“Today just feels different,” one JPMorgan trader warned in a note to his clients this morning. “Fundamental long-term money is selling. I can’t help but sense that we’re at the apex of some unknown pivot point in the market. I can’t shake it.”
That note comes from a Premium article on Zero Hedge that I can’t share because it requires a subscription to view it. The trader’s concern of the day, however, didn’t stop the market from hitting new highs again today or stop Treasury yields from falling as Powell spoke dovishly about not being able to help but feel that a Fed rate cut is getting close. (Not March close, but close enough, I guess, that Powell’s normal dulcet tones sweetened trading on market floors and, thereby, loosened financial conditions just a little more today.)
It’s hard for me to tell if Powell is perpetually stupid or really sly and smart. Is he blind to how sounding so soft always takes financial conditions to a looser point, making inflation more likely to rise, or is this just his way of feathering the stick on his aircraft for a soft landing by teasing markets to do his loosening for him? It is something we’ve seen again and again. Powell mentions the start of a move into his final landing by lowering the landing-gear of interest rates as being a ways off, but he says it in such a way that it loosens financial conditions, likely giving more rise to inflation and seemingly defeating his purpose. Is he a coward, afraid of congress (as the Dems would love more Bidenomic money pumping and made that clear to him today) and of riling markets, or is he just one smooth pilot, totally confident that his landing is softly settling like he wants?
Pressed at the start of the hearing by the panel’s chair, Ohio Democrat Sherrod Brown, on why the Fed was not quicker to cut rates “to prevent workers from losing their jobs,” Powell said that was a top-of-mind concern, while nodding also to the economy’s resilience.
“We’re well aware of that risk, of course, and very conscious of avoiding it,” Powell said. “If what we expect and what we’re seeing – continued strong growth, strong labor market and continuing progress in bringing inflation down – if that happens, if the economy evolves over that path, then we do think that the process of carefully removing the restrictive stance of policy can and will begin over the course of this year.”
I’ll cover the jobs side of this in my weekend Deeper Dive, but if you look at banks, instead of inflation, one can certainly see a reason outside of the labor situation for Powell to be desperately hoping that inflation is still coming down, even though all the data he claims he is dependent on says that it is rising. If you listen to him on banks, however, everything sounds reasonably A-OK, except if you consider the fact that the Fed hates to ever admit anything is wrong with banks and always tells us they are “strong and resilient” along with the FDIC and the US Treasury. In his talk today, Powell did admit, amid such assurances, that there is just a spot of trouble. (Lots of other articles today admitted there is a lot more than a spot.) He also did say that if the Fed lowered rates, too soon (such as in March), they’d likely have to raise rates again even higher than they are now.
As for one spot of trouble, Bill Martin, who rightly predicted the collapse of Silicon Valley Bank last year, said today that he just added more to his New York Community Bank short because “it will end up a zombie bank.” NYCB, itself, admitted today it lost 7% of all deposits during the last month. It also slashed its dividend to a penny per share.
Powell’s veiled warning about banks was rather stark if assessed in terms of the normally mute or soft tones of Fedspeak when reporting about banks. It was the kind of comment that says he knows a collapse is imminent and says what he must because he doesn’t want to tell congress all banks are “strong and resilient” when he knows the next weekend will probably be one of those ones where we all learn on Monday that the Fed, the FDIC, the Treasury and JPMorgan cobbled together another nice fire-sale snack for Jamie Dimon to feast upon. Dimon (I pronounce it “demon”) is probably smacking his lips over the prospect of a tasty morsel carved off from NYCB soon to add to JPMorgan’s perpetual banker banquet.
Powell actually stated outright in congress today that “There WILL be bank failures” caused by the commercial real estate crash.
Federal Reserve Chair Jerome Powell said Thursday he expects to see some banks fail due to their exposure to the commercial real estate sector, which has declined significantly in value following the shift to remote work.
Well, let’s be fully honest here—yes, caused by the moves away from office space but ALSO caused by the Fed’s rapid and now half-year-long-held rise in interest rates, which has devastated the value of bank reserves. This is the kind of talk that makes one think a move on NYCB might happen as soon as this weekend. (I’m not saying we will see that, but we’ve certainly seen that the Fed only says things like like “there will be bank failures” and then only vaguely, when they know they are working on a failure or three right now.
He did offer this assurance:
Powell said the banks that are in trouble with falling office space and retail assets are not the big banks, which were designated as “systemically important” in the aftermath of the 2008 financial crisis. That episode, which resulted in a taxpayer bailout of the financial sector, was also triggered by unsound real estate assets.
Rather, the banks at risk of failure now Powell identified as smaller and medium-sized.
Which, of course, perfectly describes the kind of bank NYCB is.
“It’s not a first-order issue for any of the very large banks. It’s more smaller and medium-sized banks that have these issues. We’re working with them. We’re getting through it. I think it’s manageable, is the word I would use,” he said.
“I think it’s manageable” is not really the most reassuring language coming from the biggest national central banker on the planet.
Powell did say he had identified the banks most at risk.
Oh, good. That’s so much better, at least, than last year when they seemed not to have identified any of the banks that went down, though they later said they had identified them and had given all them stiff verbal warnings while doing absolutely nothing about their condition. They tongue-wagged them.
“We are in dialogue with them: Do you have your arms around this problem? Do you have enough capital? Do you have enough liquidity? Do you have a plan? You’re going to take losses here — are you being truthful with yourself and with your owners?” he said.
Yeah, just like that! So, what could wrong there? The Fed has seen which ones have problems, and they are tongue-wagging them to save us from troubles like they did this month last year. Maybe it’s seasonal.
“In many cities, the downtown office district is very underpopulated. There are empty buildings in many major and minor cities. It also means that all the retail that was there to serve those thousands and thousands of people who work in those buildings, they’re under pressure, too,” he said.
And this is why any regional banks that are heavy on such loans are going to end up, like Martin said, as zombie banks.
Powell said the Fed is specifically keeping an eye on banks with “significant” commercial real estate concentrations, which is a point he’s made several times in prior comments.
Powell expressed confidence that the Fed and financial regulators would be able to contain the fallout and prevent a broader crisis.
I guess that means they will be renewing their emergency bank funding program that sunsets this month.
So, nothing to worry about here, Folks, because the Fed sees this real-state rubble coming and has contingency plans to manage it.
As Powell was testifying, New York Community Bank’s stock plummeted more than 40% Wednesday afternoon after The Wall Street Journal reported that the beleaguered regional lender is seeking a major cash infusion.
It fully recovered from Wednesday’s fall when a rescue deal led by former Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital was pulled together by the bank and its new financiers, likely taking this failure off the Fed’s plate for this weekend. However, before the new deal came together a weekend rescue was quite possibly weighing on Powell’s mind, but there are others in waiting … if not for this weekend then for a weekend coming soon near you.
If anyone can save NYCB it is Steven Mnuchin. He’s the guy who was paddling around the pool on his Caribbean vacation in December of 2018, knocking back piña coladas, while texting the world that he’d been calling all the major banks in the US that weekend from poolside to make sure they have enough cash for the weekend, and they had all assured him they were fine, triggering one of the biggest one-day stock avalanches and near bank runs in recent history with a surprise text that “all is well.” So, this guy can move mountains of capital just floating around his pool with a cell phone. His day in the pool also helps demonstrate how mere vague mention of troubles in banking by Powell is a big tell.
Sounds like they have the situation managed though:
Mnuchin said that he did “extensive diligence” on NYCB’s loan portfolio and that the “biggest problem” he found was its New York office loans, though he expected the bank to build reserves over time.
“I don’t see the New York office working out or getting better in the future,” Mnuchin said.
That’s sort of an odd kind of reassurance. I wonder if that was his special brand of poolside, cell-phone diligence.
The bank, which has $116 billion in assets, is evaluating whether it should reduce assets to below the key $100 billion threshold that brings added regulatory scrutiny on capital and risk management, executives said Thursday.
In other words, they’re debating whether they need to be honest about their devalued reserve assets and place themselves under more severe scrutiny by the bank regulators. That, of course, is kind of dumb in itself because all the bank regulators know full well the truth about how devalued bank reserves are over what banks are saying their reserves are worth. Sounds like March 2023 all over again in March 2024.
When asked by an analyst about the feared exit of deposits after ratings agency downgrades, NYCB Chairman Alessandro DiNello said the bank got “waivers” that allowed it to keep custodial accounts that otherwise may have fled.
Figures.
Sort of like all those banks that got wavers on devaluing their bond assets by parking them all with the Fed for a year in exchange for almost-free cash.
While news of the Mnuchin investment is good for regional banks overall, Wells Fargo analyst Mike Mayo cautioned that the cycle for commercial real estate losses was just beginning as loans come due this year and next, which will probably cause more problems for lenders.
Ya think?
Thus, another article today by Reuters says regional banks face big hurdles a year after SVB’s failure. It lays out several good graphs, showing exactly what troubles and tightness regional banks are feeling. Deposits, for example, are still falling further and further from where they were the week before SVB collapsed last year, though not falling as quickly … but still lower each month, not improving.
The FDIC has expanded its list of likely zombie banks, announcing today that the “Problem Bank List” grew again last quarter by another eight banks to where there are more “problem banks” on their list now than there were in the days when SVB & Friends were crashing.
Overall, the FDIC said that the sector remains strong and resilient.
Well, that’s good news, at least. They only trot out those assurances when just a few things are actively failing badly.
Banks are placed on the problem bank list based on a key risk measure known as CAMELS.
Well, see, there is part of the problem right there. They are still measuring how close to insolvency they are in numbers of camels like Saudi Beduins, instead of in real money. Notably now, however, many central banks are upping their holding of real money (also in the news today) known as gold.
The regulator said banks on the list get an individualized correction action plan and their progress will be evaluated by the agency’s regional supervisors.
Good. So, just like last year. They are getting lip-flapped back to solid health.
“The banking industry continued to show resilience after a period of liquidity stress in early 2023,” Martin Gruenberg, the head of the agency, said in a statement.
They always show resilience until the particular Monday when their failure is announced to the world.
He added that the industry faces significant risks that could affect credit quality, profits and liquidity. The FDIC chief flagged concerns around commercial real estate loans.
“Significant” would be the word to keep your eye on there.
The agency said that net income for banks declined 44% from the previous quarter. The agency attributed this largely to expenses related to the FDIC’s so-called special assessment.
Ah, good, so it is helping cripple them—not that they shouldn’t pay to guaranteed their depositors, but still dropping income by 44% doesn’t make the likelihood of failure smaller either. So, more likelihood of failure but better insurance for those who will be most likely wounded. (By the way, ignore those five charts the FDIC doesn’t want you to see in the news today—little things like the quadrupling of net charge-offs, the tripling of the rate of non-current CRE loans since last year—that kind of stuff.)
Moody’s also saw significant risk in a number of banks today, so it downgraded their credit ratings. But, hey, that was just all over Europe. So, no big deal here as those downgraded banks have only some interconnectedness with ours … as we saw when various Swiss-bank failures were triggered when SVB and its pals went down in the US. The same thing can work in reverse, you know?
This is all why Jerome Powell issued his hope of rate cuts for reprieve later this year:
Banks may get more relief on those holdings in the months ahead. Fed Chair Jerome Powell told a Senate hearing today that rate cuts “can and will begin over the course of this year,” if inflation comes in as expected.
Again, pay attention to the operative words that I’ve highlighted for you. Problem is inflation is already not continuing to come down. We have CLEARLY seen in many reports now that it is RISING. So, yes, if wishes were horses, beggars would ride. Problem is they are camels. And actually just a mirage of camels in a drought-stricken banking desert where the beggars are wishing for liquidity.
Originally posted at thedailydoom.com