The Economy

US regional banking shares under lens after NYCB slide

New York Community Bancorp Isn’t the Only Bank Warning About U.S. Office Loans

New York Community Bancorp Stock Plunges 38%, Reigniting Fears for Regional Banks

This isn't going anywhere. ... even if people aren't going to focus on it until they are absolutely forced to (the American way!). When Signature Bank and SVB failed, it was because they had portfolios of long-term treasury bonds that were under water because of the Fed raising it's overnight rate (a pin prick to the bond bubble they had engineered).

The response was for the Fed to prop up the banking system by lending money to banks through a special lending facility that accepted those bonds as collateral at par (not at their underwater value). In another words, the "loans" are not really collateralized. But that kind of scheme was preferable to banks failing and people learning that an FDIC promise that the money doesn't exist for is nonsense.

That lending facility has injected arificial liquidity back into the banking system, which in turn has reblown some of the bubble world we have lived with since the financial crisis.

But they are doing things that are at odds with each other because of the pressure on them to deal with the consumer price inflation they stoked by monetizing trillions of dollars of debt when our politicians turned into drunken sailors during Covid. The result is that while their Bank Term Funding Program has been more quantitative easing with a different name slapped on it (quick, buy some NVidia stock!). ... they have also raised their overnight rate to 5.25 percent which has made the cost of borrowing more expensive. ... and there is trillions of dollars of debt that could keep rolling itself over at zero percent interest rates, but can't in a slower economy where nominal rates are now higher. Put simply, in the aggregate our economy (and our government) is near the point where it can't afford any interest on all of the debt we have run up to live a fantasy for a long time.

So now? It's the commercial real estate sector in focus with the NYCB news yesterday. But there is trillions of dollars leveraged loans all over the economy, and who knows who is exposed to them (the shadow banking system is actually scarier than the regulated banking system).

There is a serious lag on this stuff. ... The refinancings of loans at the artificially low interest rates they engineered for a decade and a half are JUST beginning, and not everything comes due at once. As people need to refinance -- most of this happens in 2024, 2025, 2026 -- as long as nominal rates stay anywhere near where they are a the moment, we are going to see serious stresses and defaults. ... and it is going to be beyond their ability to do the slapdick bail outs (which kick the can down the road and make the problem worse for a future reckoning) that has become the norm.

Which is why I fully expect that they will end up reversing course and trying to go back to a free money environment.

But unlike the period after the financial crisis, my guess is that the massive monetary inflation that comes with that won't be more confined to blowing up the values of speculative investments like stocks, expensive real estate, collectibles (which explains that WSJ story about $200 million dollar homes and the rich getting richer, while everyone else stagnates), than making groceries and rent unaffordable. They now have an inflation problem (as people use the term -- what people will see at the grocery store). And it's really more of a stagflation story, because both fiscally and monetarily we have also put an anchor on the economy with all of the malinvestment (public and private) the free money was wasted on.

 

You can decide for yourself if it is "good" or bad."

You can also question how it squares with something that is way more empirical (i.e. -- not a number that relies on surveys that are then "adjusted" by the political appointees creating the number): January hiring was the lowest for the month on record as layoffs surged

But that's up to you.

 

FWIW, the household survey. ... showed a LOSS of 31K jobs in January.

And more: https://www.zerohedge.com/markets/j...double-expected-and-higher-all-estimate-wages

 

In the mean time, the Wall Street Journal woke up to how none of it adds up.

A Jobs Mystery: Where Are All the New Employees Coming From?

“Household employment appears to have grown at less than one-third the pace of payroll gains, which makes no sense whatsoever,” said Robert Barbera, director for the Center for Financial Economics at Johns Hopkins University.

FWIW, my "doom bonering" earlier pointed out that the household survey showed a loss of 31K jobs. But my bad for actually having a small understanding of what they are putting out, rather than just parroting the headlines they feed to people.

Unfortunately, the WSJ didn't go into enough depth and try to really get to the bottom of it, for example getting into the fact that the establishment survey that ridiculous 353K number came from is "adjusted" (always in one direction) in a way that is makes it bear no resemblance to the actual survey. It's a completely made up number.

The saddest part is the wage increases they emphasized -- Joe Biden is making people earn more. Except. ... It's pure deception. The household survey numbers show that record numbers of people (who don't want to) are working part-time jobs because their hours had been reduced or they were unable to find full-time jobs. The result of all of the surge in part-time workers is that the number of weekly hours worked dropped to 34.1, which is the lowest level since the depths of the covid crisis. In the hands of the BLS, though, the emphasis was on how wages are increasing! Except it's not because actual wages for the same number of hours are increasing, it's because people are being forced to work less.

The BLS always played fast and loose with it's "data" for politicized reasons. ... but right now, it's at such an extreme that it's really a new low.

 

Today's layoffs
Snap to lay off 10% of global workforce, around 500 employees

Today's long form layoffs story:
Google’s Once Happy Offices Feel the Chill of Layoffs

Those monthly BLS jobs numbers are becoming particularly ridiculous in this environment. ... this stuff is so tangible.

Also, this stuff is global. Some of you want to make it about Joe Biden, the great job creator. ... but, for example, this morning SocGen laid off hundreds of people in its Paris office.

This is purely about slightly higher interest rates putting just a little pressure on the economy.

 

Why One Shaky Bank Is Stirring Fears of a Wider Financial Mess

Moody’s Cuts NYCB to Junk, Extending Sharp Decline in Shares

Our banking system is insolvent, people just don't know it yet.

When it was SVB, Signature, etc. last year, the stress was due to long dated treasury bonds that were underwater because the Fed raised their overnight rate (they were forced to, because their central planning that was being confined to asset bubble creation that makes the economy unstable in the long run, finally made consumer prices rise so much too that a lot of people were unable to afford food and rent) and popped the bond bubble it had foisted on everyone for more than a decade.

With New York Community Bancorp, it is now CREs, commercial real estate loans. ... underwater ALSO because the Fed felt it was forced to let rates rise to try to deal with the consumer price problem. Rising rates have made those loans lose a ton of value, and they are now under water.

This isn't limited to a handful of banks, and it isn't limited to regulated banks. The shadow banking system, where borrowers largely have turned to since the financial crisis, is a mess of leveraged loans -- the extent of which none of us will know until it unwinds, the same way people didn't know what was going on with collateralized debt obligations creating a dangerous leveraged pile of debt in the early 2000s, until it started to unwind.

The Federal Reserve dealt with the banking stress last year by "loaning" to the banks that were about to go under against the treasuries they owned. ... except valuing the bonds at par instead of the much lower values the bonds are actually worth now. It's a deal none of us would get. Essentially, they have gotten uncollateralized loans with money that is created out of thin air so everyone can pretend they are solvent.

Putting aside all of the leveraged debt for all kinds of things that are really out there. ... with NYCB, the focus is now shifting to CREs. There is close to $2 trillion worth of commercial real estate loans on the books of commercial banks and thrifts. There is another $2.5 trillion worth of commercial real estate loans in the shadow banking system. These were loans given out for more than a decade like they were dispensing candy. ... because the rate environment was distorted by a central planner that made the cost of money way too cheap -- you were literally getting paid to borrow, because in real terms rates were negative.

A lot of that debt went to projects that nobody would have ever lent to without covenants and much higher interest rates without the moral hazard those idiots created, meaning those projects would have never gotten off the ground and that debt wouldn't exist now. But the mess that now exists was predicated on them just being able to take on more and more debt and roll over existing the debt forever at 3, 4, 5 percent interest, which was getting paid with more and more debt. Now that financial conditions are tighter because they were forced to stop, and those borrowers are starting to have to refinance at 7, 8, 9, 10, 15 percent, you are getting the beginning of defaults. ... and with NYCB, you are starting to see, who is exposed. The question everyone should be asking is who is going to bail out trillions of dollars of debt that was misallocated badly because they engineered a facade? How are we going to pretend and prop up debt with exponentially more debt again?

If this keeps progressing, I am certain the Fed will try to reverse and go back to negative rates. ... they'll do more schemes like that bank term lending program and huge asset purchase programs like quantitative easing to destroy the dollar and try to prop up the debt bomb they have created with more mispriced debt. We all lose, because that money is so badly misallocated, that we are robbing ourselves of decades of growth for it.

We can't go on forever like that, and they have already made the payback for what they have done into something that has the potential to be economically devastating, and it gets worse the longer they go on.

The difference between now and 2008 and the years afterward is that they let the consumer price inflation genie out of the bottle now. They'll choose trying to inflate away the debt over a debt bomb going off (which is a devastating tax for us). We all lose either way.

 

Also. ... yesterday's layoffs:

JPL to lay off 8% of workforce
DocuSign to lay off 6% of workforce, or about 440 jobs

Those BLS numbers people parrot when they do the monthly jobs report have always been a tweaked fiction, but right now the attempt to tell people that reality isn't reality (in an election year) is taking it to a new level.

Distorting the cost of money (making it too cheap so politicians can run up sovereign debt and pretend the private debt spending it encourages is a good economy that they created) creates some serious excesses. Rates aren't even really normalized right now, especially with the underlying lending risk given how the real economy is functioning. ... and it is having a serious effect on people's lives, including layoff news every day now.