YouSaid · the spoken record

James Gorman

lines on the record: 82
first: 2022-04-18
most recent: 2022-04-18
sittings or episodes: 1
sources: podcast

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“And I actually brought up what Chris said about the Federal Reserve going insolvent with Joseph. I haven't discussed it extensively, but Joseph sent me a link to the Federal Reserve's website. And there are a lot of reasons why this shouldn't happen, such as the fact that, according to the Federal Reserve's official policy, they don't sell assets. They let them roll over, except for when they just want to sort of test things. And also, their liabilities, bank reserves, don't yield any interest. Although I guess they do during the reverse repo rate. Yeah, but very close to zero interest rates. And they own treasury. So if you own a treasury yet, it's yielding 2% and the reverse repos rate is zero. It's kind of hard to lose money. And yet the Fed might find a way if it has to sell these mortgage-backed securities and perhaps treasuries at a huge mark-to-market loss. So I just wanted to share a few thoughts.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“2034 when that mortgage back security rolls off. The duration changes, it's not like a treasury bond when it's seven years and it pays off in seven years. They are extremely, they have a huge amount of volatility in the duration. So they would have to sell into an open market and that would be a lot of problems. And this goes on with the treasuries too. I was just looking into the Federal Reserve was buying billions and billions of dollars of treasuries every day in March and April when the 30-year bond was at 1.2% and TLT was at 170. Not that they trade TLT obviously. What they bought in a day was greater than the entire market cap of TLT. But I'm just saying that as an example. So if the Fed is facing a 30% mark-to-market loss, that is a problem.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“The opposite and cash flows they thought they were going to have for 10 years are now going to be 20 years. So interest rates have risen a huge amount, and that is why Chris is saying, and Joseph Wang has made points about this too, that no one is going to refinance their mortgage. Everyone who wants to buy home, a lot of people, they have a home, and if they're going to buy a home, they're going to do it when mortgage rates are at two, not when they're at 5% or 6%, as Chris thinks they're going to go. So if no one is refinancing their mortgage, then mortgage-backed securities will not prepay and they will, the duration of them is extended for a very long time. I knew this from Joseph, and I thought there were like six, seven years. But Chris was saying 10, 12, 15 years. I don't know if he said 15. So that means that the Federal Reserve's plan of letting the mortgage-backed security roll off, they're going to be waiting for 12 years. It's going to be...”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Then other dealers are going to get it. It's sort of a reflexive loop. Now to the convexity point, why will the Federal Reserve be forced to sell mortgage-backed securities? Again, this is not an official thing. They have actually said otherwise, but mortgage-backed securities are not convex instruments. They are short convexity. A lot of people know what an option is, a call, a put. If you have a mortgage, meaning you have a house and you're on the hook for paying it, have a mortgage, then you kind of have a free option because you can refinance if rates go lower and if rates increase or stay the same, you don't have to refinance. So people who own a mortgage, investors, not people who have a house, people who own mortgage-backed securities, I should say, they are short convexity. So if interest rates fall, then everyone wants to refinance and cash flows that they thought they were going to get for 10 years, they now only get for three years. If interest rates rise, then it's...”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“And they had a coupon of 2%. And they were trading at, let's say, $101. So the effective yield is maybe 1.8%. I'm just going to make that up. Now, the yield is much, much higher. Mortgage rates are now at 5%. So the Federal Reserve now has to sell mortgage-backed securities into the market. Actually, I made a misstatement according to the Federal Reserve 2014 guidelines, but a lot of smart people think that the Federal Reserve is going to have to extend mortgages. And I'll explain why. But mortgage rates are at 5%, and now it's trading at $91. There's not a market for that. It's like selling silver coins at a gold fair, you know? And when you're trading size in large positions, block by block, if other people aren't trading.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Not 5.44%, but 5.46%, so two basis points increase. Doesn't inspire a lot of confidence there. So that's what Chris was saying. It's about the spread. The other point is about Chris is saying that U.S. banks are not exposed to Russia. Most of the risks there are in European banks. And I don't know enough about that, but I do take Chris's word for it about direct exposure, but in terms of commodity exposure, there was a recent paper from the Dallas Fed showing otherwise, and they're unwilling to extend credit to commodity producers because it's so volatile. And of course, Zoltan Poster has been going all about that. What Chris said, what about mortgage-backed securities, it might be confusing to people who are not as familiar with it. The Federal Reserve bought a lot of mortgage-backed securities in March and April of 2020.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“The Apple Podcast app. Okay, now let's get to what I wanted to talk about. I got like three or four points about the banking system and what Chris was saying. The first is that the media and just people in general, investors are suffused, they're flooded with the idea that rising rates are good for banks. And in theory, they are because banks make money by extending loans when rates are higher. They have a higher rate of return. But it's about not just what they earn on the loans, but the cost of funding as well. And if costs go up and banks suddenly have to pay 3% for overnight deposits, that's going to severely eat into their margins. And also on the loan point, just sit like the Citibank in Q1 of 2021, first quarter of 2021, they made five... On their loan yield at the time when the five-year treasury was”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Yes, but again, the difficulty with crypto is who are you dealing with? Can you actually identify who the counterparty is? Because if you as a U.S. resident innocently do a crypto transaction and then the folks at FinCEN show up a couple months ago and say, hey, you were trading with a banned party in Russia, you have problems. You know, you have an obligation to know who you're dealing with. And unfortunately, in the crypto world, you often don't. Now, luckily, Jack, we have the blockchain and the guys at FinCEN and Treasury have already figured out who to figure out or how to figure out who your counterparty is. So we can all look forward to that.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Well, I have the blog, the Institutional Risk Analyst, and we have a premium service of subscription service where we actually talk about individual names and markets. I've tried to focus on both the traditional banks and some of the newcomers, which are interesting. There are a whole bunch of banks in the US that got into crypto. I'm not sure they're going to be able to stay in crypto. That's a sector we didn't talk about much. But the whole impact of the sanctions in Russia and Ukraine is that everybody out there that touches crypto assets is going to have a compliance regime for know your customer and anti-money laundering. It looks like a broker dealer. So if you don't have that and you're involved in that industry right now, you better go call your lawyer and start talking to consultants and vendors.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Going to take years to unwind this, so you know during that process, as I say, if we have a lot of hyperventilation and headline risk, that's an opportunity to go buy quality names. But I would urge your viewers to do their homework and be patient. Everybody's gotten to the point where we think we have to react instantly. This is one of the blessings of social media. And sometimes you want to turn the social media and the TV off and just think about your strategy and take a measured reasoned approach to getting there. I think oftentimes the best approaches are when you ignore short-term cycles and just stick to your knitting. Like I'm not selling my NVIDIA, okay? If it goes down another third from where it is now, I'll go buy more.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Sharing it, the ones that are involved in global trade, the ones that compete with city, for example, like BNP and France, they're all heavily involved in the commodities markets. And reporting in Europe is not anything like in the US. They can hide problems for years, and they will. You may recall after the 2008 crisis, European banking community was basically on ice for almost a decade. They ignored loan losses because if they had cleaned up the mess, they wouldn't have had any capital left. The big problem in Europe is that the banks just don't have the profitability you need to deal with problems. U.S. banks are very well capitalized. They have excess of liquidity right now. So I'm not particularly worried about them as far as Russia is concerned. But for the rest of the banking world outside of the US, I think it's going to be a continuing problem.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“I think we're hoping that this unfortunate conflict in the Ukraine was going to end relatively quickly, but I don't think that's the case. And, you know, we've cut off a major commodity producer from the global market. We just took out the Cleaver and cut all of those ties. So it's going to take time in industries like shipping, for example, aircraft leasing. You know, here's an asset class that was completely gold, insured. You know, the planes were probably the most portable and attractive asset in the global capital markets. Now all of a sudden, the less sore for those aircrafts are going to take total losses, those planes are not coming back. There's a lot of change here that people have to manage. And it takes time. They have to gather the information, figure out what the losses are, and then deal with it. And I think we'll be.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Most U.S. banks don't have significant offshore operations. J.P. Morgan City, among the top five, are really the ones you have to be concerned about. And the risk they have is kind of secondary and tertiary. In other words, you know what their direct exposures are, but you don't know what's happening to their customers. So they may have a customer that initially they didn't think had exposure to Russia, but then the customer ends up defaulting. Okay, and the bank doesn't see it initially, but then they have to go deal with it. European banks have the most exposure to Russia, obviously. You also have some Asian banks. The commodities market is already causing problems. There has been a number of stories about Chinese and European firms that took positions in commodities.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Chris, I want to close by asking you about threats that banks face from Russia's invasion of Ukraine. Both in terms of the volatility of commodity prices, perhaps interfering with hedging via extension of credit to commodity traders, as well as credit lines that are within Russia that may have to go bad today, again, April 14th, Citibank announced that its current exposure, direct and indirect, was $7.8 billion. Citibank headquartered within the US, but it does business worldwide. What is the exposure of US banks, Citibank, as well as European banks and other foreign banks to Russia? And how serious of an issue is it?”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Single digits, and then they make money on credit cards. I remember in 2009 when Capital One hit 11% gross defaults on their credit card book. Okay, that's a lot. Most U.S. banks couldn't tolerate a loss rate half of that. They'd fail. But Capital One, that's their business. They have more capital. They have 13, 14% capital, and they know how to manage delinquency. But that's a very different business. That's almost a consumer finance business as opposed to a traditional banking business.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“The default rate on Jamie Diamond's credit card book is very low. The default rate on City's credit card book is two and a half to three times JP. That's because they're willing to bank a lower quality, more subprime customer, and they charge them accordingly. You know, as I like to always explain to policymakers who are angry about payday lenders, why do payday lenders charge 200% interest? Because half of their book is going to default. People are not going to pay them back, so the survivors basically subsidize the delinquency. If you think about it that way, it makes sense. So for banks, they always want to keep their delinquency rate under control.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“No, I think that's right. You had a period where people were paying off credit card balances kind of 2020. And then in 21 the numbers bottomed a little over seven hundred billion for bank credit cards. And now we're getting back up towards a trillion dollars in total receivables. What that shows you is that consumers are spending money and they also no longer have cash from not paying their mortgage or not paying their rent that they could use to reduce debt. And now we're kind of normalizing the household's needs in terms of funding costs. It's good for banks. The credit cards are probably the single best asset class for commercial banks when it comes to making money. Because think about it. Imagine your city and even though you pay more money for deposits than some of the other big banks, you make three times as much on your credit book compared to Jamie Diamond. Jamie's...”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Am seeing a small glimmer of hope in the credit card business wherego, JP Morgan, their lines of credit to consumers have been going up on a year-over-year basis. Does that give you a sense of assurance that demand for credit is going up? Is it a reflection of people having less money because the fiscal support is no longer there?”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, well, if they defaulted on the auto loan, you ripped their garage door off, take the car, and sell at the next day. Yeah, if you're not making your car payment, don't put it in the garage and close the door. That's bad. Because the repossession guy has the right to take your garage door off.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Fashion than they have over the past couple of years. You couldn't lose money on a loan. Think about auto loans because of the shortage of cars. The loss given default on auto loans went down to almost zero, which is crazy.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“We got cut in half after the crisis, yeah. And, you know, it was partly the banks were just hunkered down for seven years. It's very interesting if you compare the 2010 through 20 with the 1990s period. In both cases, you had flat growth in terms of total credit available for housing and very anemic volumes. Then finally, you had pent-up demand. After eight, ten years of very weak growth, you have all these millennials who want to have families. You had a lot of other reasons for demand. You had people in cities going out and buying second homes, so they could go hide from COVID. So there's a lot of dynamics in this market that are unusual, and now as we transition to hopefully a somewhat of a more normal period, you're going to see these markets behave in, I think, in a more traditional way.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“That's right, and they typically finance themselves either in the equity markets if they're lucky or with the lines from a bank. May I give you another great example as a company called Blend, which provides services in the mortgage space, very high profile IPO. I think that company is going to have to get bought. I'm not sure they're going to survive. There's another one called Better Mortgage that was supposed to merge into a SPAC. I don't think that deal is going to get done. And the reason is that volumes are falling. Everybody in the industry is focused on cost management, laying people off. So housing was a big tailwind when the Fed was dropping rates during COVID and everything else, but now it's a headwind. We're probably going to lay off 30, 40 percent in the mortgage industry this year. Think about that. That's a huge reduction in headcount.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Some of this paper is going to look after a recession. We really haven't tested these models through And I think that's kind of the next thing. So if I'm looking for financial exposure, I would rather be in quality banks than in quality nonbanks. Nonbanks look great when rates are low and people are making a lot of loans, but when rates go up in volumes fall, they tend to have to make inferior loans to support their volume targets. And that's where they get into trouble.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“I think the new crop of nonbank lenders You know, people like Upstart, which I've written about, some of these other shops which have embraced automated underwriting for loans. You know, there's a big difference between artificial intelligence and real intelligence. And unfortunately, when you get into a market where you're originating consumer loans, unsecured consumer loans, and you're selling that paper to investors and banks, you can almost bet. In fact, I would bet that there's going to be a lot of delinquency in that paper going forward. Because remember, during the last two years, the Fed made credit risk disappear temporarily. And so all of these models look great, lending club, all the rest of them, right? But if you look at the actual pricing of these models and how they make money and the effective rates that they give to consumers in terms of credit, you have to wonder how...”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Chris, where in the financial world are you seeing the biggest amount of imprudent risk-taking? You talked a lot about what you like, but what do you think are the biggest risks out there? We talked a lot about interest rate risk. Maybe you can elaborate on that more, but also credit risk. Is it CLOs? Is it high yield bonds or is it stocks of companies that deal in these issues? What are you the least constructive on?”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“So there's a lot fewer Ginny Mays out there, and is the reserve position of the Fed Falls? Guess what? Banks have to buy treasuries and Jinnie mates for reserves. As a structural change, too, that's going on here that we have to be very cognizant of”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“You could have a tremendous rally in treasury bonds if people see recession. What are they going to buy? They're going to buy safety. If you're a bank of China and you've been letting your treasuries run off, but now they're at 3%, you might go buy them before the rally starts. Same with the Bank of Japan, Nurinchukin, the big postal bank in Japan. It's a huge buyer of treasuries in GMAs. So we always have to remember that liquidity is about the availability of cash, but it's also about collateral. And right now you could argue that there's still a shortage of risk-free collateral in the market today because the Treasury deficits are falling. Even though the Fed is slow to buying up Treasury securities, the Treasury is issuing fewer securities. And by the way, keep in mind, mortgage market volumes are cut in half. They're going to be probably down 60% this year.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Well, it's funny as a 10-year gets toward 3%. I kind of wonder about that because there are an awful lot of buyers around the world who would like to own a 3% Treasury bond. And when you look at the treasury yield curve versus, say, swaps, the swaps are way, way, way lower. And that indicates there's a lot of bid out there for dollars. So I think that unfortunately the Fed's mandate and the discussion we have in the U.S. is largely a domestic discussion. We really don't talk about global demand for dollars, but it's a very important factor. And it's not one that a lot of people spend time on. So, you know, my sense is that we could get treasury yields to get up to, say, three and a quarter on the 10-year, but then it may rally. Imagine what happens, Jack, if the Fed is trying to push Fed funds up to 3% and the 10-year treasurer rallies back under two, which I think could happen.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Well, if that's right, the Fed owns a lot of that production, by the way. The Fed owns two-thirds of low coupon treasuries and mortgages that were issued during that period. So, you know, they're going to have to What it comes down to, and for investors, you know, you have a piece of paper where you have a significant loss, and either you sit with it, you keep it, or you can take the loss and try and buy a higher coupon asset, but there's a trade-off there that you have to assess very carefully”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Chris, while we're talking about so much panic in the market and blood on the streets, there's an immense amount of blood on the streets in treasuries, the 10-year treasury, the 30-year treasury with drawdowns in something like TLT, close to 25, 30%.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Loans and mortgage securities and all the rest of it. But that's an opportunity for a lot of these guys too. They make money on that. So I guess what I'm saying is there's not going to be a big boom and there's not going to be a big bust. There's going to be a lot of confusion in the markets. And what you want to do is take advantage of that confusion, have your strategy very firmly in mind as to what you want to own and what you don't want to own. I'll give you a great example. When NVIDIA traded off a third from the highs, I was a buyer. And if it trades off more, all the chicken littles are running around on television go on about the sky is falling. I love that. I love that. I want to see managers in tears on the big news channels, and then I'll be buying. Back up the truck.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“It depends how you view credit. I don't expect an apocalyptic cycle here with credit costs going up to 2008 levels. Let's remember that in the first quarter of 2020, U.S. banks put about $55 billion aside to take care of losses from COVID. Didn't happen. The system kept on going largely because the Fed had lowered interest rates so much. you know, basically got through that. They went through a couple of tough years when it was hard to make loans that made sense. It was hard to find good assets. Most of the men ended up buying bonds instead of making loans. So today, I think you're going to have an environment where banks are going to be able to lend more and kind of go back to a more normal business model. But is it going to be a great boom? No. You're going to see high credit costs. You're going to see delinquency.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“And help me understand how do you square your cautiously, very cautiously optimistic view on the banks with your expectation that a recession sometime in the near future is going to come. I feel like typically when a recession is going to come, that's not a time to buy a bank stock, right?”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“For equity investors who can keep their nerve and not, you know, run away. The tendency in the market is to always be late. People don't start buying until they see everybody buying because it's the shiny object, right? They're all chasing the shiny object. When stuff gets dicey and you start to see people running away from the market, that's when you want to be buying. But unfortunately, human nature is not to do that. But as humans, we like to eat, we like to avoid danger. Those are the two hardwired tendencies in human beings. So we're almost always late to the party in terms of stocks. There are very few investors who have the discipline to wait until there's blood in the street and then they buy.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“And then I'm going to look to buy some of the better performers cheap because to me that's where you want to be. If you really like the growth in financials, and I do, you don't buy JP Morgan. JP is your bellwether. You wait until some of the others get a little bit cheaper and then you go in and you feast. So I'm thinking about adding to my portfolio in terms of the bank names, the quality names, but I'm also expecting to see the capital ones and the Goldman Sachs trade back down to where they're supposed to be. They don't deserve to be at a premium to book. And I think you have to be disciplined as an investor. You have to know what you want. And you've got to watch it carefully. This market, if we get a downdraft, let's say the FOMC goes for a half point next month. And all of a sudden, you start to get volatility in the credit markets, even more than we're seeing today. That's going to provide a buying opportunity.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“In that category, my best pick last year was Western Alliance. The bank doubled in terms of the stock. Why? Because they bought one of the best mortgage companies in the US, Amerahome, which was an Apollo portfolio company. So there's a lot of value in the banking market, but remember, buy side managers buy big. They don't care if the stock is mediocre. They don't care if the financial performance is so-so like Bank America. They buy it for liquidity. If they were buying quality, they wouldn't even look at the top four. They would start at U.S. Bank and work their way down because it's in the middle of the big bank group that you have the highest equity returns. And you also have growth. They buy other banks. So for me, if I want to be long financials, I'll start nibble it away at the commons when they get back towards book value.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“As an investor, I'm bullish because I'm going to get an opportunity to buy some stocks, both commons and preferreds, at reasonable valuations. Because in April 20, I got rid of all my common stocks that I loaded up on bank preferred. My favorite time, Jack, is when there's blood in the streets, because that means I could go out and buy boring stuff that helps me balance my barbell approach. I have some very high beta stocks like NVIDIA and some of the oil companies. And then I have boring stuff like Bank Preferance, which never move. But during the last couple years, these things were trading at a 10, 15, 20% premium in some cases. So I'm looking forward to market weakness so I can load up on that. But you know what? People like American Express or Schwab are not going anywhere. These are solid businesses. They're making money. There are other banks like that.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“So, you're not constructive on U.S. stock. Let's say the SP 500. How do you feel about bank stocks relative to the S&P 500? Are you bearish on the bank stocks but more bullish than you are in the S&P or more bearish than you are”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Straight to one and a half times book. That's not normal because these are high risk businesses. Investors typically want to get them at a discount. So as we normalize all of this and we start to force institutions, especially non-bank institutions, to raise their money in the markets, pay real rates for the cost of capital. That's going to slow things down a lot. I think you could see stocks give up quite a bit of ground this year, maybe 10, 20 percent.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“The cost of funds for everybody else outside the banking system, the sticker shock for emerging companies and the high yield market, for example, is going to be considerable when you can no longer finance new businesses. You know what I'm talking about. There were a lot of companies that emerged over the past 24 months that really would not have worked in a normal interest rate environment, but somehow they were able to go public. We look at all the mortgage companies that went public. That's not a normal activity. Mortgage companies typically trade below book value because of the risk, because they are highly correlated to interest rates. So when you saw a bunch of them going public, you know, middle to end of last year, that was bad. That told you that bad things were happening. When you saw the Big Banks, like particularly Capital One, which rarely trades above book, well above book value. When you saw Goldman Sachs,”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“How? Explain to me the plumbing. You said that deposit rates rising is going to be a slow process. JP Morgan already has too much money. So if it's not the cost of funds, how is high rates going to derail the economy?”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Is and that's why I'm thinking the Fed is never going to get to that 3% Fed funds target. If they get a couple of half-point increases between now and the fall, they should count themselves lucky. Because you raise rates too quickly. This thing's going to vapor lock, Jack. It's just going to stop. How?”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“I think the Fed managed to provide some stimulus for a lot of different areas of economy, especially housing. But you also have the lingering effects of COVID. And then we have the problems caused by the war in Ukraine, which are going to be profound. You're going to have elevated commodity prices. You're going to have disruption in many parts of the global economy. You're going to have famines in certain parts of Africa and Asia because they buy grain from Russia and Ukraine. It's not there. So I think that we're going to be dealing with the disruptions, the lingering problems from COVID. Look at China. China's not done with COVID. That's going to be a big negative for the global economy. And I think, you know, as I say, last couple of years, the US economy was on steroids and happy juice. Now, as we normalize, you're going to find out just how solid the U.S. economy is.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“So that's another part of managing this process. When banks are shrinking, that means liquidity is shrinking. And the Fed has to figure out how they're going to somehow prevent another market crisis. But at the same time, they want the banks to shrink.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Very slowly. Your bank deposit rates go up slowly because right now banks are awash in cash. If Jamie Diamond could make his bank 20% smaller tomorrow morning, he would do it. And they happen, you know, a lot of the big banks like Wells have been pushing big deposits out of the bank. They've been literally saying, here, Jack, take your money and put it somewhere else. Because they don't want it. They don't want it. It kills their equity returns because, again, they can't use that money from much. They can invest it in T-bills. That's about it. So, you know, for banks, a lot of them would love to be smaller. And I think you'll see the industry's total size go down about 10% over the next couple of years”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Okay, and I remember walking down the street during the morning seeing going by a bank window in 2018, 2019, and seeing rates higher than zero at deposit rates. And I was like, what is it? Am I on Mars? So you're saying when the Fed funds rates goes up, the funding rate will go up as well in order to attract deposits.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, they give you the cash and you get to sit on it for a week before you send the payments out. If you get a prepayment on a mortgage, let's say somebody refinances their mortgage, the principal repayment goes through the bank and sits there for two weeks. Interest-free. So, those are the kinds of funds that banks can use to build their business. The stuff from the Fed is very transitory. There's that word transitory, right? And they're not enduring.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“How do I go about? The reserves are cash. They're part of your overall liquidity. The trouble with reserves, the kind we discussed before that were created during quantitative easing is they don't last very long. They usually have an average life of less than a year. So, you're not going to use that to make a 30 year mortgage. What you need for a bank to grow your book is what we call core deposits. That's mom and dad's checking account. That's corporate deposits where the most important part. So if you're a bank and you're trying to grow your business, you got to get businesses, small and mid-sized enterprises, to give you their payroll. You get to sit on that. You want to have mortgage loans on your book because you're getting your payroll.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“And how do banks secure funds? Let's get into the plumbing a little bit. I know if I'm JP Morgan and you're the Fed and you do QE, you buy a Treasury Security from me. I have bank reserves. I can't loan bank reserves to customers because customers don't have an deposit with the Fed. How do I go about?”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“No, that's what they have taught by side managers to say when they appear on CNBC. The point about profitability in banks is the spread between the cost of funds of the bank and what they make on the loans. Net interest margin. Net interest margin was protected by the Fed when they push rates down. I'm not sure they can protect the banks as we normalize rates. So if you start seeing funding costs rising faster than what the banks make on their loans, then they're going to get squeezed.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT