Hey There Income Hunter,
Expectations for today’s CPI report were quite high with an average forecast of 8.8%, but the numbers were even higher across the board …
The headline CPI year-over-year is the most important since that includes the most important items for consumers (food & energy) – and it was a shocker!
This all but guarantees another +.75% rate hike by the Fed on July 27.
There is one problem … This number will continue putting tremendous pressure on the economy …
- The consumer is already stretched to its limits with max credit card debt and little-to-no savings.
- The housing market bubble has burst with plenty of downside to come.
- The stock market has so far been in an orderly bear market but that may change now.
The signposts continue to flash warning signs for a financial system breakdown … What will the Fed do?
Banks Risks Rising
There are plenty of areas where Banks are leaking revenues including …
- EU asset prices are plummeting,
- Counterparty risk is rising sharply
- EM assets assets are down
- Crypto financing is in risk of default
When risk hits asset prices hard most traders move their marks down very slowly I know because I was once in that seat. When the poop hits the fan, the bad news ends up coming out all at once.
Here is the insane part of the story … The Fed is allowing banks to increase dividends even though global credit risk in many spots is through pre-Covid levels.
So after the most recent bank stress tests we have global bank balance sheets stressed by $20T to $30T in mark-to-market losses from Equities, Treasuries, European government bonds, Crypto, Private equity and Venture capital …
Now, the worst emerging market credit crisis in decades is building momentum on top of the already stressed bank balance sheets.
Other Bank Risks
- There are several Sri Lanka-like tragedies, which have all been caused by a rising dollar since the dollar is used in most payments for oil. Months of protests over soaring prices and a lack of food and fuel has wreaked havoc on emerging market (EM) economies.
- EM country’s foreign currency reserves have virtually run dry, meaning they don’t have enough funds available to buy goods from other countries. This could cause bank counterparty defaults on loans.
- Credit Suisse credit default swaps (CDS) blowing out, high yield bank CDS near worst covid levels!
- US Bank “Safe” Assets – US Treasuries. This hurts bank capital – down 11%, the worst year since at least 1973
No, think about this … the data is this bad after just 150bps of rate hikes from the Fed.
Bring It Home
There is not much escape from this recession for the banks. We are talking about the everything bubble bursting.
This includes stocks, bonds, real estate, corporate bonds, leveraged loans PE. The banks have risk in every asset class.
Think about how much bigger the banks are today than 20-years ago …
One of the main problems is they were considered too big to fail, which gave them confidence to continue to grow.
Consider bear strategies on any rallies in the SPDR Select Sector Financial Fund (XLF) … I believe it will eventually take out the Covid lows
Live and Trade With Passion My Friend,
Griff