN is at $23.36

The US financial sector XLF is at $15.76

I am bearish on all global financial stocks. I think their balance sheets have been artificially inflated over the last 4 years due to relaxed FASB accounting standards (2009 changes relaxed mark-to-market accounting). I think there are large potential losses waiting to be realized in financials both on balance and off balance sheet (the hidden derivative exposures).

I have very little faith in the quality and honesty of bank accounting. The entire sector is littered with crooked executives and money managers who were never charged or convicted of their financial crimes. Remember these are people who misrepresented both the value and credit risk of instruments, FOR YEARS, and were never called out on it.

Both USA and Canada coddled the banksters, and instead of punishing them we rewarded them by inflating the price of their assets through central bank purchases and government support. The sector returned to record high bonuses and salaries. CEOs at the Canadian banks, for instance, all enjoyed higher salaries once they ran the companies into the ground and were dependent on government support.

I am very bearish on the financials and I don't recommend that anyone hold any bank stocks, unless they have total faith in the accounting. Personally, I don't trust the people, and think they have been parasites and crooks. There's zero enforcement holding them in line. Invest in this sector at your own risk!

Also keep in mind that central bank activity, through asset purchases, has seriously juiced the prices of all assets held by financial companies. It's specifically juiced bonds and credit instruments. Unless central banks keep up their pace of manipulation – er excuse me, "liquidity support" – the price of assets will revert to normal, which means balance sheets will get hit hard.


I'm short the TSX (which is 34% financial). I am long Berkshire Hathaway, but only because I have faith in their accounting. My confidence in BRK and Buffett, however, has been eroding over the last few years.

- Perpetual Bull,