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The banking crisis has just begun.
Last Friday, Moody’s Investors Service downgraded regional lenders, including U.S. Bancorp, Zions Bancorp, Bank of Hawaii Corp., Washington Federal Inc., Western Alliance Bancorp, Associated Banc-Corp., Comerica Inc., UMB Financial Corp., First Hawaiian Inc., Intrust Financial Corp., and First Republic.
After posting its latest quarterly results and reporting that its deposits dropped 40 percent to $104.5 billion, shares of First Republic Bank slumped nearly 50 percent today.
With the banking blues worsening, CNBC reported that the “SPDR S&P Regional Banking ETF (KRE) and SPDR S&P Bank ETF (KBE) lost more than 3 percent as financials weighed on the market. Western Alliance Bancorp and PacWest each slid 4 percent, while Charles Schwab shed almost 3 percent.”
And of course, there is the Credit Suisse debacle, which, according to the Financial Times, suffered $68.6 billion in outflows in the first quarter as clients fled the stricken bank: “In light of the merger announcement, the adverse revenue impact from the previously disclosed exit from non core businesses and exposures, restructuring charges and funding costs, Credit Suisse would also expect the investment bank and the group to report a substantial loss before taxes in [the second quarter] and 2023,” Credit Suisse said.
The Worst is Yet to Come
The socioeconomic crisis spreading across the globe was self-inflicted by reckless record low interest rates and cheap monetary policy since the Panic of ’08.
And making a bad situation worse, the coming crisis was further exacerbated by central banks and politicians flooding economies and equities with free and cheap money to fight the COVID War. Besides the economic consequences of fighting COVID, the economic, mental, physical and spiritual damage inflicted upon the citizens of the world is incalculable.
As we had forecast back in March of 2020 when the COVID War was fully launched, among the serious damage is the Office Building Bust… which is now, some three years later, just making the mainstream news.
In the U.S., the first to initiate the work-from-home trend was the tech industry… whose stocks flourished as people stayed home, worked from home, shopped from home, ordered food from home, learned from home, and were forced by politicians to stay-at-home. In fact, if you went out to the beach, park, bar, gathered with friends, or went to church, you were fined and punished. Indeed, so draconian were the COVID War mandates that people were not permitted to see dying loved ones in hospitals and nursing homes.
And now, thanks to the geeks who by their deeds and actions supported the draconian COVID War, tech-city San Francisco is now among the worst-suffering major cities in America: homeless fill the streets and crime has spiked. Indeed, with people stealing what they can, Whole Foods flagship store in downtown San Francisco shut down last week.
Making a bad situation much worse, San Francisco’s office vacancy rate, according to JLL real estate, has soared to 30 percent. According to CoStar Group, across the nation, with the vacancy rate at nearly 13 percent, it is at its highest level since they began tracking back in 2000.
And beyond the office buildings, as we reported in great detail, the businesses that depend on commuters are losing money and/or going out of business.
Therefore, on the banking front, with commercial mortgages accounting for nearly 40 percent of the median U.S. bank’s loans, according to KEW Research, and about 13 percent of the big banks—and with interest rates rising so the building owners have to pay more on their floating loans as they suffer from far less revenue—the worst of the banking crisis has just begun.
With the value of commercial office buildings down some 20 percent, Morgan Stanley analysis shows that with nearly one-third of the nearly $5 trillion in commercial real estate loans coming due before the end of 2025… the crisis is “front-loaded.”
Again, for some three years we had forecast what is now making “the news.” Here are just a few of the articles from past Trends Journals:
• “REMOTE WORK = COMMERCIAL BUST” (2 Jun 2020)
• “NEW YORK OFFICES: PEOPLE EMPTY” (15 Sep 2020)
• “FED WARNS OF BANKRUPTCIES, COMMERCIAL REAL ESTATE CRASH” (23 Feb 2021)
• “OFFICE WORKERS’ SLOW RETURN ENDANGERS LANDLORDS, CITY FINANCES” (9 Mar 2021)
• “AS FORECAST: NYC COMMERCIAL REAL ESTATE CRISIS WORSENS” (24 Aug 2021)
• “RETURN TO OFFICES POSTPONED: COMMERCIAL REAL ESTATE BUST?” (14 Sep 2021)
• “WORKERS STAYING HOME: COMMERCIAL REAL ESTATE DISASTER LOOMING” (19 Oct 2021)
• “COMMERCIAL REAL ESTATE BUST? OFFICE OCCUPANCY RATES IN TOILET” (29 Mar 2022)
• “DIMMING HOPE THAT PRE-COVID DEMAND FOR OFFICE SPACE WILL RETURN, WSJ SAYS” (22 Nov 2022)
• “AS FORECAST: BUSINESS OFFICE BUST BEGINS TO BITE” (20 Dec 2022)
• “TOP TREND 2023, OFFICE BUILDING BUST: RETAILERS FOLLOW COMMUTERS OUT OF CITIES” (7 Mar 2023)
• “TOP TREND 2023, OFFICE BUILDING BUST: THE COMMERCIAL REAL ESTATE FACE OFF” (28 Mar 2023)
LAST WEEK: EQUITIES SLIP ON BANK NEWS
Bank stocks continue to show mixed results as banks deal with recent turmoil in the U.S. financial sector and analysts see tighter conditions ahead for lenders.
Truist Financial shaved 6 percent off its share price Friday when it reported earnings that fell short of forecasts; Western Alliance’s stock added 2.4 percent after the bank announced that deposit outflows had dwindled.
“Given what’s happened with financial sector stress, we see greater lack of clarity now, given the potential for tightening lending conditions and that continues to raise questions on the outlook,” Lisa Erickson, chief of public markets at U.S. Bank Wealth Management, told The Wall Street Journal.
For the week, the Dow Jones Industrial Average ticked down 0.2 percent. The NASDAQ lost 0.4 percent. The Standard & Poor’s 500 index was down 0.1 percent.
Recent news on the economy also was mixed.
The Federal Reserve Bank of Philadelphia’s index of manufacturing activity dropped by 8 points this month, falling to -31.3, marking its eighth consecutive month of decline.
Only 3 percent of firms polled reported an increase in business, while 35 percent said business had slowed.
The survey results “spooked investors that a deep recession may be on the horizon,” the WSJ noted.
However, overall U.S. manufacturing data showed business activity at an 11-month high. Service businesses are at their busiest in 12 months.
The higher numbers contributed to a rise in prices, stirring recurrent worries that the U.S. Federal Reserve will continue raising its base interest rate more or longer than expected.
Treasury yields rose Friday, with the 10-year note paying 3.570 percent compared to 3.546 percent Thursday. Yields rise as securities prices fall.
Spot gold slipped, ending the week down 0.8 percent at $1,995.10 at 5 p.m. U.S EDT on 21 April.
Brent crude oil’s price gave back 5.4 percent this week, reaching $81.66 at 5 p.m. U.S EDT on 21 April. West Texas Intermediate crude moved down 5.6 percent to $77.87.
Bitcoin fell 5 percent through the week, trading at $28,000.80 at 5 p.m. U.S EDT on 21 April.
Abroad, markets were mixed.
The London FTSE 100 rose 0.6 percent and the all-Europe Stoxx 600 gained 0.4 percent.
Japan’s Nikkei ticked up less than 0.01 percent, while the South Korean KOSPI was down 1.0 percent.
In China, the Hong Kong Hang Seng index fell 1.5 percent. The mainland’s CSI Composite lost 1.4 percent and the SSE Composite 1.1 percent.
YESTERDAY: STOCKS MIXED AS INVESTORS AWAIT EARNINGS REPORTS
The Dow Jones Industrial Average rose 66.44 points, or 0.2 percent, to 33,875.40 and the S&P 500 was up 3.52 points, or 0.1 percent, to 4,137.04. The Nasdaq was down 35.25 points, or 0.3 percent, to 12,037.20.
With 170 companies in the S&P 500 set to release corporate earnings this week, as we have reported, the expectations are low.
The 10-year U.S. Treasury yield on Monday traded down to 3.53 percent.
As we note above in the ECONOMIC OVERVIEW section of this Trends Journal, the big news on The Street is finally seeing what we had long forecast: the banking crisis has just begun.
Elsewhere, London’s FTSE was down 1.93, or 0.02 percent, to 7,912.20 and the benchmark STOXX600 was down 0.03, or 0.01, or 468.97.
In Asia, Japan’s Nikkei was up 29.15, or 0.10 percent, 28,593.52 and South Korea’s Kospi was unchanged at 2,523.50. Hong Kong’s Hang Seng was down 115.79, or 0.58 percent, to 19,959.94. China’s Shanghai Composite 25.84, or 0.78 percent, to 3,275.41 and the Shenzhen Component was down 133.42, or 1.17 percent, to 11,317.01.
OIL: Brent crude was up $1.07, or 1.3 percent, at $82.73 a barrel and U.S. West Texas Intermediate finished the day up 89 cents, or 1.1 percent, at $78.76.
Oil prices benefited from a weakening dollar and there is optimism that China’s May Day holiday will give a boost to oil consumption in the country after years of COVID-19 lockdowns.
Investors were also waiting for the Federal Reserve meeting due next week that The Street anticipates will result in a 25 basis point interest rate hike. FXStreet noted that OPEC+ production cuts have pushed the price of WTI upward. There are also plans by the oil cartel to announce another production cut in May.
TRENDPOST: As the economy goes down and interest rates go up the economies will slow down and so too will oil consumption. However, as demand goes down OPEC+ will lower supply which will in turn keep Brent Crude in the $80 per barrel range. And as we note there are always the wild cards such as war in the Middle East. Should military conflict break out between Israel and Iran oil prices will soar above $130 a barrel which will in turn crash equity markets and economies.
GOLD: Spot gold was trading up 0.3 percent to $1,988.69 an ounce and U.S. gold futures were up 0.4 percent to $1,999.20.
Reuters noted that the U.S. dollar eased 0.5 percent and hit a one-week low—which makes the yellow metal less expensive for foreign buyers. The precious metal fell after hitting $2,000 last week on concerns that the Federal Reserve will keep increasing interest rates.
Markets are currently pricing in a 91 percent chance of a 25-basis-point hike, according to the CME FedWatch Tool.
TRENDPOST: Gerald Celente has called gold the best safe haven asset and sees great upside at current levels. Again, we forecast gold prices will go down when the Federal Reserve is expected to raise interest rate 25 basis points next Wednesday. After that, should the Fed hold interest rates and begin to lower them the dollar will greatly weaken and gold prices will rise much higher.
BITCOIN: The world’s most popular crypto was trading down, in the $27,450 range most of yesterday after trading at around $28,250 on Friday, and near-term optimism for bitcoin seems confused.
Standard Chartered wrote in a note Monday that it sees the crypto jumping to as high as $100,000 by the end of 2024, after the high-profile collapse of Silicon Valley Bank and Signature.
Geoff Kendrick, an analyst for Standard Chartered, wrote that the banking upheaval made a good case for a “decentralized, trustless and scarce digital asset.”
CNBC noted that he said “we believe the much-touted ‘crypto winter’ is finally over.”
TRENDPOST: The Trends Journal sees the value in bitcoin, but has warned that government oversight could be its death knell.
Chamath Palihapitiya, the tech investor, seems to agree. He told the All-In Podcast that he believes “crypto is dead in America.” The comment was jarring coming from a former crypto advocate who once predicted bitcoin would hit $200,000.
“The United States authorities have firmly pointed their guns at crypto,” he said after indicating that cryptos were blamed for the recent banking crisis.
TODAY: DOW FALLS 340 POINTS AS BANKING CRISIS COMES BACK INTO FOCUS
The Dow Jones Industrial Average fell 344.57 points today, or 1.02 percent, to close at 33,530.83 and the benchmark S&P 500 was off 65.41, or 1.58 percent, to end the day at 4,071.63. The tech-heavy Nasdaq Composite also shed 238.05 points, or 1.98 percent, to close at 11,799.16.
The big news on The Street today was new fear that the regional banking crisis will turn into a massacre.
First Republic, which recently announced that deposits fell $104.5 billion in the last quarter – or 40 percent, announced that it will begin implementing cost-cutting measures and cut its headcount by up to 25 percent. Its stock fell over 49 percent to hit a record low.
The San Francisco-based bank has said its deposit activity stabilized after a sudden rush drop after the high-profile failures of Silicon Valley Bank and Signature.
Mohamed A. El-Erian, the economist, tweeted early today that the price reaction “is a reflection of markets recognizing that deposit stabilization is necessary but not sufficient. The bank also faces other challenges, including on account of funding costs, the shrinkage of its balance sheet, and provisions.”
The consumer confidence index fell to 101.3 in April, which marks a 9-month low, according to the Conference Board, the business research group.
Ataman Ozyildirim, senior director of economics at the Conference Board, said it looks as though consumers fear a looming recession and believe inflation will remain persistently high.
“Overall purchasing plans for homes, autos, appliances, and vacations all pulled back in April, a signal that consumers may be economizing amid growing pessimism,” he said.
The Commerce Department also said today that new home sales increased 9.6 percent to an annual rate of 683,000 last month, which was higher than expected.
London’s FTSE was off 21.07 points, or 0.27 percent, to 7,891.13 and the benchmark STOXX600 was down 1.89, or 0.40 percent, to 467.08. In Asia, Japan’s Nikkei was up 26.55, or 0.09 percent, to 28,620.07 and South Korea’s Kospi was down 34.48, or 1.37 percent, to 2,489.02. In China, the Shanghai Composite was down 10.54, or 0.32 percent, to 3,264.87 and the Shenzhen Component was down 168.00, or 1.48 percent, to 11,149.01.
TREND FORECAST: The Banking bust has just begun. As interest rates rise, more money will flow from the banks into more profitable investments. And when the Office Building Bust hits the banks and there are more bank failures, the money flowing out will dramatically increase.
Among the safe-haven assets beyond money market funds, we forecast that the worse the banking crisis becomes, the higher gold prices will rise…to well above $2,000 per ounce.
OIL: Brent crude was down $2.01 a barrel, or 2.44 percent, to $80.71 and West Texas Intermediate was down $1.67, or 2.12 percent, to $77.10.
Rebecca Babin, a senior energy trader at CIBC Private Wealth, told Bloomberg that the crude market is in “wait-and-see mode with trading dominated by short term strategies as opposed to real investors.”
“Longer-term investors aren’t going to make real bets until there is clarity around China’s recovery and U.S. recession,” she said.
Fears of a recession in the U.S. are resurfacing due to a hawkish Federal Reserve and a weakening economy. There are also fears that the Chinese economy – which beat expectations in the first quarter to grow by 4.5 percent – does not maintain its momentum.
GOLD: The yellow metal was trading up $7.40, to 0.37 percent, to $2,007.20 an ounce as of 4:23 p.m. ET.
The precious metal benefited from falling Treasury yields. The 10-year yield was at 3.43 percent and the 2-year was selling at 4.03 percent. Higher Treasury yields generally put pressure on gold prices because the precious metal is a non-yielding asset.
Gold buyers are also considering future Fed moves on interest rates.
TREND FORECAST: Again, as we have forecast, gold prices will rise sharply when the Fed stops raising interest rates and the dollar weakens.
BITCOIN: The world’s most popular crypto was trading up about $371.10, or 1.35 percent, to $27,885.80 a coin as of 4:24 p.m. ET today, as some skeptics wonder if the digital coin could fall back to $20,000 in the near term due to interest rates, slowing economies, and government oversight.
Crypto bulls have noted the important role bitcoin can play as a store of wealth in countries like Argentina, which has seen its peso fall by 99 percent compared to the U.S. dollar since 2018. Coin Telegraph reported that bitcoin hit a record high in “Argentine peso terms following persistent inflation in Argentina.”
The report went on to say that the country’s currency continues to be battered.
“Traders were paying as low as 460 ARS to buy $1 from the black market on April 24 — more than double the official spot rate that pays 220 ARS for the dollar,” the report said.
TRENDPOST: Bitcoin has been trading consistently in the high $20,000s and was up today despite the stock market slipping. Watch for bitcoin to stay in this range until the Fed announces its next interest rate move next week. If the Fed raises rates by another 25 basis points, what for bitcoin – a non-yielding asset – to trade in the $24,000-$26,000 range.