Tag: Financial Crisis

The Inevitable Rise In Rates

Posted on by Noah Kiedrowski

Consumer Price Index (CPI) Market Scare

A string of robust Consumer Price Index (CPI) readings spooked the markets as a harbinger for the inevitable rise in interest rates. As investors grapple with the prospect of downstream rate increases, pockets of vulnerabilities throughout the market have been exposed. The overall markets have been on a blistering bull run since the November 2020 presidential election cycle. The overall markets as assessed by any historical measure have reached stretched valuations with record risk appetite. As real inflation enters the fray, these frothy markets will come under pressure and possibly derail this raging bull market. Although rising rates may introduce some systemic risk, the financial cohort is poised to go higher. The confluence of rising rates, post-pandemic economic rebound, financially strong balance sheets, and a robust housing market will be tailwinds for the big banks.

Financials

The prospect of rising interest rates coupled with fantastic earnings have propelled bank stocks to all-high highs. Citigroup (C), JPMorgan (JPM), Bank of America (BAC), and Goldman Sachs (GS) have appreciated to all-time highs. Rising interest rates in combination with the highly disruptive COVID-19 backdrop abating has served as the foundation for this move higher. The big banks responded and evolved in the face of COVID-19 to the real possibility of widespread loan defaults, liquidity issues, ballooning credit card debt, and stressed mortgages. To exacerbate these COVID-19 impacts, interest rates, Federal Reserve actions, yield curve inversion, and liquidity heavily weighed on the sector. Continue reading "The Inevitable Rise In Rates" →

Why It's Different This Time

Posted on by George Yacik

The other day I completed a survey for my brokerage company, and one of the questions they asked was, "Is the current crisis worse than the 2008 financial crisis?" A couple of months ago, when our state and region were mostly in lockdown, I would have answered with a resounding and unhesitating, "Yes!"

Now I'm not so sure. Admittedly, I don't live in one of those states where the virus is now spiking, and things here are close to back to normal, so maybe my vantage point is too subjective. Nevertheless, I would have to say this crisis is far from as bad as the previous one, which may explain why the stock market has behaved the way it has, namely prices are off only a little from where they began the crisis, with only that short, sharp drop in February and March.

One reason, of course, is that the economy, as a whole, has rebounded strongly over the past couple of months as most of the country has reopened, at least to some degree, even as millions of people continue to work remotely. But the main reason is that that the lessons we learned from 2008 have been brought to bear in this crisis, namely that the government and the Federal Reserve have thrown much more money and resources at the problem than they did 12 years ago, which has mitigated the damage to a great degree.

As we've seen in the second-quarter earnings reports released so far by the big banks, the measures taken after 2008 to make sure they've built up enough capital to withstand another global crisis have paid off. Other than Wells Fargo (WFC) – which is still in the Fed penalty box, forbidden to grow assets – which reported a big loss, the other big banks reported flat Goldman Sachs (GS) or reduced JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) earnings compared to a year ago. It could have been a lot worse. Who would have thought they'd be able to pull that off three or four months ago? Let's give the Dodd-Frank Act and Fed capital requirements the props they deserve. Continue reading "Why It's Different This Time" →

Can It Happen Again? Emphatically, Yes

Posted on by George Yacik

The last few weeks the financial press has been filled with articles noting the passing of the 10th anniversary of the Lehman Brothers bankruptcy. A few of the articles have been hand-wringing of the sort that if Lehman had only been rescued – like AIG – or merged with a strong commercial bank – like Merrill Lynch – the crisis would have never happened, or at least it wouldn’t have been so severe.

That’s wishful thinking. There was plenty of reckless and irresponsible behavior taking place on Wall Street to create the crisis that did develop, whether Lehman was saved or not. Like giving home mortgages to anyone who asked while creating securities backed by these often worthless loans, which only magnified the risk by a huge factor, then slapping a triple-A credit rating on them, so everyone was assured that everything was fine.

But most of the recent articles have been about whether such a crisis can happen again. And the answer is, unfortunately, absolutely. We may already be seeing the seeds being planted right before our very eyes, although I’m not sure how close we are to the next crisis. It certainly bears careful watching.

Boom-and-bust cycles are endemic to any free-market capitalist system anywhere, unfortunately, since they’re largely based on self-interest and, too often, greed. The only system where that is not the case is a planned or Communist one, where the economy is perpetually in bust mode. When the next bust will hit is anyone’s guess, but it seems with each passing day that we keep moving closer and closer to it, and not a whole lot is being done about it. Continue reading "Can It Happen Again? Emphatically, Yes" →

Let's Not Relive The Past The Hard Way

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates


Be careful what you wish for. That’s my modest advice to some bankers and their government regulators who want to ease up on bank oversight.

An article in the Wall Street Journal last week reported that several banks around the country are dropping the Federal Reserve as a regulator. The actions so far seem innocent enough, and perfectly reasonable in the examples mentioned, but they did conjure up some bad memories of how the housing bust – and subsequent global financial crisis – got started.

Here’s the story.

According to the Journal, Little Rock-based Bank of the Ozarks in June opted to ditch its holding-company structure, which means it is no longer regulated by the Fed. Now, as a bank only, and not a BHC, it will be regulated solely by the Federal Deposit Insurance Corp.

Saving money from having two layers of regulation was the main motivator for the bank. George Gleason, the bank’s CEO, said, “We didn’t really need to be regulated by both.”

The bank, which has about $21 billion in assets, is the largest bank to make such a move, but it’s not the only one. Continue reading "Let's Not Relive The Past The Hard Way" →

What Happens When The Fed Starts Selling?

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates


The financial markets have been fixated for years at the prospect of interest rate increases by the Federal Reserve but have largely ignored the $4.5 trillion elephant in the room, namely the Fed’s gargantuan balance sheet. But last week several members of the Fed began publicly discussing their support to finally start winding down that massive portfolio.

Way back before the global financial crisis, the Fed’s portfolio held pretty steady in the high $800 billion to low $900 billion range. Then, as the crisis hit full force in the last three months of 2008 after the Lehman Brothers collapse, the portfolio more than doubled, ending that year at slightly north of $2 trillion. While the worst of the crisis may have been reached at that point, that was only the beginning of the balance sheet’s growth.

Between the end of 2008 until the end of 2012, the Fed’s portfolio grew gradually by another $800 billion or so, before spiking again, adding another $2 trillion over the next two years as the Fed embarked on quantitative easing. Eventually the portfolio reached $4.5 trillion, including both Treasury and mortgage-backed securities, at the end of 2014, where it has held largely steady ever since. Continue reading "What Happens When The Fed Starts Selling?" →