Bank Investing

CHAPTER 9Cycle

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing.”

– Charles O. Prince III, July 2007

The comments above made by Charles “Chuck” Prince, the former Chairman and CEO of Citigroup did not age well. Chuck Prince got a lot of flak for these comments that had a rather unfortunate timing in that they were made to the Financial Times in mid-2007. In a later interview with the Financial Crisis Inquiry Commission, he clarified that his comments were in relation to leveraged lending to private equity firms and not the mortgage business.

In defense of Mr. Prince not many people in similar seats in 2007 were prescient to figure out how long the music would play. This is true at any point in a business cycle; no one can tell when the cycle ends. We had been constantly hearing investors ask “where are we in the cycle?” and we have been hearing responses ranging from “7th or 8th innings,” “two years left,” “late cycle,” or something similar for the last five years preceding the COVID-19 pandemic. There were crickets as the markets made its ascent towards the mid-February 2020 peak, brushing off news of COVID-19 cases in Wuhan, China in December 2019 and the first US case in the state of Washington in January 2020.

What should a prudent investor do apart from buying left tail protection in the form of options and credit default swaps – which can be a drag during ...