Banks Face Their Day of Reckoning

Last week, the awakening began. In the tawny uptown offices, big banks reported mostly dismal results and warned the economic Trump bump was more smoke than fire.

The contrast from January is stark. Then, favorable earnings comparisons and the presidential honeymoon led many to promise the start of something big. However, recent conference calls were about plummeting consumer loan growth, delinquencies and policy uncertainty.

The fact that so many got it so wrong is not a surprise. It was wishful thinking.

It’s something legendary trader Jesse Livermore understood well. The 1923 classic Reminiscences of a Stock Operator, counselled traders against making feel-good investment decisions that ignored rational evidence. Livermore knew there are no easy fixes to big problems.

Last week, bank leaders tamped down enthusiasm. The Wall Street Journal reported that Jamie Dimon, CEO of JP Morgan (JPM), admonished analysts it “would be just silly” to expect a new president to easily push through his agenda during the “sausage making period.”

That’s an understatement. Republicans could not keep their seven-year-old promise to repeal and replace the Affordable Care Act despite having control of Congress and the White House. Sure, they are likely to take another run at it. But that effort also delays tax reform.

Consumers could use some help. Despite stronger sentiment, actual consumer lending is falling off a cliff. Credit card delinquencies are rising, too.

At Wells Fargo (WFC), car loans are down 29%. The news is not much better elsewhere. In fact, North American consumer banking profits at Citigroup (C), JP Morgan and Wells Fargo fell 25%, 20% and 9% respectively.

The problems at banks spell more pain for consumers.

The problems are not new. Last November, the New York Federal Reserve noted six million Americans stopped paying their auto loans. Stagnant wages and rising costs are hurting. Average consumers feel stretched. It’s pain that should have been the message of the November presidential election.

Sadly, relief is not near. In March, the Federal Reserve bumped short-term rates higher and suggested more increases are in the offing. While this helps banks — they make money with higher spreads between their short-term borrowing and longer-term lending rates —  it means even higher payments for consumer loans.  It means more pain.

Following the presidential election, many assumed a flurry of tax and regulatory reforms would instantly lead to a stronger economy. Stocks, particularly banks, spurted higher. The idea was as intoxicating as it was flawed.

Tax and regulatory reform is not easy. Making sausage is messy and ugly.

Now investors are waking to the reality real reform might be several months away even as economic pressure points persist. They are getting nervous. They are beginning to question the post-election leadership of financials. Wishful thinking is meeting reality.

Shares of the SPDR Financials (XLF) rose from a low $19.50 following the election, to $25.25 in March. Since that time, most of the price action has been below the 50-day moving average at $24. This is worrisome and suggests more weakness.

Bank shares could even fully reverse the gains from November.

Livermore prided himself in making rational investment decisions based on the evidence. He would have respected the November rally. He also would have been mindful of the more recent weakness and the growing set of negative economic data.

Best wishes,

Jon Markman

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Comments 7

  1. Mike April 17, 2017

    Tax and regulatory reform, tax and regulatory reform. Isn’t 19 trillion dollars in debt enough? Wasn’t the Savings and Loan scandal and the economic collapse in 2008 enough? Giving tax breaks to the wealthiest people on Earth and removing the laws against fraud, collusion, misrepresentation and utter maleficence don’t actually yield a vibrant economy. Of course consumers are hurting, corporate America sent millions of good paying jobs to slave wage Nations and pocketed the increased margins. All of those workers corporate America tossed aside were somebody’s customers. And the other political Party trying to supplant those working Americans on the bottom with 12 millions self imported slaves is tantamount to twisting the knife. Yea, we’ve got problems and the biggest is the incompetent loon playing golf in Florida and the 535 self serving mutants in Congress.


  2. Jonathan April 17, 2017

    Thanks John. Livermore was a genius.


  3. Dan S April 18, 2017

    We’re living in a totally manipulated economy, biased news media and a government hell bent on not following the wishes of its constituents (the people). Makes one wonder where the breaking point will be? Oh well let’s just keep printing money out of thin air its worked so far, who cares if a burger and fries will costs $50.00.


  4. James April 22, 2017

    I think the opposite I think we are in for one the biggest booms the world economy has ever seen. What I am really interested in is what gross domestic product at factor costs and gross national product at factor costs and market prices will be..I am also interested in what the current budget surplus will be and what what the current account budget surplus will be. I am also interested in what the current account budget surplus will be. What’s gonna be foreign direct investment into the country. Arevwebgoing to have a good current account surplus. Usually government an make up their budgetsn6 months to what they expect to be? Foreign direct investment direct investment is crucial to grow an economy. What’s also important is game theory which was also put forward by the great economist john Nash. He believed that an economy would always move sub perfect Nash equilibrium. He also believed it was possible to resolve prisoner dilemmas type situations. That it was possible for a positive outcome to come from a bleak situation. Nashnwas one of the great economists and his book a beautiful mind is one of the great read books of all time.


  5. Lora Haines April 27, 2017

    I would like to know why I am holding HOLX only going up pennies a day? You said “more about it later” but I’m close to selling it and going back to day-trading where I can make some money!


  6. D. McCoy June 7, 2017

    Always about “the markets”. What about more conservative American savers, arguably the most responsible among us, who have been decimated by so many years of miniscule interest on their savings? Meanwhile, irresponsible wheeling and dealing by the big banks resulted in a mega rescue for them? Now, the Trump team proposes invalidating essential environmental protective measures…another illustration of focus on the short term with little thought for the longer term effects on, not only the environmental downsides, but on the very quality of human and other life forms. There is much more to life than “the markets”. We need leadership intelligent enough to understand and address complex issues within the larger context of long range effects.


  7. Paul December 24, 2017

    “Sadly, relief is not near. In March, the Federal Reserve bumped short-term rates higher and suggested more increases are in the offing. While this helps banks — they make money with higher spreads between their short-term borrowing and longer-term lending rates — it means even higher payments for consumer loans. It means more pain.”
    Come on, Jon! Really? If only that were true. Not in this ‘fractional-reserve’ world. Banks CREATE money out of nothingness, the total amount of fictitious money that could be created is determined from some ‘formula’; in 1913, the year the Fed was created, it was 6 times the amount of deposits, cash held on reserve. Then the banks lend that ‘nothingness’ to borrowers, charging the borrowers interest which is paid back to the banks from their blood, sweat and tears, real work and energy. When the loan is repaid, the money that is created from nothingness is annihilated, but the interest owed has to be paid from money earned from someone else’s borrowing. Hence the national debt. Thus the national debt, and any level of government debt, is not (mainly) due to ‘overspending’ but it is caused by and inherent in the monetary system and that system must be changed; it enslaves the world population to the ‘owners’ of the monetary system who bleed us dry in their munificence.