International Mega Banks More Leveraged  
Than U.S. Banks' 2007 Peak 

Five years and counting

During the past five years, following the worst financial crisis since The Great Depression, the financial media has been talking about the deleveraging process happening worldwide.  We've all heard the stories of how banks to consumers to corporations have deleveraged and continue to do so.  It's as if all the global financial bailouts were all orchestrated just to buy us enough time so that we could get our financial houses in order.  Then, miraculously, after someone blows the "all clear" alarm we can all go back to living our normal lives once again.

Back in 2009, I remember watching an Australian television interview with Paul Keating, the former Prime Minister and Treasurer of Australia.  When asked if he thought this was a three-year crisis, a five-year crisis or something worse, he chose the latter.  Mr. Keating went on to explain that our massive global debt had been accumulating for several decades now and that it would take many, many years to undue the damage.

How right he was!  After five years supplying bridge loans to the global financial system, central banks worldwide have been playing a game of chicken.  Can they actually print enough money to carry us over the abyss to the promised land?  Or, will time become our bitter enemy?

As seen in the chart below, some progress has been made.  The developed world's mega banks have reduced leverage throughout the system.  If only we had a limitless amount of time available to continue on this road, all things would just work themselves out eventually.  Or so it seems.

(Source:  Morningstar - Quarterly Financial Leverage - Optimus Leveraged Global Mega Bank Watchlist)  
 

Fortunately, for those of us in the U.S., things look better on a relative scale.  While our own mega banks were highly leveraged (24:1) pre-crisis, we've made great strides (thank you taxpayers!) in dropping that level back down to earth.

There is a different story, however, on the other side of the world. European mega banks' financial leverage peaked at 42:1, while Japanese banks peaked at 48:1.  They weren't using punch bowls back then; they were filling up the swimming pools! Shockingly, five years removed, European banks are just now hitting U.S. peak leverage levels, while Japanese banks still have a little ways to go. To put it another way, Europe has just now reached our dangerously high levels of leverage from 2007 and Japan is still in the "extremely dangerous" level we never actually reached.

International Mega Bank Hit Parade 

Examples of the "swimming pool" sized punch bowls overseas are not hard to come by.  In 2008, Deutsche Bank AG in Germany had leverage of 72:1!  Five years later, they have brought it down to only 32:1. 

European Bank Credit Agricole's current financial leverage is 24:1 and they are rated "F" by Morningstar for financial health, which is a rarity.  Current financial leverage is 24:1. 

Japan's Mizuho Financial's leverage hit 66:1 in 2008-2009 and is now only 32:1.       

Along with Japan's Mizuho Financial, Europe's Barclays Bank is the only other bank on our Global Mega Banks Watchlist that has the dubious distinction of running greater than 50:1 financial leverage four years in a row!  No wonder they backed out of any Lehman deal in 2008.  

There Will Be A Test 

Our fragile financial system may be going through another real-life stress test soon.  Who can say what the so-called "trigger" will be:  China credit crisis/hard landing/property market collapse?  Emerging markets currency crisis?  The Russian/Ukraine crisis?   

At this juncture, allocating assets toward tactical equity & bond strategies that can move to safety makes sense, especially since we are so long overdue for a double-digit correction in the equity markets.  Please let us know how we may help in this area. 

 

For full details on each of our strategies, including fact sheets, please visit our website. 

 

Please call us directly:

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Optimus Advisory Group's Mission
Optimus Advisory Group seeks to create liquid alternative and tactical investment strategies that meet the needs of our advisor clients.  We use a disciplined, quantitative methodology to build and manage our portfolios.  Over a full market cycle, these strategies are designed to provide superior risk-adjusted returns while maintaining a low-correlation to traditional market indices. 

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Advisors looking for expert advice on how best to utilize alternative and tactical investment strategies in their practice can access our investment consulting and research.  We provide guidance in the following areas:

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Advisors wanting to directly manage their own client accounts can access our liquid alternative and tactical strategies through a Strategy License Agreement.  For a monthly asset-based fee, we will provide the trade instructions generated by our proprietary mathematical algorithms.

 

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For more information about any of our programs, please contact us.  You may also download the fact sheets for any of our investment strategies on our website.  Each fact sheet contains strategy descriptions, performance results, backtesting research, disclaimers and disclosures for each model.

 

Thank you for your interest in our investment strategies.  We'll continue to keep you informed.

 

Sincerely,

 


Steve Rumsey

Chief Investment Officer
Optimus Advisory Group
6 Venture, Suite 200

Irvine, CA  92618 

(949) 727-4734

 

Advisory services offered through Optimus Advisory Group,
a registered investment advisor.
Disclosures

The performance results shown include the reinvestment of dividends and other earnings. Comparison of the Optimus Advisory Group Programs to any other indices is for illustrative purposes only and the volatility of the indices used for comparison may be materially different from the volatility of the Optimus Advisory Group Programs due to varying degrees of diversification and/or other factors. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will be profitable. Optimus Advisory Group does not make any representation that the Optimus Advisory Group Programs will or are likely to achieve returns similar to those shown in the performance results in this presentation. Optimus Advisory Group reserves the right to trade different funds within their models.   

 

The historical S&P performance results (and those of all other indices and index funds used as proxies for indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual client or prospective client in determining whether the performance of the Optimus' portfolio meets, or continues to meet, his/her investment objective(s). It should not be assumed that any Optimus portfolio holdings will correspond directly to any such comparative index.    

 

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy (including the investment strategies devised or undertaken by Optimus Advisory Group) will be profitable for a client's or prospective client's portfolio. All performance results have been compiled solely by Optimus Advisory Group and have not been independently verified.   

 

The Optimus performance results do not reflect the impact of taxes.