Category Archives: Banking

Modern Monetary Theory Explained

Over the past few months MMT, or Modern Monetary Theory, has exploded onto the financial scene. And not withstanding the Orwellian Newspeak that is encompassed in its title, MMT is simply Keynesian money printing on steroids.

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Japan of course is the poster child for Modern Monetary Theory, as they have been expanding their monetary base for more than two decades without having to experience the normal repercussions of inflation and economic decline.  And because so many modern day academics and ‘economists’ have swallowed hook, line, and sinker Japan’s ‘success’, this theory is now being touted as the way for government’s to provide unlimited benefits to all their citizens. Is it any wonder economic advisers to Democratic Political candidates are all pushing for free everything?

But of course what is missed in all of this is the fact that as of today, all credit begins at the Federal Reserve, and is loaned or sold to the banks FIRST before it is distributed to the government, small businesses, or to consumers.  Thus like in Japan, where the central bank has to use its monetary credit expansion to buy market assets rather than provide liquidity to its real economy in order to avoid inflation, so too would MMT do what is occurring now already following 6-8 years of central bank stimulus.

It would make those who receive the money FIRST… which are the 1%ers, even richer while indebting those who receive it afterwards.

Since central banks began QE (2008):

National Debt on Dec. 31, 2008:  11.5 trillion
National Debt as of today:  22 trillion

Corporate Debt on Dec. 31, 2008:  2.5 trillion
Corporate Debt as of today:  9 trillion

Consumer Debt on Dec. 31, 2008:  2.69 trillion
Consumer Debt as of today:  3.979 trillion

Now, let’s look at how much the 1% has grown their wealth in that same period.

https://martinhladyniuk.files.wordpress.com/2019/02/700b2-wealth2bdisparity.jpg?w=623&h=299

As you can see, the amount of wealth acquired by the top 1% moved exponentially over the past decade when the central banks began their QE programs of monetary expansion.

Of course many Socialists will say that THEIR programs would sufficiently put the new money almost ‘directly’ into the pockets of the people.  But all one has to do is look at the longstanding Food Stamp or (EBT) program and how the money is actually issued first to JP Morgan (who gets its cut), and after that it is distributed piece meal to the masses.

The reality is, when money is created through a fiat system of CREDIT rather than from a resource backed one like Gold or Silver, those who get access to that money first will always increase their wealth while those who are allowed to access it after will either break even, or as in the case of governments, corporations, and consumers, lose ground via debt and real inflation. 

So when individuals on bubblevision or who wear titles in the halls of academia try to sell you a bill of goods that TODAY is different, and that that they can provide everyone everything because nations are allowed to print as much money as they want at will, simply provide them those pesky little things called ‘facts and evidence’ and tell them that Americans don’t want to be like Venezuela and Zimbabwe when it all comes tumbling down.

Source: Shotgun Economics

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“They’re Running Out Of Options” – U.S. Farm Bankruptcies Surge To 10-Year High As Trade War Bites

The Farm Belt helped cement President Trump’s historic electoral triumph over Hillary Clinton. But even before Trump started his trade war with China nearly one year ago, Trump’s protectionist bent has added to the collective woes of farmers, who were already struggling with low prices for corn, soy beans and other agricultural commodities.

China’s decision to purchase millions of soybeans (after orders ground to halt late last year following another round of tariffs) offered some relief to soybean producers who were teetering on the brink even with President Trump’s farm bailout money in hand. But even if negotiations result in a lasting agreement, it might not be enough to save hundreds of American family farms from collapsing into bankruptcy, as the Wall Street Journal pointed out in a story published Wednesday.

https://www.zerohedge.com/s3/files/inline-images/Screen%20Shot%202019-02-06%20at%204.26.01%20PM.png?itok=yL2oJsJ4According to a WSJ analysis of federal data, the number of farmers filing for bankruptcy has climbed to its highest level in a decade…

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…driven by a lasting slump in agricultural commodity prices due in large part to the rise of rival producers like Brazil and Russia.

Bankruptcies in three regions covering major farm states last year rose to the highest level in at least 10 years. The Seventh Circuit Court of Appeals, which includes Illinois, Indiana and Wisconsin, had double the bankruptcies in 2018 compared with 2008. In the Eighth Circuit, which includes states from North Dakota to Arkansas, bankruptcies swelled 96%. The 10th Circuit, which covers Kansas and other states, last year had 59% more bankruptcies than a decade earlier.

And Trump’s trade wars – not just with China, but more broadly – aren’t helping.

Trade disputes under the Trump administration with major buyers of U.S. farm goods, such as China and Mexico, have further roiled agricultural markets and pressured farmers’ incomes. Prices for soybeans and hogs plummeted after those countries retaliated against U.S. steel and aluminum tariffs by imposing duties on U.S. products like oilseeds and pork, slashing shipments to big buyers.

Low milk prices are driving dairy farmers out of business in a market that’s also struggling with retaliatory tariffs on U.S. cheese from Mexico and China. Tariffs on U.S. pork have helped contribute to a record buildup in U.S. meat supplies, leading to lower prices for beef and chicken.

Because of this, the level of farm debt is approaching levels last seen in the 1980s.

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The stress on American farmers is also affecting agribusinesses giants like Archer Daniels Midland, Bunge and Cargill, who are feeling the heat even as lower crop prices translate into less-expensive raw materials for the commodity buyers.

What’s worse is that even after working side jobs to try and make ends meet, some farmers are still winding up more than $1 million in debt.

Mr. Duensing has managed to keep farming, hiring himself out to plant crops for other farmers for extra income and borrowing from an investment group at an interest rate twice as high as offered by traditional lenders. Despite selling some land and equipment, Mr. Duensing remains more than $1 million in debt.

“I’ve been through several dips in 40 years,” said Mr. Duensing. “This one here is gonna kick my butt.”

Even more shocking than the number of bankruptcies, the number of farms that continue to operate while losing money has risen to more than half of all farms, even as the level of productivity has never been higher.

More than half of U.S. farm households lost money farming in recent years, according to the USDA, which estimated that median farm income for U.S. farm households was negative $1,548 in 2018. Farm incomes have slid despite record productivity on American farms, because oversupply drives down commodity prices.

And bankers who lend to farms warn that there will likely be more bankruptcies to come as more producers “are running out of options.”

Agricultural lenders, bankruptcy attorneys and farm advisers warn further bankruptcies are in the offing as more farmers shed assets and get deeper in debt, and banks deny the funds needed to plant a crop this spring.

“We are seeing producers who are running out of options,” said Tim Koch, senior vice president at Omaha, Neb.-based Farm Credit Services of America, which lends to farmers and ranchers in Iowa, Nebraska, South Dakota and Wyoming.

Perhaps the only silver lining – if you can even call it that – is that bankruptcy lawyers in states where farms are prevalent are doing their best business in years.

Mounting stress in the Farm Belt has meant big, if somber, business for the region’s bankruptcy attorneys. In Wichita, Kan., the firm of bankruptcy attorney David Prelle Eron filed 10 farm bankruptcies in 2018, the most it has ever handled in one year. Wade Pittman, a bankruptcy attorney based in Madison, Wis., said his firm filed about 20 farm bankruptcies last year, ahead of past years, and he said he expects the numbers to continue to rise as milk prices remain stagnant.

Joe Peiffer, a Cedar Rapids, Iowa-based attorney, said his office is the busiest—and most profitable—it has ever been. Just before Christmas, he sent letters to eight farmers declining to represent them because he didn’t have sufficient staff to handle their cases promptly. He is doubling his office space and interviewing new attorneys to join the firm.

One factor driving bankruptcies is tighter lending standards, said Mr. Peiffer, including at agricultural banks, which are under pressure from regulators to exercise greater caution over their farm-loan portfolios.

“I’m dealing with people on century farms who may be losing them,” said Mr. Peiffer, whose own father sold his farm in the late 1980s.

One anecdote featured in the story recalls the rash of suicides among NYC cab drivers, who have struggled to pay the hefty loans attached to their taxi medallions thanks to the rise of Uber, Lyft and other ride sharing apps.

Darrell Crapp, the fifth-generation owner of a hog and cattle farm in Lancaster, Wis., returned to his home one day with a queasy feeling in his stomach, only to find his wife unconscious on their bathroom floor. She had swallowed a handful of pills. She survived, but Crapp attributed the incident to financial stressors as their farm teetered on the brink of bankruptcy.

It was a Sunday in April 2017 when a queasy feeling in Darrell Crapp’s stomach sent him rushing home. He found his wife, Diana, lying crumpled on the floor of their Lancaster, Wis., bathroom. She had swallowed a handful of pills.

Overwhelmed with debt and with little prospect of turning a profit that year, the Crapps knew BMO Harris Bank NA wouldn’t lend them money to plant. The bank had frozen the farm’s checking account.

Mrs. Crapp managed the fifth-generation corn, cattle and hog farm’s books. She had stayed up nights drafting dozens of budgets to try to stave off disaster, including 30-day, 60-day and 90-day budgets.

“It was too much for her,” Mr. Crapp, 63, said of his wife, who survived the incident.

Crapp Farms filed for chapter 11 bankruptcy the next month, with a total debt of $36 million.

After filing for bankruptcy, the last of Crapp’s land, a 197-acre patch that was homesteaded by his ancestors in the 1860s, will be auctioned off in the near future.

And after all that, Crapp may still need to declare Chapter 12 bankruptcy, a personal bankruptcy provision available to farmers and fishermen, to wipe his remaining debts.

“We haven’t won very many battles,” said Mr. Crapp. “The bank pretty much owns us.”

Unfortunately for American farmers hoping to reclaim the market share they’ve lost during the trade war with China, even if Trump can strike a trade deal with the Chinese that mandates purchases of US agricultural products – which the Chinese have already pledged to do – there’s still another wrinkle: Japan recently signed a revamped version of the TPP that will offer preferential treatment to Australia, New Zealand and other rivals to American farmers, potentially sealing off another market from US agricultural products.

Source: ZeroHedge

Wells Fargo Experiences 2nd Major Systems Outage In Six Days: Websites, apps, ATMs offline

Wells Fargo is experiencing a system outage that is disrupting access to the firm’s website, mobile apps, ATMs and debit and credit cards.

Wells Fargo customers took to Twitter Thursday morning to report their frustration about their transactions being declined and being unable to withdraw money from their accounts or check their balances online.

The Wells Fargo Advisors website appears to still be up and running. However, investors are unable to check their brokerage accounts via the Wells Fargo mobile app.

InvestmentNews reached out to Wells Fargo to ask whether advisers’ internal systems are similarly impacted and what is causing the system outage.

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“Wells Fargo Advisors is aware of the issue and technical teams are working to resolve the issue as quickly as possible,” spokeswoman Jackie Knolhoff wrote in an email.

At 9:06 a.m. EST, Wells Fargo tweeted an apology to customers. An hour later, the company followed with a tweet saying, “We’re experiencing a systems issue that is causing intermittent outages, and we’re working to restore services as soon as possible. We apologize for the inconvenience.”

TradePMR, a custodian that recently partnered with Wells Fargo on its growing RIA channel, said connectivity to First Clearing, Wells Fargo’s subsidiary for RIA services, is not affected.

“Advisers using TradePMR’s technology have not experienced any service issues,” said Robb Baldwin, founder and CEO of TradePMR, adding that his platform is completely separate from Wells Fargo Advisor technology. “It is business as usual for our advisers.”

Regional news outlet KULR 8 reported that the outage could be tied to a fire at a Wells Fargo server farm in Shoreview, Minn. The Shoreview fire department later clarified on Twitter that the server farm’s fire suppression system was triggered by dust from construction. It is unclear whether or not this is responsible for the entire system outage.

This is the second time in a week the firm experienced a digital disruption. A similar disruption occurred last Friday.

InvestmentNews will update this article as the story progresses.

Source: by Ryan W. Neal | Investment News

Société Générale’s Albert Edwards: Investors Should Brace For A World Of Negative Rates, 15% Budget Deficits And Helicopter Money

Eariler this week, when the San Fran Fed published a paper that suggested that the recovery would have been stronger if only the Fed had cut rates to negative, we proposed that this is nothing more than a trial balloon for the next recession/depression, one in which the Federal Reserve will seek affirmative “empirical evidence” that greenlights this unprecedented NIRPy step (in addition to QE of course).

Today, in his latest note to clients after returning from a 2 week vacation in Jamaica, SocGen’s Albert Edwards picks up on this point and cranks it up to 11 writing that “as central banks thrash around for new tools, I have long thought the next recession would trigger the adoption of helicopter money and deeply negative Fed Funds. Clients have been sceptical of the latter because of the negative impact on bank margins, but now I am more convinced than ever that we will see negative Fed Funds.”

Predictably, Edwards takes aim at the SF Fed “analysis”, writing that “just because the San Fran Fed has published this paper doesn’t mean the Washington Fed will adopt the policy in the next recession, but with this economic cycle clearly now in its final act, one can sense that a number of trial balloons are being floated on what the Fed might do in the next recession. This is just one of them.

More to the point, Edwards also focuses on the recent resurgence of interest in Modern-Money Theory, i.e., MMT, or government-mandated helicopter money, which is predictably a “theory” espoused by socialists everywhere most notably Bernie Sanders and his economic advisors…

https://www.zerohedge.com/s3/files/inline-images/MMT%20spike.jpg?itok=_k1YiwHo

… and writes that “many of the more radical Democrats in the US seem to be adopting the idea and since I expect the US budget deficit to soar to 15% of GDP in the next recession, the ideas of MMT will surely become even more popular.” Edwards is convinced that “the Fed and other central banks will be desperate enough to adopt outright monetisation (aka helicopter money, that is to say the direct central bank financing of public sector deficits) in the next recession. And as that will coincide with public sector deficits in the mid teens, we will be conducting a live MMT experiment. Welcome to a brave new world!”

As validation of his (not all that controversial) view, Edwards believes that in recent weeks we have seen the Fed “take a large step away from Quantitative Easing (QE) and towards outright monetisation.”

When QE was introduced the central bankers vehemently denied that QE was monetisation as the latter sounded too scary. Their argument was QE is different from outright monetisation because they (the central banks) were absolutely going to unwind QE as soon as practical (aka Quantitative Tightening or QT – remember how they told us it was going to be so easy with minimal consequences!). And as economic agents knew QE would be reversed and did not regard it permanent, QE could not be equated to monetisation. My own view has always been that until QE is actually fully reversed, it is to all intents and purposes the equivalent of outright monetisation, and so the central banks are merely splitting hairs.

Naturally, Powell’s recent commentary which switched off the balance sheet unwind “autopilot” caught Edwards’ attention, and the recent trial balloons by the WSJ – and the Fed – hinting at the like likely abandonment of QT, just as it was getting started- removes any doubt in Edwards’ mind “that what we have seen since 2008 is in fact outright monetization” and asks rhetorically, “does anyone really think these bloated central bank balance sheets will ever be reduced before the next recession brings yet another tidal wave of QE?”

The answer: of course not, especially if it only took a 20% drop in stocks for the Fed to immediately reverse its “autopilot” course.

Which brings us to the topic of the next inevitable recession, in which Edwards expects our “all-knowing” central bankers will pull any and every policy lever they have to hand and that in my view includes the Fed pursuing deeply negative interest rates.”

Here the SocGen strategist concedes that the reason most clients reject this outcome is “the destructive impact negative interest rates would have on bank margins, which might exacerbate any credit crunch. Hence policy makers would therefore shy away from negative rates.”

Needless to say, Edwards himself disagrees, reasoning that unlike in the 2008 Global Financial Crisis he does not expect banks to be at the apex of the next recession, perhaps as a result of an ocean of liquidity thanks to the $1.5 trillion in excess reserves currently in the system.

I have long said that in the next recession the main toxic asset to avoid will be US corporate bonds – most especially Investment Grade. In the next recession, banks will inevitably lose money if commercial and residential property prices decline and corporate and consumer loans default – although we have been reassured that banks are better capitalised than before and that they have been vigorously stress-tested.

But more importantly due to the Volker Rule and other macro-prudent regulations, banks do not sit on mountains of corporate and mortgage paper as they did in 2007. It is pension funds, insurance companies – and via ETFs, mom and pop – who bought the avalanche of US corporate bonds issued since the last GFC.

So the good news, according to the grumpy SocGen permabear, is that banks are unlikely to be a systemic risk as the next crisis drives a rapid unravelling of the global economy, like they were in 2008 (sarcastically, he then notes that he is “not known for seeing a cup half full!”).

That is why he is confident that central bankers will not care if bank profits are squeezed as interest rates are pushed deep into negative territory – including the sort of adverse market reaction towards the banking sector we saw when Japan cut interest rates from +0.1% to -0.1% in early 2016 (Japanese banks fell around 25% relative to the market as did the eurozone banks as the ECB pushed interest rates to minus 0.4%, see charts below).

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Addressing just this hot topic, moments ago Dallas Fed president Robert Kaplan said that he is “skeptic about whether that’s a viable option” although he quickly added that the central bank should “not take any option off the table” even as he admitted that deploying negative interest rates in the U.S. could cause problems for the financial system.

Perhaps that’s some advice the Fed could have given the ECB, SNB and BOJ before they launched NIRP, but we digress, especially since Edwards is ultimately right, and with fears about banks off the table, banks will be driven by just one prerogative (the same one that Nomura’s Charlie McElligott hinted at earlier) – doing everything to preserve inflation, and avoid deflation, to wit:

The primary central bank objective will be to avoid outright deflation. The inability of the ECB, in particular, to escape the gravitational pull of zero core inflation, despite its continual predictions of success, has been truly shocking

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However, it is not just the eurozone that risks falling into outright deflation in the next recession: according to Edwards, the US is also vulnerable, and while core CPI and core PCE have remained relatively healthy in recent months, and roughly at the
Fed’s 2% target, this has been mostly a function of strong rents and Owner Equivalent Rent, i.e. housing prices, which dominate the core CPI calculation.

However, the risk is that US rent inflation “tends to broadly follow the fortunes of the housing market overall and there is no doubt that the US housing market has begun to unravel quickly over the past six months. New home prices are now actually falling yoy (even with a heavy 9-month moving average, see right-hand chart below). The last two occasions this happened were Nov 1990 and Dec 2007 when the US economy had entered recession! Rent inflation slumped shortly afterwards. In the next recession, the reality of outright deflation will dominate investors’ fears.

https://www.zerohedge.com/s3/files/inline-images/US%20CPI%20rent.jpg?itok=Ifk7b1pS

Meanwhile, in addition to inflation, central banks will be keeping a close eye on the dollar (recall we noted earlier that only two factors matter for the fate of the current rally: inflation and the dollar).

The reason for that, according to Edwards, is that one key policy lesson from Japan in the 1990s (and the GFC of 2008) when the economy slipped towards outright deflation is that a strong currency must be avoided at all costs as it exacerbated the deflation impulse still further.

Finance 101 dictates that a strong currency means import prices begin to decline and what we found in Japan, was that even where an industry was dominated by domestic Japanese producers, the marginal importer was able to undercut domestic producers and became the price setter for the whole sector. “Economists’ models could just not pick up this behavior and were unable to foresee the strong deflationary pull.”

So while Edwards predicts that the Fed does not want to rush to cut Fed Funds into negative territory, the cost of delaying will be very high if others are doing it (via a strong dollar).

The Fed will be forced to participate as avoiding deflation will be the number 1 priority – not the profitability of the banking sector. Investors should contemplate a brave new world of negative Fed Funds, negative US 10y and 30y bond yields, 15% budget deficits and helicopter money. Sounds ridiculous doesn’t it? What I said in 2006 sounded ridiculous too.

Concluding, as he often does, Edwards says that he hopes he is wrong, but fears that he will be proved right (again… eventually).

Source: ZeroHedge

More Alarm Bells As Banks Report Tightening Lending Standards While Loan Demand Slides

The latest alarm signal that the US economy is on collision course with a recession came after today’s release of the latest Senior Loan Officer Opinion Survey (SLOOS) by the Federal Reserve, which was conducted for bank lending activity during the fourth quarter of last year, and which reported a double whammy of tightening lending standards and terms for commercial and industrial loans on one hand, and weaker demand for those loans on the other. Even more concerning is that banks also reported weaker demand for both commercial and residential real estate loans, echoing the softer housing data in recent months.

This tightening in C&I lending standards coupled with sharp declines loan demand, especially for mortgage and auto loans, is shown below.

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Here are the details via Goldman:

  • 20% of banks surveyed reportedly widened spreads of loan rates over the cost of funds for large- and medium-sized firms, while 16% narrowed spreads. 14% of banks surveyed reported higher premiums charged on riskier loans, while 4% reported lower premiums. Other terms, such as loan covenants and collateralization requirements, remained largely unchanged. Demand for loans reportedly weakened on balance.
  • Relative to the last survey, standards on commercial real estate (CRE) loans tightened on net over the fourth quarter of the year. On net, 17% of banks reported tightening credit standards on loans secured by multifamily residential properties, while 13% of banks on net reported tightening standards for construction and land development loans. As above, banks reported that demand for CRE loans across a broad range of categories moderately weakened on net.
  • Banks reported that lending standards for residential mortgage loans remained largely unchanged on net in 2018Q4 relative to the prior quarter. However, this benign environment was largely as a result of slumping demand for credit, as banks reported weaker demand across all surveyed residential loan categories, including home equity lines of credit.
  • While banks reported that lending standards on consumer installment loans and autos remained largely unchanged, banks reported that lending standards for credit cards had tightened slightly. Here too demand – for all categories of consumer loans – was moderately weaker, while respondent willingness to make consumer installment loans tumbled to the lowest value since the financial crisis.

https://www.zerohedge.com/s3/files/inline-images/installment%20loans.jpg?itok=xsclC3ru

Finally, and most concerning of all, is that in their response to special questions on their 2019 outlook, assuming that economic activity continues to be in line with consensus forecasts, banks reported they plan to tighten lending standards somewhat for C&I loans, commercial real estate loans, and residential mortgage loans, in other words the most important credit would become even more difficult to attain. As a result, or perhaps due to the slowdown in the economy, banks also expect demand for C&I, CRE, and residential mortgage loans to weaken somewhat in 2019.

Banks also reported expecting delinquencies and charge-offs to increase somewhat on C&I, CRE, and residential mortgage loans; as Bloomberg’s Andrew Cinko muses “if America was heading toward an economic contraction that would be a typical expectation. But this doesn’t seem to be the case for the foreseeable future. So what gives?”

Perhaps “what gives” is that the economy is not nearly as strong as consensus would make it appear, and behind closed door, loan officers are already batting down the hatches and preparing for a recession. 

* * *

Here would be a good time to remind readers that according to a Reuters investigation conducted in mid-December, when looking behind headline numbers showing healthy loan books, “problems appear to be cropping up in areas such as home-equity lines of credit, commercial real estate and credit cards” according to federal data reviewed by the wire service and interviews with bank execs.

Worse, banks are also starting to aggressively cut relationships with customers who seem too risky, which is to be expected: after all financial conditions in the real economy, if not the markets which just enjoyed the best January since 1987, are getting ever tighter as short-term rates remain sticky high and the result will be a waterfall of defaults sooner or later. Here are the all too clear signs which Reuters found that banks are starting to prepare for the next recession by slashing and/or limiting risky loan exposure:

  • First, nearly half of the applications from customers with low credit scores were rejected in the four months ending in October, compared with 43 percent in the year-ago period, according to a survey released by the Federal Reserve Bank of New York.
  • Second, banks shuttered 7 percent of existing accounts, particularly among subprime borrowers, the highest rate since the Fed started conducting surveys in 2013.
  • Third, home-equity lines of credit declined 8 percent across the industry, with growth slowing in areas such as credit cards and commercial-and-industrial loans, the survey showed.

Then there are the bank-specific signs, starting with Capital One – one of the biggest U.S. card lenders – which is restricting how much it lends to each customer even as it aggressively recruits new ones, CEO Richard Fairbank said last December.

We have been more cautious in the extension of credit, initial credit lines, the broad-based credit line increase programs,” he said. “At this point in the cycle, we’re going to hold back on that option a bit.”

Regional banks have become more cautious lately as well, as they avoid financing riskier projects like early-stage construction loans and properties without pre-lease agreements (here traders vividly recall the OZK commercial real estate repricing fiasco that sent the stock crashing). New Jersey’s OceanFirst Bank also pulled back on refinancing transactions that let customers cash out on their debt, and has started reducing exposure to industrial loans, CEO Chris Maher told Reuters.

“In a downturn, industrial property is extremely illiquid,” he said. “If you don’t want it and it’s not needed it could be almost valueless.”

What happens next?

While a recession is looking increasingly likely, especially as it becomes a self-fulfilling prophecy with banks slashing loans resulting in even slower velocity of money, while demand for credit shrinks in response to tighter loan standards and hitting economic growth, the only question whether a recession is a 2019 or 2020 event, bankers and analysts remain optimistic that the next recession will look much more like the 2001 tech bubble bursting than the 2007-09 global financial crisis.

We wonder why they are so confident, and statements such as this one from Flagship Bank CFO Schornack will hardly instill confidence:

“I lived through the pain of the last recession. We are much more prudent today in how we underwrite deals.”

We disagree, and as evidence we present Exhibit A: the shock write down that Bank OZK took on its commercial real estate, which nobody in the market had expected. As for banks being more “solid”, let’s remove the $1.5 trillion buffer in excess reserves that provides an ocean of artificial liquidity, and see just how stable banks are then. After all, it is this $1.5 trillion in excess reserves that prompt Powell to capitulate and tell the markets he is willing to slowdown or even pause the Fed’s balance sheet shrinkage.

Source: ZeroHedge

Wells Just Reported Their Worst Mortgage Number Since The Financial Crisis

(Wells Fargo Earnings Supplement) When ZeroHedge reported Wells Fargo’s Q3 earnings back in October, they drew readers’ attention to one specific line of business, the one they have repeatedly dubbed the bank’s “bread and butter“, namely mortgage lending, and which as they then reported was “the biggest alarm” because “as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled, sliding just shy of the post-crisis lows recorded in late 2013.”

Well, unfortunately for Wells, despite the sharp drop in yields in Q4 which many had expected would boost mortgage lending or at least refi activity for the bank that was until recently America’s largest mortgage lender, the decline in mortgage activity has continued,  because buried deep in its presentation accompanying otherwise unremarkable Q4 results (modest EPS best; sizable revenue miss), Wells just reported that its ‘bread and butter’ is once again missing, and in Q4 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline shrank again, dropping to $18 billion, the lowest level since the financial crisis.

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Meanwhile, Wells’ mortgage originations number, which usually trails the pipeline by 3-4 quarters, was just as bad, dropping a whopping $12BN sequentially from $46 billion to just $38 billion, and effectively tied for the lowest print since the financial crisis.  Putting this number in context, just six years ago, when the US housing market was actually solid, Wells was originating 4 times as many mortgages, or about $120 billion.

https://www.zerohedge.com/s3/files/inline-images/Wells%20origiantions%20q4%202018.jpg?itok=26bJj1Sr

And since this number lags the mortgage applications, we expect it to continue posting fresh post-crisis lows in the coming quarter especially if rates resume their rise.

Going back to the headline numbers, here is a recap of the key metrics:

  • 4Q adj. EPS $1.21, est. $1.19
  • 4Q revenue $20.98 billion, Exp. $24.7BN
  • 4Q net interest income $12.64 billion
  • 4Q loans $953.11 billion vs. $942.3 billion q/q
  • 4Q mortgage non-interest income $467 million
  • 4Q residential mortgage originations $38 billion
  • 4Q margin on residential held-for-sale mortgage originations 0.89%
  • 4Q non- performing assets $6.95 billion
  • 4Q net charge-offs $721 million, estimate $736.8 million (BD)
  • 4Q total avg. deposits $1.27 trillion

There was more bad news for Wells. First, as the chart below shows, Noninterest Income has been a disaster and is only getting worse with virtually every revenue category posting Y/Y declines.

https://www.zerohedge.com/s3/files/inline-images/wells%20noninterest%20income%20q4%202018.jpg?itok=6nAL-W9q

Things were not better on the interest income side where the bank’s Net Interest Margin managed ended its recent streak of increases, and was unchanged at 2.94% resulting in $12.644 billion in Net Interest Income, and missing expectations of an increase to 2.95%. This is what Wells said: “NIM of 2.94% stable LQ as a benefit from higher interest rates and favorable hedge ineffectiveness accounting results were offset by the impacts of all other balance sheet mix and lower variable income.

https://www.zerohedge.com/s3/files/inline-images/NIM%20Wells%20Q4%202018.jpg?itok=WF4DdIH5

While Wells loss provisions declined modestly in Q4, its actual charge-offs jumped from $680MM to $721MM, the highest since Q1.

https://www.zerohedge.com/s3/files/inline-images/Wells%20charge%20offs%20q4%202018.jpg?itok=E1Jkk2Lr

There was another problem facing Buffett’s favorite bank: while NIM failed to increase, deposits costs are rising fast, and in Q4, the bank was charged an average deposit cost of 0.55% on $914.3MM in interest-bearing deposits, double what its deposit costs were a year ago.

https://www.zerohedge.com/s3/files/inline-images/wells%20deposit%20cost%20q4%202018.jpg?itok=NBzR9GZt

There was a silver lining however: amid concerns over the ongoing slide in the scandal-plagued bank’s deposits, which declined 3% or $40.1BN in Q3 Y/Y (down $2.3BN Q/Q) to $1.27 trillion, in Q4 Wells finally succeeded in getting a modest increase in deposits, which rose to $1.286 trillion, if still down 4% Y/Y. This was driven by growth in Wealth & Investment Management deposits driven by higher retail brokerage sweep deposits, “partially reflecting a change in our customers’ risk appetite, as well as higher private
banking deposits.” Offsetting this were declines in small business banking deposits, partially offset by growth in retail banking consumer deposits.

https://www.zerohedge.com/s3/files/inline-images/wells%20depositgs%20q4%202018.jpg?itok=sHfMWQmz

And some more good news: the recent ongoing shrinkage in the company’s balance sheet appears to have finally reversed, because one quarter after average loans declined from $944.3BN to $939.5BN, the lowest in years, and down $12.8 billion YoY, average loans outstanding increased fractionally to $946.3BN, up $6.8BN, or 1% Q/Q. This rebound was entirely due to commercial loans , which were up $7.7 billion LQ on higher commercial & industrial loans. Meanwhile, consumer loans continued to decline, and were down $835 million LQ as growth in nonconforming first mortgage loans and credit card loans was more than offset by declines in legacy consumer real estate portfolios including Pick-a-Pay and junior lien mortgage loans due to run-off and sales, as well as lower auto loans.

https://www.zerohedge.com/s3/files/inline-images/wells%20avg%20loans%20out.jpg?itok=JTJXxS5o

And finally, there was the chart showing the bank’s overall consumer loan trends: these reveal that the troubling broad decline in credit demand continues, as consumer loans were down a total of $13.7BN Y/Y across most product groups.

https://www.zerohedge.com/s3/files/inline-images/wells%20loans%20total%20q4%202018.jpg?itok=o07QLBIm

What these numbers reveal, is that the average US consumer can barely afford to take out a new mortgage even at a time when rates are once again sliding. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.

Source: ZeroHedge

 

Did Russia Just Trigger A Global Reserve Currency Reset Process?

Russia De-Dollarizes Deeper: Shifts $100 Billion To Yuan, Yen, And Euro

(Listen to the report here)

Russia is continuing to ramp up its efforts to move away from the American dollar (Federal Reserve Notes). The country just shifted $100 billion of its reserves to the yuan, the yen, and the euro in their ongoing effort to ditch the US Dollar.

The Central Bank of Russia has moved further away from its reliance on the United States dollar and has axed its share in the country’s foreign reserves to a historic low, transferring about $100 billion into euro, Japanese yen, and Chinese yuan according to a report by RT. The share of the U.S. dollar in Russia’s international reserves portfolio has dramatically decreased in just three months between March and June 2018. The holding decreased from 43.7 percent to a new low of 21.9 percent, according to the Central Bank’s latest quarterly report, which is issued with a six-month lag.

The money pulled from the dollar reserves was redistributed to increase the share of the euro to 32 percent and the share of Chinese yuan to 14.7 percent. Another 14.7 percent of the portfolio was invested in other currencies, including the British pound (6.3 percent), Japanese yen (4.5 percent), as well as Canadian (2.3 percent) and Australian (1 percent) dollars.

The Central Bank’s total assets in foreign currencies and gold increased by $40.4 billion from July 2017 to June 2018, reaching $458.1 billion. –RT

Russian and others have been consistently moving away from the dollar and toward other currencies. Economic sanctions, which are losing their power as more countries move from the dollar, and trade wars seem to be fueling the dollar’s uncertainty.

Peter Schiff warns that as the supply of dollars is going to grow and grow, the demand for the American currency can fall, while the US Fed will be unable to stop the dollar’s demise. Schiff says that what is coming for Americans, is massive inflation.

“Eventually, what’s going to happen is it’s going to be the demand for those dollars is going to collapse, not the supply. And when the demand for dollars collapses, then the price of the dollar collapses. You get massive inflation. That is what is coming.”

Russia began its unprecedented dumping of U.S. Treasury bonds in April and May of last year. Russia appears to be moving on from the rise in tensions with the United States. The massive $81 billion spring sell-off coincided with the U.S.’s sanctioning of Russian businessmen, companies, and government officials. But Russia has long had plans to “beat” the U.S. when it comes to sanctions by stockpiling gold.

The Russian central bank’s First Deputy Governor Dmitry Tulin said that Moscow sees the acquisition of gold as a “100-percent guarantee from legal and political risks.”

As reported by RT, the Kremlin has openly stated that American sanctions and pressure are forcing Russia to find alternative settlement currencies to the U.S. dollar to ensure the security of the country’s economy. Other countries, such as China, India, and Iran, are also pursuing steps to challenge the greenback’s dominance in global trade.

Source: ZeroHedge

***

India Begins Paying For Iranian Oil In Rupees Instead Of US Dollars

Three months ago, in Mid-October, Subhash Chandra Garg, economic affairs secretary at India’s finance ministry, said that India still hasn’t worked out yet a payment system for continued purchases of crude oil from Iran, just before receiving a waiver to continue importing oil from Iran in its capacity as Iran’s second largest oil client after China.

https://www.zerohedge.com/sites/default/files/inline-images/iran%20oil%20clients_0.jpg?itok=DURuMPHn

That took place amid reports that India had discussed ditching the U.S. dollar in its trading of oil with Russia, Venezuela, and Iran, instead settling the trade either in Indian rupees or under a barter agreement. One thing was certain: India wanted to keep importing oil from Iran, because Tehran offers generous discounts and incentives for Indian buyers at a time when the Indian government is struggling with higher oil prices and a weakening local currency that additionally weighs on its oil import bill.

Fast forward to the new year when we learn that India has found a solution to the problem, and has begun paying Iran for oil in rupees, a senior bank official said on Tuesday, the first such payments since the United States imposed new sanctions against Tehran in November. An industry source told Reuters that India’s top refiner Indian Oil Corp and Mangalore Refinery & Petrochemicals have made payments for Iranian oil imports.

To be sure, India, the world’s third biggest oil importer, has wanted to continue buying oil from Iran as it offers free shipping and an extended credit period, while Iran will use the rupee funds to mostly pay for imports from India.

“Today we received a good amount from some oil companies,” Charan Singh, executive director at state-owned UCO Bank told Reuters. He did not disclose the names of refiners or how much had been deposited.

Hinting that it wants to extend oil trade with Tehran, New Delhi recently issued a notification exempting payments to the National Iranian Oil Company (NIOC) for crude oil imports from steep withholding taxes, enabling refiners to clear an estimated $1.5 billion in dues.

Meanwhile, in lieu of transacting in US Dollars, Iran is devising payment mechanisms including barter with trading partners like India, China and Russia following a delay in the setting up of a European Union-led special purpose vehicle to facilitate trade with Tehran, its foreign minister Javad Zarif said earlier on Tuesday.

As Reuters notes, in the previous round of U.S. sanctions, India settled 45% of oil payments in rupees and the remainder in euros but this time it has signed deal with Iran to make all payments in rupees as New Delhi wanted to fix its trade balance with Tehran.  Case in point: Indian imports from Iran totaled about $11 billion between April and November, with oil accounting for about 90 percent.

Singh said Indian refiners had previously made payments to 15 banks, but they will now be making deposits into the accounts of only 9 Iranian lenders as one had since closed and the U.S has imposed secondary sanctions on five others.

It’s all about control… Robert Fripp

Source: ZeroHedge