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Bank stocks as bellwethers | Financial Times

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Good morning. All Thursday was sunny. Stock prices and bond yields have risen steadily. The Federal Reserve seems to be tightened with full predictability and unperceivable tenderness. Inflation will be temporary. Evergrande et al will not sink the Chinese economy. The lion lays down with the lamb. and so on. This sends me to the irrational paranoid frenzy that is struggling to suppress me. Maybe things are really very good. Please send me the email: robert.armstrong@ft.com

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 lunch, We bring you the latest information about the world where finance and economy are linked.

If things are so good, why don’t bank stocks get better?

Back in June, I doubt Why was the bank not getting worse? Now, at my usual level of consistency, I wonder why they aren’t doing well.

What has changed? Since then, bond yields have broken through a strong upward trend and have fallen. Now they are breaking that downtrend and rising. And while there was an unpleasant perception that growth would not be as strong as it used to be in the short term, the consensus expectation is that bottlenecks will soon ease, demand will continue to be strong, and growth will outpace next year’s trend. is. , Even when the Fed is easing asset purchases. Under this scenario (which looks like the stock market is pricing), long-term interest rates should continue to rise. It all sounds pretty good for banks.

But while Thursday’s bank stocks have been a pretty good day, the last few months haven’t been very good. The performance of the KBW Bank Index compared to the S & P 500 is as follows:

Banks want to lend money and then be repaid. The second half of their business is on track. Loan defaults are surprisingly low. This is the default chart of mortgages from Deutsche Bank (because you randomly choose one type of loan). Similar patterns can be found in different loan types.

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. Turning to the commercial side, here are the unpaid amounts of commercial and industrial loans of major banks.

Last year’s surge was that companies lowered their credit lines in anticipation of Covid’s crash crunch never happening. Today, the volume of business loans remains at 2018 levels. Part of this was a loss of market share to the fixed income market, but the demand for capital was not that great.

But in the optimistic scenario sketched above (and also priced on a wide range of stock markets), loan demand should return. A loan officer survey suggests an optimistic climate for this. In line with rising interest rates, this should boost bank profits.

Another potential source of higher returns: credit cards. During the pandemic, Americans were cautiously not borrowing 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 may subside. But investors aren’t paying for capital markets business anyway.

So if things are so good, why aren’t banks doing well? One possibility is that the stock market is a bit silly about banks, trading them mechanically according to 10-year bond yields. This is the relative performance of the bank and its yield graphed against a wide range of indexes.

Banks are actually much more sensitive to short-term interest rates than long-term interest rates, so unless the 10-year yield reflects future growth and the bank is very economically sensitive, this correlation is It doesn’t make much sense.

Anyway, this pattern is crazy about banking professionals. That’s because much more than long-term interest rates and the shape of the yield curve affect a bank’s profitability. And this may be one of the better times when the bank’s outlook is better than the 10-year yield suggests, and we should all buy bank stocks.

However, there is another possible interpretation of a bank’s weak equity performance. That is, no matter what stocks generally seem to say, the economic and policy outlook is not so good and banks will get stuck at low interest rates, low interest rates-the world of credit demand, And bank investors know that.

Details of the 1950s and inflation

I wrote A few days ago About what economists Gabriel Massy, ​​Skanda Amanas and Alex Williams believe the 1950s show why policymakers don’t have to be surprised about inflation in 2021. The unemployment rate is low, but the surge has subsided without the Fed tightening policies to cool the economy. At the time, there was no self-reinforcing inflation spiral, and now it is.

Then i Wrote about How Larry Summers thinks MS & W is all wrong. He believes the Fed was (again simplified) certainly very hawkish in the 1950s, but used banking regulations rather than interest rates to cool the economy. Inflation expectations were supported by the recent memory of the gold standard and the mean reversion price it led to. And its potential growth was higher than it was then.

It’s not surprising to hear that MS & W thinks it’s Summers that’s all wrong. Below is a partial reply to Summers. Here’s a reply to Summers:

  • By the 1950s, Americans had 10 years of experience in rising prices. Therefore, the idea that the gold standard fixed their expectations is within reach.

  • The relevant credit-restricted banking regulations have actually been abolished since 1953, and as Summers says, it’s not true that only savings and loan associations can take out mortgages and then only at cap rates.

  • Inflation and wage growth both surged in the early 1950s, but then settled rapidly. Previous The unemployment rate has risen due to the recession of the 1950s. The traditional view that the economy needs to cool to prevent the formation of an inflation spiral is not appropriate. That is an important point.

Now let’s have a discussion between MS & W and Summers. I am not eligible for remote mediation. The important point for me is simple. When thinking about inflation risk, you can’t hypnotize by the 1970s. We also need to think seriously about the 50’s, and all the theories we choose need to be applied to both 10’s.

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