Some brass tacks thoughts on banks.
Regionals took a hit a year ago (Q1 2023), and coupled with America’s inflation headlines, prompted IH to question what America is doing as a nation when it comes to finances. And it looks like regional bank cash balances are falling relative to large banks, per ZeroHedge’s follow of Rabobank analysis. If Main Street is becoming less liquid, that is foreboding.
Price Increases
In 2022 and 2023, inflation and interest rates were growing at rapid rates. Inflation grew thanks to rampant spending from the government during 2020-21, alongside additional printing, asset purchases, and foreign aid. There was less of the USD to go around to citizens of the world, so it was printed and impacted the families stateside. Couple this with increases in oil prices (18%, due in part to sale of US reserves), lumber (up 36%), and mortgages (doubled) over the past eighteen months or so, and you have a consumer freeze. The effects are no wonder: consumer credit card delinquencies hit bottom at 1.5% in 3Q 2021 before more than doubling to 3.2% in Q1 2024, per the St Louis Fed.
When inflation is growing, the economic theory is that there is a significant amount of money supply in the system, so the dollar is worth less. This is evident, and today not in the form of cotton greenbacks: this inflation takes place from spending appropriations from Congress, from government asset purchases to bail out banks, and from the Fed using rates as a lever to combat inflation to attain its dual mandate of controlled inflation and unemployment. Here is a good discussion on the theory of interest rates. When mortgage rates are high, that means 30-year paper for you in your home is in higher demand. Putting aside all Jerome Powell’s headliners and CNBC, my conclusion from these events in the financial markets was that Americans are less certain about the future in this post-COVID era, and so it has pulled forward investment in all centers before a rush for the exits.
IH’s view since the 2020 election encompasses people becoming leery of politics and another shoe about to drop. Perhaps it is the foreverwars in the Mideast and Europe, COVID takeover, gender dysphoria, signs of a culture in decline. The VIX since 2022 has trended down (short the VIX?), maybe as people pull back from making too many speculative trades, despite the memestock revolution. In 2023-24, significant unrest surrounding the border, where we are headed as a nation both militarily and economically, and how we have been treating our children with respect to schooling all lend themselves to a question: where is the stability?
Banks
Where governments falter, banks lend an economy, and even a culture, that stability. When people are assured their work is going to enable them to squirrel away nuts for a rainy day, to set themselves up for a life in 2, 5, 10, 30-years’ time, they work well and save in order to meet their presumably worthy goals. This Smith-Hayek-Rothbard-Friedman cocktail creates future stability, as people will know where their paycheck is coming from and going, since they are participating in an enterprise that is bigger than themselves and receiving goodwill in return.
At the community level and the national level, from Cornerstone Bank and Trust to JP Morgan Chase, banks enable people to save with the surety that their savings will still be there in a week, a month, a year, or 10 years’ time. The lending in which banks participate (community, real estate, M&A, retail, etc) is a natural extension of the government’s ability to give out money, a decentralized way of providing for the populace (albeit, some would argue when it comes to fractional reserve banking, a risky enterprise). If investing, pick the most conservative, stable one you want. I do like JPM, to be fair, and own a fair amount, because of their conservatism (“fortress balance sheet”) and strategic goals to position the bank to be in contact with over 75% of US households. But my disclosure digresses us.
Banks need deposits in order to lend money, and in order to acquire deposits, their work will involve schmoozing to bring customers’ funds in, as they show that their money is safe. Those deposits have been the primary focus of banks in the past 18 months, since the Silicon Valley Bank crash. No money goes out unless money comes in. The Sales and Risk Management systems at more than a few banks have been butting heads to get the Sales folks to pivot from simply investing bank capital to growing bank capital.
When analyzing banks for investment, make sure yours pays a dividend. Additionally, some differences to a customary company emerge. The government mandates they must reserve capital, amount depending on the size of their asset base, to weather a shock. Their asset base is the dollar amount of loans they provide, and an asset upon which the bank collects interest. The interest comprises the bank’s revenue, endangered if the companies in which banks invest begin to falter. Their liability financings are those deposits you and others and companies put in, which can be pulled at any time for any reason, and on which the bank must pay interest.