The Sound of Big Things Breaking Bad
Regional bank stocks are plunging around the world today.
So, a day after the Federal Reserve took the language about banks being safe and secure out of its official FOMC meeting statement, regional banks are falling all over the place. One could generously say that the FOMC took out that language because it has been long enough since last March’s banking crisis that they didn’t see the language as being needed anymore to assure people that the banks are “sound and resilient.” One could—more cynically perhaps—think it is because the Fed strongly senses we’re about to enter our next March banking crisis, which could be much larger because it involves all the same bank reserves that may still be weak for the same reasons but this time is being caused by the all-out, ongoing crash in commercial real estate.
The Fed has not clarified why it removed that statement, but the timing with a few banks seeing their stocks fall off a cliff as they announced problems yesterday almost simultaneous with the Fed’s revised statement yesterday, then the contagion to many more banks today makes one suspicious.
Apparently, the stock market these days loves nothing more than a huge bank bust
Of course, the stock market went right back to soaring today on the hope that the bad news for banks and the crashing of particular bank stocks means those March rate cuts that they took off the stovetop yesterday, just got placed back on the front burner. Some in the lunatic market, which has devolved into being nothing but a rate-cut monstrosity, can now think of nothing but rate cuts. Today, they suddenly switched from feeling morose yesterday about the sudden evaporation of their cut-rate fantasies to feeling exuberant today with new expectations that the rate cuts may even hit before March.
Accomplishing that would, of course, necessitate the kind of emergency meeting that only happens in the greatest of financial catastrophes—the kind that used to cause stock markets to crash. Now, however, even Zero Hedge ran back to implying that the bank troubles virtually guarantee the pivot is back on. So, everyone in stocks was happy again.
I’ve always said that the rate cuts will begin whenever the Fed breaks the economy in such a bad way that it is forced to try to save it. That could be in March or ten months from now or tomorrow. Multiple runs on banks could do the trick for the Fed. That’s because that is how the Fed goes about things. It has a history of tightening until something breaks, even when it doesn’t have the present inflation that it helped create burning up its backside.
The idea, however, that the Fed would start cutting rates just to avoid crashing the economy when it says the labor market is strong and the economy is strong and resilient while inflation also remains high is ludicrous, but the idea that it would cut rates if banks are suddenly failing is not insane at all. It would, however, be a mistake that would lead to very high inflation, and I’m sure the Fed knows or, at least, fears that; so the Fed is more likely to create bailouts programs than raise rates. Even that is hard to say because many of their bailout programs involve creating shiploads of new money, which, if they go for that kind of bailout, means inflation is going to soar anyway, especially as we move into more upward pressure from the Red Sea War and and more likely shortages (with both already solidly materializing in one story today).
The bond market made similar moves, taking a big drop in yields again today, as it did yesterday (having for reasons I was not sure of yesterday) not made the sudden reversal then that stocks made.
The sudden swings from the market falling hard yesterday when the Fed made it abundantly clear that no rate cuts would happen in March to soaring today because badly damage banks mean the Fed will have to cut rates sooner than it just announced it plans to do certainly shows in the starkest manner how the stock market has become NOTHING but a major casino for placing bets on the Fed’s next move. Stocks are just the chips the casino uses.
If bank stocks crash hard enough to plunge the Fed back into loosening financial conditions, it will be because bank runs start happening. There is no way that is going to be good for stocks; but investors are exuberant because, “Hey, at least the Fed will be printing more money for us to speculate with.” I should say, there is no way that would be good for stocks back in the days when investors actually did care about economic fundamentals of the companies they invested in. Now that market is purely based on speculative bets over how Fed money will cause the other speculators to bet, then we could see the bizarre situation where stocks soar even if the economy crashes into the Second Great Depression. (I don’t really think investors would retain that much positive sentiment if the economy crashed that hard, but the lunatics are purely driven by their hormones, so who knows now that we live in Wonderland?)
Today is a prime example. The Dow rose more today on horrendous news for banks than it fell yesterday on the loss of its pivot dreams. Zero Hedge described this hope of sudden Fed intervention as “calling Powell’s bluff.” That’s where ZH shows its own odd-ball pivot bias. It is not as if Powell ever intended to do anything other than tighten higher for longer, especially after the market removed a lot of the tightening of financial conditions Powell had managed to get in place. But a non-bluffing Powell who clearly never intended to pivot, could certainly turn on a dime if banks start crashing all over the place because the great damage for the next Great Recession or Depression has finally arrived.
Banks are on the run
The seriously threatening news in banks today was over the deterioration in banks that I’ve said for months was going to show up from commercial real estate (CRE), which emerged in the news yesterday when a large regional New York bank make huge write-offs because it had swallowed a lot of putrid meat in taking on rotting material from last year’s banking crisis (which is where I said the first signs of trouble would likely break out). That moved to a bank in Japan making similar changes to write down its commercial real-estate holdings in line with something much closer to market truth. Then Deutsche Bank increasing provisions for the repricing of its collateral and assets based on the massive crash in the value of CRE.
With those large banks finally making the choice to come clean on valuations, pressure is likely to mount quickly for many banks to do the same thing, and then the whole banking house of cards tumbles.
On the heels of a profit warning from New York Community Bancorp that was at least partly due to the deteriorating office-loan market, a Japanese bank cut the value of some of its own U.S. office loans by more than 50%.
Aozora Bank’s stock … slumped 21%, making it the worst performer in the Nikkei 225 … on Thursday, after cutting its annual profit forecast by 52% and its revenue forecast by 35%.
and then …
Deutsche Bank AG’s provisions for losses in US commercial real estate were more than four times bigger in the last quarter, as it warned that refinancing poses the greatest risk to the struggling sector.
The bank took €123 million ($133 million) in provisions for its portfolio, up from €26 million in the same period a year ago and nearly double the amount the bank put aside in the previous three months, according to a presentation to investors released alongside earnings on Thursday.
Real estate exposures drove total provisions to €488 million, the highest quarterly total since the second quarter of 2020, when expectations for bad loans spiked during the Covid pandemic.
So, we’re back to that kind of ugly.
The bank said refinancing of real estate loans was the “main risk” as it pointed to the possibility that debts will come due on properties that have fallen in value, requiring borrowers to inject fresh equity to secure new loans.
The contagion from these revelations already is starting to look severe:
The US commercial real estate market has been in turmoil since the onset of the Covid-19 pandemic. But New York Community Bancorp and Japan’s Aozora Bank Ltd. delivered a reminder that some lenders are only just beginning to feel the pain.
New York Community Bancorp’s decisions to slash its dividend and stockpile reserves sent its stock down a record 38% on Wednesday, with the fallout dragging the shares to a 23-year low on Thursday. The selling bled overnight into Europe and Asia, where Tokyo-based Aozora plunged more than 20% after warning of US commercial-property losses and Frankfurt’s Deutsche Bank AG more than quadrupled its US real estate loss provisions.
Billionaire investor Barry Sternlicht warned this week that the office market is headed for more than $1 trillion in losses.
The Daily Doom has reported the road through the rubble leading to this problem over the past months, and I for years I’ve said CRE will be a major component in the crushing of the Everything Bubble as it unfolds. We now see that starting part of this ongoing economic collapse starting to emerge, but here is where this can go parabolic in a hurry:
“This is a huge issue that the market has to reckon with,” said Harold Bordwin, a principal at Keen-Summit Capital Partners LLC in New York, which specializes in renegotiating distressed properties. “Banks’ balance sheets aren’t accounting for the fact that there’s lots of real estate on there that’s not going to pay off at maturity.”
If the move by the three banks that have made these revisions to their balance sheets, taking a huge hit on their stocks for doing so, pressures all other banks to get real in the same way, then a huge re-evaluation of bank balance sheets will happen quickly, causing a huge repricing of banks stocks. Most of this is in regional bank stocks because they are typically the ones most invested in commercial real-estate.
Moody’s Investors Service said it’s reviewing whether to lower New York Community Bancorp’s credit rating to junk after Wednesday’s developments.
Moody’s could also start actually doing its job and dig into all the CRE in other bank’s financial statements and downgrade banks accordingly, whether the banks have come clean about the CRE impact on their outlook on their own or not.
Half of that trillion dollars mentioned above is expected to hit maturity by 2025.
So, I ask, “Are we not right back to last March’s bank crash yet?”
The KBW Regional Banking Index slumped 6% Wednesday, its worst performance since the collapse of Silicon Valley Bank last March.
Sounds like we could be. That kind of thing I said when commenting on the Fed’s pivot didn’t even cause the Fed to lower rates last March, but it is the one thing that could press the Fed hard to turn down interest rates to make it easier for these sour notes and bonds to refinance … especially if this situation is much bigger and the foreseeable bailouts don’t do the job as happened in 2020.
JPMorgan’s CEO, Jamie Dimon was the first bankster to point out that a second wave of bank collapses was coming due to CRE. However, his bank won’t be hit hard by it. He watches these things because he profits by them. His speciality is seeing the dropouts early so he can study them and be ready to scoop them up in one of those weekend Fed/FDIC fire sales where we know of no problem until the weekend is over and JMP has gobbled up another bank to add to its own monstrosity because the Fed loves to make the things that are clearly too big to fail so much bigger if it can. Dimon, you see, needs to know his market in order to know what to eat, what’s a good bargain price, and what meat is too rotten to risk eating. He’s probably starting to salivate:
Commercial real estate loans account for 28.7% of assets at small banks, compared with just 6.5% at bigger lenders, according to a JPMorgan Chase & Co. report published in April….
Declines could be stark. The Aon Center, the third-tallest office tower in Los Angeles, recently sold for $147.8 million, about 45% less than its previous purchase price in 2014.
“Banks — community banks, regional banks — have been really slow to mark things to market because they didn’t have to, they were holding them to maturity,” said Bordwin. “They are playing games with what is the real value of these assets.”
The three banks that have set a new tone by revealing their true condition may add pressure within markets for other banks to cough up the truth and come clean. That could become chaotic in a hurry.
“The percentage of loans that banks have so far been reported as delinquent are a drop in the bucket compared to the defaults that will occur throughout 2024 and 2025,” said Aviram. “Banks remain exposed to these significant risks, and the potential decline in interest rates in the next year won’t solve bank problems.”
As more trouble emerges, more pressure may develop for all banks to follow suit from investors and maybe even politicians. Coming true (getting real) when you’ve been hiding reality for a long time can come with a huge cost. Several regional banks got clobbered today after these headlines came out, showing how quickly the burn can spread. Zero Hedge lists the falling breakouts today:
Western Alliance Bancorp is getting clubbed like a baby seal today.
Zions Bancorp, Comerica and Webster Financial are also tumbling along with Citizens Financial, Regions Financial, SouthState, Prosperity Bancshares, Schwab, PacWest, and Huntington Bancshares
The market appears to be finally pricing in the end of the BTFP, and all the chaos that will ensue from that, as the risk perception has spread to the whole sector. Regional bank shares are puking hard today.…
And here is where ZH tries to lean back on their pivot propaganda, as if they were always right about the pivot:
All of which leaves us wondering... is the market starting a bank-run to call Powell's bluff?
No. This doesn’t make anything Powell said a bluff. He fully intends to tighten well past March unless something suddenly gets in his way. This just means the Fed has done what it always does, which is to remain oblivious (at least, on the surface) to banking troubles and to tighten hard until something breaks. It’s the predictable cycle I wrote about in my little book that starts by looking back at the Great Recession as it unfolded: DOWNTIME: Why We Fail to Recover from Rinse and Repeat Recession Cycles: The same characters who created bailout bonanzas for banksters in the Great Recession are doing it again. Shall we let them?
Bonds break free
This may explain what seemed momentarily inexplicable to me yesterday. Why did bonds catch such a huge bid after the Fed made clear it would tighten hard for longer? Because they saw what happened in banks yesterday and paid more attention to that. Bond investors got concerned, so some investors ran for safe-haven assets. Thus bonds caught a bid, then investors saw the rapid appearance of contagion today, and more ran for safe havens!
The Fed removed the following sentence from the FOMC statement: "The US banking system is sound and resilient." Cynics asked why the Fed no longer sees "the US banking system is sound and resilient" - is it a signal of rumblings in the economy near-term…?
Call me such a cynic. While I wondered if it was just because the Fed is convinced the problems of spring are far enough past that no one needs their reassurance anymore, the present banking outbreak at the same time makes one think maybe they suddenly didn’t want to get caught offsides as, having once again, declared everything is sound, right when it was breaking. They might be tired of looking that dumb that regularly.
While the scope of the problem is uncertain, “it negatively impacts banking lending, the lifeblood of our economy,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “Investors are buying Treasuries first, ask questions later.”
The Fed won’t pivot until big things break. Even then, it will prefer bailout programs over a direct reduction in its rate policy if it can pull that off. Is yesterday and today the sound of big things breaking?
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