The Banking Crisis is Worsening | Economic Catastrophe.

this video we need to talk about the

banking crisis not only do we need to

talk about the banking crisis and how

things are actually unfolding but what

I'd like to do is look at what the

economist tells us about left tail risks

along with Goldman Sachs now left at

tail risks or lack of growth risks think

about it like a bell curve okay if in

the middle we're growing steady if on

the far right we are hyperinflating and

things are you know basically taking off

in such a way that we have to get Paul

volckert the left tail risk is really

that uh oh we have damaged the economy

too much the Federal Reserve has gone

too far in hiking and we are going to be

in a dirty and deep and dark recession

well in this segment we've got two

important pieces to cover one I'm going

to give you the economist's conclusion

on whether or not we are going to face a

deep dark and dirty recession The

Economist by the way one of my favorite

Publications and I think they are very

very good just know if you read The

Economist they don't like Donald Trump

and lean left but they have very very

good economic Insight anyway and notice

you can still like people who have

different political opinions than you

that's very important but first let's

look at Goldman Sachs because Goldman

Sachs has uh some some neat look or a

nice look should I say uh into exactly

what's going on with uh with the banking

crisis Goldman Sachs uh obviously is uh

a finite massive Financial partner it's

one of the biggest 10 banks that we have

in the country it's also a huge

financial partner for uh for for Apple

they back the Apple credit card so

they're getting a lot of data on

consumers so when Goldman Sachs tends to

give us some insights I like to pay

attention although I don't take

everything at face value of what what

these individuals like to say because uh

they could be wrong but then again

everybody can so but it's good to look

at perspective So speaking of

perspective let's hop into it right now

there we go and let's throw up the

coupon code there we go okay fantastic

so first let's start here on the banking

crisis and then we'll talk left tail

risk so this segment was very

interesting they say here further signs

of stabilization in the banking system

although money market funds continue to

see largely institutional inflows the

pace declined by about roughly half of

that scene in the prior week now we've

talked about this before this idea that

the banking crisis is stabilizing you're

actually seeing small Bank deposits

level out in other words they kind of

these were small Bank deposits then they

fell and now you're kind of getting this

leveling of small Bank deposits it

really feels like the banking crisis has

slowed or come to a halt Goldman Sachs

here tells us that even the pace of

money market movements has slowed we've

talked about this yesterday about how

discount borrow or discount window

borrowing of the FED has also slowed and

that really the fed's lending to bridge

Banks via the bank term funding program

in other words by the FED pivot although

I don't really think that's the FED

pivot it was just really a tool that

they deployed is also stable and what

they talk about here is really this this

idea that last week we were talking

about how this Scramble for dollars had

gone Global remember when I came to you

from ski resort talking about how the

Fed was injecting liquidity via new

daily liquidity swap operations on a

Sunday

uh though we expected it would be

one-off in other words we're really

saying look we we had this sort of

one-off Crisis where everybody was

freaking out but so far every indication

of struggles is waning the demand for

the dollar is waning internationally

this is not to be confused with the

Petro dollar okay I'm talking emergency

lending dollars This Is this different

different topic okay we can talk about

The Disappearance of the dollar in a

different video people keep bringing

that up but it's just not that important

right now uh so discount window

borrowing Bank term funding facility

money market movement small Bank

movement and a dollar movement all

relatively stable this is actually

phenomenal uh Insight right we want to

pay attention to stability in the

banking crisis uh and so really the

question then is okay well how is the

banking crisis really going to affect us

so let's see here

North America United States yield

response to near-term news potentially

asymmetric our Baseline view is that

credit tightening resulting from the

current banking turmoil should be

contained listen to this so many people

are saying that said our economy is

going to go into a deep dark recession

because oh my gosh what about all of the

credit tightening oh my gosh Kevin

quickly change the banner to the paid

promotion on life insurance met

kevin.com life because everything's

going to hell the reality is no the

reality frankly is no the the banking

crisis is not that big of a deal I was

having actually a slight debate about

this yesterday somebody was asking me

but Kevin like big Banks they're going

to be forced uh to to like lend less and

I'm like

how many times have you gone to a big

bank for a loan in real estate uh and if

you're not familiar with going to Big

banks for loans you know that you don't

go to big banks for loans you usually go

to smaller banks for loans and then

there's a thought oh but they're going

to regulate smaller Banks more right no

guess what the Biden Administration just

talked about they talked about how we're

not going to punish the big Banks

because they've already been punished

well then we're going to punish the

small right no because that's not fair

to the small Banks so whom are we going

to punish them let's punish the medium

Banks

I kid you not you can't make this stuff

up The Binding Administration now wants

to punish the medium-sized Banks

and Titan Landing standards and

medium-sized Banks and I believe what

this is all this is going to do is

basically turn the medium-sized Banks

the more closer to systemically

important banks that 250 mil a bill

threshold rather and you're going to see

the medium Banks become more regulated

like the larger Banks so we don't have

another Silicon Valley Bank which

basically just means the smaller banks

are going to be like

we just had a lot of deposit outflows

you know what that means we're going to

have to get more creative to bring

customers back how about better

mortgages business loans you want rental

property lines of credit again what

could we come up with to bring customers

back they will come up with an endless

Suite of lending products and I believe

you already know this so this I don't

want to sound redundant you already know

that I am of the belief that we are in a

Nike Swoosh style recovery that will we

we now I believe are in the beginning of

what will likely be a 10-year bull run

my opinion but guess what I think is

going to add fuel to the fire of that

bull run it is none other than small

Bank lending taking off to support a

return of deposits to small Banks and

they're going to do that by enticing you

with with cheap loans and beautiful sexy

loans beautiful curvy delicious loans

that you can't get anywhere else and and

we'll be tempted by those and drawn in

by these delicious loans and we'll just

have to go back to the small Banks and

re-engage relationships and then you

know what the small banks are going to

do they're going to say hey look we know

you have concerns about the FDIC limits

of 250k but you know what look we have

made a menu for you if you open up a

discount and this count and discount and

this account and this account we could

get you up to three million dollars of

FDIC coverage just have multiple

different business accounts and multiple

different LLC accounts and multiple

different accounts of businesses and all

of your deposits will be protected in

fact if I was a small bank right now

that's exactly what I would be doing if

I was a small Bank I'd be thinking about

exactly how I'm going to milk FDIC for

everything it's worth I would start LLC

formation within my bank and I would be

like dude let's just create another LLC

and then you're going to put 250 into

that subsidiary and 215 to that

subsidiary of your business and guess

what we'll basically make it easy and

seamless for you to always be FDIC

Insurance in the meantime you want some

sweet sexy delicious loans because guess

what the big and medium Banks ain't

going to be able to provide for you but

we can

it's hell yeah it's it's like the the

game is just hilarious I I strongly

believe in it and I actually think it's

a good thing because it'll contribute to

to a bull market uh and uh and yes is

risky financing risky absolutely uh but

worst case scenarios small

non-systemically important Banks go

kaput and who really cares uh and and

the people who bank at those banks will

will be enticed to be at those Banks

under the promise of FDIC insurance and

then guess who's really going to pay for

the small Banks taking risk the medium

and big Banks once again it's corporate

socialism folks

foreign

so the banking crisis really isn't that

bad but anyway we'll listen to this the

credit tightening will likely not be

large enough to push the economy into

recession or Force the FED to ease

aggressively to the extent markets

appear to be anticipating even in a

probability weighted sense why do they

talk like this they talk so

complicatedly basically they're saying

yo credit crisis ain't gonna be at bad

don't worry people are overblowing

credit crisis that's all they needed to

say but I'll go back to their words even

in a proper you know what it's hoity

toity even at a probability weight it's

so where we ascribe increased odds to a

recessionary outcome We Believe yields

have declined too much who writes this

trash this is basically saying people

have fled to bonds despite this we do

not think fading this pricing via

duration shorts is particularly

attractive in the short term in other

words uh don't don't even though we

don't think

that uh even though we think that bonds

are going to fall and rates are going to

go up it's probably not a good idea to

short so even though we say this don't

bet on it

uh by contrast restoring full confidence

and assessing the impact of diminished

credit provisioning could take time this

is something we do hear about as well

the lag that it takes to actually get

any kind of credit tightness this is

something we do regularly see is is this

idea that it could take

potentially six to 12 months but take a

look at this banking turmoils

distributional effects on rates the

evolution of the options implied skew of

risks to interest rates has largely

mirrored our own views though with some

differences in magnitude on the front

end we believe the recent events

significantly reduce the odds of a much

higher terminal rate

though our Baseline projection is

roughly about 30 bips above the market

we incr but the increase in probability

of deep Cuts is is probably a little too

optimistic in other words investors are

clearly much more concerned about

recessionary left tail risks and that's

why investors are pricing in all of

these Cuts but the reality is the

economy has been incredibly resilient

and that's where we have to get into the

next pieces on how resilient the economy

has been I mean consider what the

economist says JP Morgan has some

insight into this as well Morgan Stanley

uh Citibank gives us some credit card

data we'll go through all of this

quickly here but what does The Economist

tell us the economist I wrote this down

here because I thought it was it was a

fantastic piece here uh The Economist

says the current activity index released

by Goldman Sachs is steady so even

through the banking crisis we haven't

actually really seen current activity

fall the purchaser's manager index which

would be a leading indicator of stress

at manufacturing steady weekly measures

of GDP

steady is it really maybe just that

we're too early to see the recession at

the moment well ipsos finds that

American confidence in the economy

during the banking crisis is actually

growing

maybe it's rigged but the economist is

like why are people so blase and I

actually have a very interesting idea

about why people are so blase

potentially because people are like dude

we just went through War basically with

Russia not only did we go through war

with Russia but we went through a

pandemic

we made lots of money during the last

two years so we have a lot of extra

stability more stability than we

previously had in 2019 that's not to say

there still isn't poverty and there's

still aren't food insecure people which

is terrible and the government should do

something about that but in many regards

the government as a whole is relatively

incompetent and and that's like if you

work for the government I believe in you

as an individual they don't believe in

the entity totally you know in total uh

the the sum of its parts are not greater

than the parts itself anyway so uh point

being uh yeah I think there's actually a

really good chance the reason people are

so indifferent right now is because they

have money to just continue to spend and

like the things that are occurring at

this point we kind of just roll our eyes

to it's just like okay Putin's yapping

again all right we're over it another

covid variant all right really like you

expect me to get like excited or

agitated now you think I'm gonna go sign

up for your life insurance just because

you mentioned another coveted variant

Kevin that's racial thinking although I

would like it if you try checked out

metcaven.com life I think it'd be pretty

cool it's a paid promotion but they're

pretty awesome but anyway

um

really the resilience is is very very

clear here now let's look at what JP

Morgan has to say about this because

they have a phenomenal piece on this as

well let's let's throw them up on screen

here they're one of these is is the

better option I gotta label the stream

yard lets you label these in a pretty

cool way that was the Moscow piece we

covered I can't figure it out now that's

did you know the best example the stream

yard right now Kevin you're screwing it

up there we go but that's just my fault

I'm just pushing the wrong buttons

all right here we are so what does JP

Morgan say recession forecasts have been

moved back modestly and easing

expectations have been brought forward

the upshot of these developments is that

recession narratives built on the view

of private sector fragility are being

challenged in other words we're like

stronger I actually wrote this I go

maybe covid and War on such War like a

dress rehearsal for for Hard Times ahead

right but anyway JPMorgan says the

private sector fragility in other words

the the weakness of the private sector

the idea that private sector is weak is

really being challenged and that

downbeat near-term economic forecasts

are becoming far more reliant on the

emergence of disruptive Financial Market

developments in other words everybody's

paying so much attention to this banking

crisis but the reality is it's just sort

of a bearish excuse in terms of well the

economy is still doing well so what are

the Bears going to talk about how about

a banking crisis now In fairness we did

just have a banking crisis but uh whoops

you know it wasn't that big of a deal

you know there was actually a piece from

a Goldman Sachs Trader

uh I didn't save it here actually I

saved it on my iPad let me just read

this to you really quick I thought this

was really interesting bull case for

Tech if the leading crunch because of

this credit crisis is only 25 to 50

basis points to GDP secular growth

technology companies benefit from gross

growth scarcity okay in English in

English the Goldman who is this this is

uh Goldman Sachs Equity observations I'm

trying to see who wrote this let me go

to the end of it I don't think it really

matters but it's a Goldman Sachs analyst

is basically saying look if the credit

crisis squeezes uh the economy by 25 to

50 bips it probably actually benefits

big Tech

because they could actually hold up

their numbers to the pain of smaller

technology companies and they'll be able

to more appropriately Leverage The gains

of artificial intelligence now there are

risks that we continue to face some form

of wage price spiral and increasing

labor costs but if those risks go away

there is actually a very clear bull case

for Tech as the economy continues to be

so resilient especially since Global GDP

is still on track for 3.7 percent

annualized gains the U.S is on track for

3.3 percent annualized gains of GDP this

quarter that's phenomenal that's not

even below Trend growth below Trend

growth would be like one percent we're

tracking at 3.3 right now so yeah maybe

it's coming maybe the pain is coming but

uh current strength has been very very

well strong now JPMorgan doesn't

actually think that current strength is

going to stay JPMorgan thinks we are

going to end up in a recession towards

the end of the year JP Morgan suggests

uh we've had some upside is surprises on

retail sales and I thought this was

really incredible listen to this even

though JP Morgan is convinced we're

going to see a recession look what they

wrote here the gain from real

consumption did not come from a drawdown

in savings as strong gains in the labor

market

and reduced Energy prices actually

helped support real G real disposable

income growth on an average annualized

rate of 6.5 percent over the past two

quarters

so even though corporate profits may be

moderating they're far from falling the

way a lot of people expect it and profit

margins remain stable which really

aligns with what we've seen with this

idea from Goldman that big Tech could

actually win in this pricing power style

stocks could win in this we talked about

non-bank lenders as well actually we

didn't talk about non-bank lenders we

talked about small Banks being a little

bit more sort of like you know maybe if

they're going from wearing like a

bathing suit to going to wearing a

bikini and a thong you know uh like they

got they gotta turn up the sex appeal a

little bit we expect that to happen

they're also non-bank lenders uh whether

that's private money whether that's

direct lenders for mortgages they

they're the ones who usually have easy

credit for you so this idea about you

know uh significant stress in the in the

financial system it just we're just not

seeing it right now uh and uh JPMorgan

talks a little bit about how these these

are not necessarily indicators that are

going to push us into a recession even

though their base case is still a

recession

now JPMorgan also suggests here

that uh actually this is just sort of a

reiteration of what we just talked about

so let's skip that let's now look at

Morgan Stanley right here so Morgan

Stanley had a piece on tighter credit

and then I want to look at credit card

data from City Credit shocks take a toll

on the economy but they take time to

build tightening credit conditions

should drag down Global growth in the

second half of the year and additional

loan growth deceleration will

potentially pressure GDP by oh my Lord a

third of a percent or I'm sorry 10 basis

points really Morgan Stanley you think

tighter lending standards are going to

affect a GDP growth in the fourth

quarter by 10 bips

nobody cares like this is so minor even

these estimates of and Morgan Stanley's

being a bear in this piece they're not

that big of a deal

our banking analysts see a meaningful

increase in funding costs ahead so you

haven't yet seen them which will likely

lead to tighter lending standards slower

loan growth and wider loan spreads than

previously expected the the stage is now

set for an even sharper deceleration and

credit growth over the course of the

Year this is the base case right that

we're going to see a loan slowdown

potentially of 11 by the fourth quarter

of uh 2023 compared to the fourth

quarter of 2022 uh but uh but uh I'm

sorry this is um this is down from 11 in

the fourth quarter the bear case would

bring us to two percent loan growth at

the end of 2023 compared with a baseline

of four percent loan growth so in other

words Morgan Stanley's saying things are

so bad loan growth will only be two

percent at the end of the year whereas

we want it to be four percent

even the Bears are starting to sound a

little weak here within GDP the impact

of consumption and business investment

is roughly equal they say a quicker

resolution oh look at this they actually

hedge their bearishness they say risks

around the Outlook are large and

two-sided a quicker resolution of

financial system troubles could see the

economy remain on solid footing yes in

line with recent payroll prints on the

other hand a more non-linear tightening

of financial conditions from Huron could

see larger and more rapid deteriorations

of growth in the labor market yet if we

see more tight loan growth but we're not

sure that we're actually going to see

this everybody's talking about it but as

NatWest told us last week the short-term

indications are far and few between that

we're actually seeing any kind of credit

stress you know the most the biggest

irony is going to be that if we end up

going through this cycle and everybody's

talking about recession everybody's

talking about this credit stress and it

just never ends up happening

uh so then we have here all told they

see a negative one percentage Point

shock to real GDP uh all told sorry a

negative one percentage Point shocked

credit growth ends up decreasing real

GDP by 20 bips okay so if you're two

percent below Trend so you're 40 lower

or 40 basis points lower on GDP it's

it's relatively a nominal impact

so Morgan Stanley does go a little bit

further on and then I want to look at

credit card data with you all so at this

time our estimates lean heavily on the

variation of data in the 1980s and 90s a

time when the banking sector was more

prevalent in terms of a source of

financing today Bank lending only

accounts for one third of all private

non-credit relative to 50 in the 1980s

okay let me translate that to English

for a moment so in English and this

relates to what we talked about at the

beginning of the video in a commercial

Jack in English today we are 20

percentage points less reliant on big

banks for Lending than we were careful

with the cable there than we were in the

1980s the last time we actually had to

worry about credit shocks what's up dude

did you just wake up you want to come

say hi to everyone

[Music]

awesome so so anyway really this is not

that big of a deal uh in comparison a uh

100 basis point increase of the FED

funds rate lowers growth by around 40

basis points that's fine uh so really

even Morgan Stanley here a bear is

hedging this idea uh that uh that maybe

it's not going to be as terribly as

expected

uh so these right here are impacts on

GDP okay let's go to the let me see if

there's anything else that I really want

to hit from this Morgan Stanley piece

they do think uh more potential layoffs

in q1 24 I find it interesting that we

continue to see a uh delay of when we're

actually going to see these layoffs it

just seems like it's always delay delay

delay everything keeps getting pushed

back because the economy continues to be

strong

uh however technically employment is

sensitive to credit tightening but as it

was during the Great Recession but

remember the Great Recession was a

global or great financial crisis are we

actually really going through a

financial crisis right now or are we

just going through dare I say transitory

inflation

we do not expect the actual implications

for drop growth to be as significant

this time around because this time is

different given Staffing shortages in

the economy will likely continue to

support labor hoarding this year as

economic growth slows further we think

limited upside in labor force

participation will keep the unemployment

rate relatively low somewhat offsetting

the significant slowing in jobs we

expect okay in English once again before

we get to credit card data Morgan

Stanley is a bear because they think

we're going to have a lot of credit

tightening which will slow GDP and

you'll have low loan growth however

they're going to hedge that by telling

you the big Banks don't even matter that

much anymore and maybe people will keep

labor hoarding which means people keep

having money and we're really just going

to end up spending through this

recession the biggest risk to all of

this is that inflation skyrockets

inflation skyrockets were screwed then

all these problems come to a halt now

let's quickly look at credit card data

so what do we have for credit card data

City's credit card data uh across 16

sub-sectors not including spending on

Services I read that and I'm like that's

stupid uh showed the weakest spending

since April of 2022. now that's great

for disinflation but potentially not

that great for economic growth so I want

to do I do want to bring that up they do

talk about though that likely the

disruption in the financial sector

briefly led to a divot in spending I

noticed in a YouTube ad uh spend that it

seemed like YouTube ad spend did a

little bit of this during the banking

crisis that there was somewhat of a

trough basically because of the banking

crisis and so it's likely that this uh

this credit card data and this weakness

uh may be temporary because of the

banking crisis though it's something

we'll want to pay attention to I'll show

you a few things in here first I'll show

you that there was an acceleration in

pet stores up 8.5 percent over the prior

week

and a decline in e-commerce e-commerce

Pure Play apparel appliances Electronics

Home Improvement and Home Furnishings

you can see the percentages on screen

here but yesterday

you can

[Music]

jack says bye you're welcome to grab a

sandwich from the refrigerator as well

the ones with Jack on it

all right so um this is the an important

chart over here because in my opinion it

just shows you the trajectory and shows

you you know that these negative changes

really are something we've seen for a

while look for example at home

improvement there was really only one

week people spent more money on Home

Improvement it was Christmas of 22.

otherwise Home Improvement has been

negative across the board you can see

that here you could see that electronic

spending has been negative across the

board so not a surprise you can see that

Pet Shops and pet foods and Supply

positive for retail spend for for the

entire last what on a weekly basis four

months three and a half months for three

and a half months pets have been

positive not a single break in that

appliance stores have pretty much been

negative the entire time and as a result

overall spend has declined uh pretty

much with the exception of the week of

Christmas over the last four months so

there is this potential idea that yes

look at this chart here this shows you

that we could could end up seeing that

earnings Crush that Morgan Stanley's

Mike Wilson keeps talking about but look

at how this chart how beautiful this is

this shows you normal growth in 2019

then you get the coveted pandemic and

you get this crazy v-shaped recovery

here where basically uh retail sales

fell around 10.7 percent uh and and then

they started increasing then the

stimulus money hit when the stimulus

money hit boy that's really what

spending skyrocketed the different

rounds of stimulus we really saw

spending balloon on a weekly basis uh

you know averaged out over here by month

in uh in 2021 and now we're getting into

that recessionary territory so yes In

fairness retail sales are going down but

it is entirely possible that the

Market's already priced in some form of

eps declines for some stocks and even if

as long as inflation goes away if we can

look through some EPS declines which are

expected to show up the market does not

necessarily have to decline solely

because of eps declines because a lot of

those may end up being priced in and we

see this leading indicator these leading

indicators from a mile away so uh very

very interesting

I'm a big fan of that uh and uh yeah

look I mean for me

again every single day what do I do I

read reports on the banking crisis on

consumers consumption on what's going on

at uh at companies earnings calls and

I'm trying to understand uh where the

risks are we've been saying for I would

say over six to eight months now there

is no wage price spiral and uh and the

inflationary data is fantastic but that

doesn't seem to be the big concern now

now the big concern seems to be the

recession uh well banking crisis briefly

but so far that's turning out to be a

nothing burger and the idea that bears

are amplifying the banking crisis as a

reason for why spending in EPS is going

to decline more is the only reasonable

argument that's left uh and and it is a

reasonable argument I will not say the

Bears do not have a point they have a

point EPS could decline substantially

more meaningfully than we expect but so

far uh with with uh labor hoarding and

uh the reports that we're getting on

earnings

things aren't looking that terrible uh

so I'm very very excited for the future

I'm very optimistic maybe I'm too

optimistic but that's my thought so

hopefully that's very insightful for you

on the banking