Oct. 18, 2022

What The Bankers Are Saying

Each quarter the nation's four most prominent and influential banks report their results. These banks are the nation's largest: JP Morgan, Wells Fargo, Citibank, and Bank of America. On Wall Street, this begins Earnings Season, when all of the publicly traded companies in the country report theirs to shareholders. And this is more than mere traditions. To me, this is the heart and soul of our financial system. Each corporate executive is under regulatory and legal scrutiny. Any material misstatement could result in a fine or even jail time.

By leading off with the four marquise banks, investors get the latest insight into the current financial environment in the country. Typically, however, that financial insight is only gleaned when you review the actual results of the bank.

The tradition in the industry is for the CEOs to present a lot of "warm and fuzzy" and not much hard reality. For that, we need to turn to the actual financial ledgers at the back of the Quarterly Statement. Fact is usually in the numbers, if not in the speeches. But lately, these quiet CEOs are speaking out, telling it "like it is," to use an old expression. Jamie Dimon has been particularly outspoken, and we'll talk more about that in just a minute.

To summarize the condition of these money-centered banks currently, they are, to use a favorite term of President Biden, in "transition." Each bank moves from historic low-interest rates toward much higher rates. We have moved from low commercial activity to high liquidity because of the Pandemic and the following stimulus.

It turns out that 2021, the stimulus year, was pretty good. And it doesn't look like the banks will be able to match those earnings this year. Lower results this year would make sense. The entire strategy of the US Treasury and the Federal Reserve was to power the nation's recovery from the Pandemic through the financial markets. The government provided lending facilities and mailed out stimulus checks, all to fuel the comeback. People paid their bills on time with free cash, and corporations increased their leverage on nearly zero interest rates.

What's not to like?

The most profound effect was on the number one bank in the country, JP Morgan. Morgan was able to reduce its loan loss reserves by $2 billion. Set-asides are the amount banks set aside for expected loans that will not perform. The bank put that extra $2 billion to work and used it to expand its business.

But that was in 2021. Now, those stimulus checks are but a long-ago memory. And some who were paying their bills on time are starting to slide. This year Morgan has to once again set aside reserves in case those borrowers stop paying their accounts altogether. Morgan has put $1 billion in those loan loss reserves this year. So they've gone from $2 billion released last year to a $1 billion set aside this year. That's a big transition!

In listening to the big four banks, you get the sense that there is a growing unease among these bankers. And Jamie Dimon, Chairman of JP Morgan, has been addressing this unease this last week. On Wednesday, Diamon discussed the trouble in Europe, the War in Ukraine, and the energy crisis. He concluded Europe is already in recession, and the US is headed there in the next half year or so.

If you noticed, the stock market dropped like a rock with his comments. But he is probably correct. He certainly is putting the bank's money behind this assessment. In addition to setting aside an additional billion dollars in reserves, he is also keeping better than a trillion dollars in bank capital at very low-yielding but safe Government investments. Better to stay liquid and secure right now than go anywhere on the risk spectrum.

I thought you might be interested in a little inside baseball. It's part of the reason that we can see that the banks, indeed, have a tough transition.

As a former Financial Officer for a couple of brokerage firms, I can tell you that you usually file your public earnings and regulatory filings simultaneously. You like to get them both out of the way as soon as possible and start working on this quarter's financials.

I notice that neither JP Morgan nor Bank of America is doing that this quarter. The Regulatory filings aren't technically due until October 31. That's two more weeks. That's why the financial officers at both banks will use that time to review the numbers again. Double checking that everything is ship shape and in order. When your world is in flux, like it is right now, it is very prudent to take your time to ensure all the reports are accurate.

This extra review tells me it's been a rough quarter.





Great Britain auctioned their 30-year Gilts this morning. The classic long bond measures most countries' sovereign interest rates; it began the year with an interest rate of slightly over 1%. Today's auction sold at a 4.4% rate. How's that for inflation? The higher interest reflects the new Liz Truss government's financial difficulty. A difficulty that has already seen one Chancellor of the Treasury resign.

It's a rocky road for this new British Government.

There aren't many blue skies in Germany this morning. The latest Economic Sentiment survey shows that the average German's outlook for this winter remains at rock bottom. The reading came in at a negative 59, up slightly from the multi-year low set last month. These meager numbers show how seriously the man in the street German takes their current predicament. And the survey reflects just how difficult it will be to survive this economic maelstrom.

In just a few minutes, the Federal Reserve will release the latest Industrial Production level for the country. As you know, I believe that Industrial Production is one of the keys to a sustained economic recovery. It appears that American Industrial recovery peaked in February when Production was up nearly 7% yearly. The production level has decreased for seven months, and we'll be lucky if it's half of the February level for this report. This country, which once led the world in Industrial Production, must return to "making things."

There is a cloud hanging over the Atlanta Fed this morning. As yet another senior member of the Federal Reserve finds himself under investigation. Ralph Bostic, President of the Atlanta Branch of the Federal Reserve, has just admitted to breaking Fed rules regarding trading and records. Bostic's improper trading is the fourth such violation by a senior fed official in the last year. It reflects a systemic issue of petty corruption that seems to run throughout our Government and Agencies.

Some significant companies reported their earnings this morning, and all, so far, are trading higher. Leading off was Vaccine Maker, Johnson & Johnson, then a group of major financial companies: Goldman Sachs, State Street Bank, and Truist Financial, which is the new company created from the merger of BB&T and Sun Trust Bank, and finally, Albertson's Markets, trading higher in response to the recent Kroger merger.