Inside Friday’s Bank Earnings, The Age Of Magic Money And 3,749

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4Q Earnings Season kicked off for real on Friday with JP Morgan (JPM), Citigroup (C) and Wells Fargo (WFC) reporting. The WSJ’s ace banks reporter, Telis Demos, had a great piece explaining the dynamics of bank balance sheets, “Banks Are Not Ready to Show You The Money”, January 16. While deposits are growing quickly, banks are having difficulty growing their loan books. For example, JPM’s deposits grew by 37% year over year but their loan book by only 2%. C saw deposits +19% while their loan book was actually -4%.

As a result, banks are having to invest their new assets in investment securities rather than traditional loans: “While banks don’t have great options for deploying cash without loan growth, the banks mostly increased their investment-securities assets in the fourth quarter… This helped slow their quarterly declines in net interest margin, a measure of banks core profitability” (Demos).

Whatever the reason, all three banks got hit on Friday with JPM -1.79%, WFC -7.80% and C -6.93% causing the XLF to be -1.65% to $30.94 and fail, for now, at the previous bull market highs (Chart Source: 2kaykim Twitter, January 12, 9:52am).

I was reading Jim Rickard’s excellent new book The New Great Depression yesterday which led me to Sebastian Mallaby’s “The Age of Magic Money: Can Endless Spending Prevent Economic Calamity?” (Foreign Affairs, July/August 2020).

When it comes to lending, we are not going to run out of ammunition – Fed Chair Powell quoted in Mallaby

Mallaby shows how the Fed has become Uber aggressive in response to the coronavirus as has the Federal Government. The combination of all this quantitative easing and federal stimulus has levitated financial markets and kept the economy from complete collapse.

However, it’s sustainability depends on low interest rates which depend on low inflation which depends on a stable dollar. If the $ keeps falling, import and commodities price will continue to rise resulting in inflation and higher interest rates. This sort of development could tie the Fed’s hands as they turn their attention away from stimulus to controlling inflation (Chart Source: Mike Zaccardi Twitter, January 13, 12:32pm PST; Chart Source: NorthmanTrader Twitter, January 13, 3:48am PST; Chart Source: Michael Kahn Twitter, January 8, 1:03pm PST).

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