The latest bank worry is Charles Schwab and the nearly $29 billion in unrealized losses it has sitting on its balance sheet.
The firm claims it has plenty of liquidity to cover customer deposits but increasing outflows still stand to dent the companies profitability.
In general, nearly the entire financial sector has lost its shine for investors and this goes far beyond the risk of bank failures. The troubles that banks are experiencing are in large part due to them not adjusting their investment and hedging strategies in step with the Fed's rapid rate increases.
Institutions that were loaded up on US Treasuries and other rate-sensitive assets have amassed increasing "paper losses" as the Fed lifted its benchmark rate from near zero to near +5% over just the course of one year.
However, these firms argue that the paper losses shouldn't be raising such alarms because they may never need to be incurred. Meaning as long as they don't sell those assets, the losses shouldn't count. But to investors, which are typically looking at future earnings potential, they matter very much. If the Fed ends up reversing course this year and rates come back down at a rapid clip, most institutions will likely be spared extreme pain. But if the Fed holds rates at current levels for another year or more, many may have no choice.
There are also growing concerns about "shadow debt," which is basically loans made to private equity and other less-regulated, nonbank entities.
Because of the lack of oversight, Wall Street insiders and regulators alike are concerned about the unknown interconnections between this debt and banking institutions as it could pose a systemic threat to the global financial system. How big a threat isn't really known because the system is so opaque.
To get a better sense of the risks, regulators in the UK are set to start stress testing some private equity firms and other nonbank credit providers this year. US regulators are considering a similar move. This alone could have ripple effects if it results in less money flowing through these private creditors, which would mean fewer funding options for startups and other young businesses. That in turn could lead to slower job creation and likely slower economic growth.
In other words, the Fed's tightening program is having its intended effect of slowing the economy but we may only be scratching the surface on where the worst of the fallout might be felt.
Congress today begins two days of hearings into the recent bank collapses with the Senate Banking Committee meeting today, followed by the House Financial Services Committee tomorrow (Wednesday). There are likely more hearings to come but investors are primarily interested in whether lawmakers appear open to a higher deposit insurance level (over the current $250,000 limit) or other guarantees that could restore faith in the banking system.
Keep in mind, however, banking problems do not necessarily mean big stock market problems. As far as the S&P 500 is concerned, the bank stocks really don't matter all that much. Think about it like this, the collective combined weighting of Bank of America, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley, and Wells Fargo is still less than half the weighting of either Microsoft or Apple.
In other words, while the banking crisis is a significant concern for the overall economy, it's just not that big of a deal currently in regard to the overall stock market.
Investors today will be digesting quite a bit of economic data, including the Case-Shiller Home Price Index, Consumer Confidence, the Richmond Fed Manufacturing Index, and advance reads on International Trade and Retail and Wholesale Inventories.
Most of this week's notable earnings are on the calendar for today as well, with Lululemon, McCormick, Micron Technology, and Walgreens all reporting.
Keep paying close attention to your local and regional banks, be asking lots of questions and comparing to find the best possible homes for your money. When things change, often times we have to change...
The Good and Bad of AI - The latest breakthroughs in artificial intelligence could lead to the automation of a quarter of the work done in the US and eurozone, according to research by Goldman Sachs. The investment bank said on Monday that “generative” AI systems such as ChatGPT, which can create content that is indistinguishable from human output, could spark a productivity boom that would eventually raise annual global gross domestic product by 7% over a 10-year period. But if the technology lived up to its promise, it would also bring “significant disruption” to the labor market, exposing the equivalent of 300-million full-time workers across big economies to automation... Lawyers and administrative staff would be among those at greatest risk of becoming redundant. Source Financial Times
Americans Will Dump up to $1.1 Trillion in Stocks This Year: This year could mark the end of the affair between Americans and their stock holdings. That’s according to Goldman Sachs analysts who say due to the rise in bond yields since the start of 2022, and increased flows to bond and money-market funds, U.S. households could end up dumping up to $1.1 trillion of equity holdings this year. The current level of market yields clearly shows that the era of TINA (There is No Alternative) has ended and that now there are reasonable alternatives (TARA) to equities, said a team of strategists led by Cormac Conners and David Kostin. Although equity demand remained resilient amid sharply rising rates in 2022, we believe the YTD flows into the money market and bond funds signal an escalating household shift away from equities and toward the alternatives. Their model of household equity demand is based on the 10-year U.S. Treasury yield and personal savings rate. In their base case, they estimate net selling of $750 billion this year, alongside their forecast for the yield on the 10-year Treasury note to rise from around 3.6% currently to 4.2% by the end of this year, and the personal savings rate will rise to 5.3% from 4.5%. Conners and the team said such stock selling would reverse six previous quarters of household equity demand. Source Market Watch
Tale of Two Housing Markets: The United States is a country of two housing markets with home prices falling in one from a year ago and in the other, they’re still posting annual gains. That division runs right down the center of the U.S. In all of the 12 major housing markets west of Texas, plus Austin, home prices fell in January on an annual basis, according to mortgage-data firm Black Knight Inc.’s home-price index. In the 37 biggest metro areas east of Colorado, except Austin, home prices rose year-over-year. This pattern of geographical disparity is highly unusual, if not unprecedented, housing analysts say. “We’ve never seen anything quite like this where it’s so stark, west to east,” said Andy Walden, vice president of enterprise research strategy at Black Knight. The housing market is at a pivotal moment heading into the crucial spring selling season. Declining mortgage rates in December and January spurred a pickup in activity, but some of the momentum halted in February as rates started to climb again. Source WSJ
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World Bank Says Global Economy Faces a "Lost Decade": After three decades of mostly fast-paced growth, the global economy may finally be in for a big slowdown. A number of economic risks, including an aging global workforce and declining private sector investment, are converging to limit economic growth. Left unattended, these threats could reverse decades of efforts to reduce poverty and fast-track development, while setting the stage for a “lost decade.” That’s the warning of a new report released by the World Bank on Monday. The report referred to potential GDP growth as an economy’s “speed limit”: how much growth policymakers can realistically target without risking excess inflation. Chiefly responsible for lowering the global economy’s speed limit is slowing productivity gains in labor forces worldwide. But the World Bank identified a much larger worldwide trend that could deal a fatal blow to the global economy’s speed limit: a looming decline of skilled young workers that is dragging down the global labor force. Because of declining birth rates worldwide, it’s a challenge that will likely get worse before it gets better. Source Fortune
Retirement Has Become Much Longer Across Rich Countries: Over the past weeks, protests in France against the government’s pension reforms have intensified. France is no stranger to protests but President Emmanuel Macron’s decision to force through an increase in the pension age from 62 to 64 years has aroused particular ire. All rich countries with welfare states will, in fact, need to make similarly unpopular choices. The combination of fewer births and longer lives means that the old-age dependency ratio—the proportion of people aged 65 and older to those aged between 20 and 64—is expected to rise from one in five in 1990 to one in two by 2050 across the oecd, a club of mostly rich countries. And the time people spend in retirement has shot up in the past 50 years. In 1970 men, on average, retired at 66 and could expect to live another 12 years. In 2020 they retired at 64 and had 20 years ahead of them. By contrast, although their life expectancy at retirement has also doubled over the same period, Mexican men today spend 16 years in retirement. Source The Economist
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