Bank stocks as barometers | Financial Time


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Hello. All Thursday was sunny. Stock prices and bond yields have been rising steadily. The Federal Reserve appears to be tight with utter predictability and imperceptible tenderness. Inflation will be temporary. Evergrande et al will not sink the Chinese economy. The lion lies down with the lamb. etc. It sends me into the irrational paranoid frenzy that struggles to suppress me. Maybe things are really, really good. Please send me the email: [email protected]

I will also take a few days off. No hedge I’ll be back next Wednesday. Need to read something instead? I sincerely recommend signing up due diligence When Free meal, We bring you the latest information on the world where finance and economy are linked.

If things are going so well, why aren’t bank stocks improving?

In June I doubt Why hasn’t the bank gotten worse? Now at my usual level of consistency I wonder why they are not doing well.

What changed? Since then, bond yields have broken a strong uptrend and come down. Now they are breaking this downward trend and going up. And while there was an unpleasant perception that growth would not be as strong as it was in the near term, the consensus expects that bottlenecks will ease soon, demand will continue to grow. ‘be strong and growth will exceed next year’s trend. is. , even when the Fed eases asset purchases. In this scenario (which makes the stock market appear to be pricing), long-term interest rates should continue to rise. This all sounds pretty good for the banks.

But while Thursday’s bank stocks were a pretty good day, the past few months haven’t been very good. The performance of the KBW Bank index against the S&P 500 is as follows:

Banks want to lend money and then get paid back. The second half of their activity is on track. Defaults are surprisingly low. This is the Deutsche Bank mortgage default table (because you randomly choose a loan type). Similar models can be found in different types of loans.

What are all the men in the repo doing to keep them busy?

The problem was the first part of the business. The demand for loans was terrible. On the commercial side, here are the unpaid amounts of commercial and industrial loans from the big banks.

The surge over the past year was that companies cut their lines of credit in anticipation of the Covid crash that would never happen. Today, the volume of corporate loans remains at the level of 2018. Part of the reason is a loss of market share to the fixed income market, but the demand for capital was not so strong. .

But in the optimistic scenario sketched out above (and also assessed across a wide range of stock markets), demand for loans is expected to return. A survey of loan officers suggests an optimistic climate in this regard. Along with rising interest rates, this should boost bank profits.

Another potential source of higher returns is credit cards. During the pandemic, Americans were careful not to borrow their cards. In the second quarter of this year, card loan growth at JPMorgan Chase, Citigroup and Bank of America was 0%, -5% and -10%, respectively. But here we are talking about Americans. Except for other disasters, this pattern changes.

Yes, the volatility that has generated good returns in securities trading and investment banking can ease. But investors don’t pay for the capital markets anyway.

So if things are going so well, why are the banks not doing well? One possibility is that the stock market is a bit dumb about banks, mechanically trading them based on 10-year bond yields. It is about the relative performance of the bank and its graphical performance against a wide range of indices.

Banks are in fact much more sensitive to short-term interest rates than to long-term interest rates, so unless the 10-year yield reflects future growth and the bank is very sensitive to l economics, this correlation does not make much sense.

Anyway, this model is crazy for banking professionals. Indeed, much more than long-term interest rates and the shape of the yield curve affect a bank’s profitability. And this is perhaps one of the best times when the outlook for the bank is better than the 10-year yield suggests, and we should all be buying bank stocks.

However, there is another possible interpretation of the poor performance of a bank’s shares. In other words, no matter what stocks generally seem to say, the economic and political outlook is not so good and banks will be stuck at low interest rates, low interest rates – the world of credit demand. , And banking investors know it.

Details of the 1950s and inflation

I wrote A few days ago On what economists Gabriel Massy, ​​Skanda Amanas and Alex Williams think, the 1950s show why policymakers shouldn’t be surprised by inflation in 2021. Unemployment is low, but the surge is has calmed down without the Fed tightening policies to cool the economy. Back then, there was no self-reinforcing inflation spiral, and now it is.

Then I Written about How Larry Summers thinks MS&W got it all wrong. He thinks the Fed was (again simplified) certainly very hawkish in the 1950s, but used banking regulation rather than interest rates to cool the economy. Inflation expectations have been supported by the recent memory of the gold standard and the reversion average price to which it has led. And its potential growth was higher than it was then.

It’s no surprise to hear that MS&W thinks it was Summers who got it all wrong. Below is a partial response to Summers. Here’s a response to Summers:

  • In the 1950s, Americans had 10 years of experience in raising prices. Therefore, the idea that the gold standard has set their expectations is within reach.

  • Restrictive credit banking regulations have in fact been abolished since 1953, and as Summers says, it is not true that only savings and loan associations can take out mortgages and only at capped rates.

  • Inflation and wage growth both increased in the early 1950s, but then stabilized quickly. Previous The unemployment rate rose as a result of the recession of the 1950s. The traditional view that the economy must cool down to avoid spiraling inflation is not appropriate. This is an important point.

Now let’s chat between MS&W and Summers. I am not eligible for remote mediation. The important point for me is simple. When you think about the risk of inflation, you can’t hypnotize the 1970s. We also have to think seriously about the 1950s, and any theories we choose have to be applied to both 10s.

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