Bank Profits Fall, Stock Prices Fall, Euro Falls Below $1.00

Bank profits appear to be falling for the second quarter of 2022.

Oh, the big banks are taking advantage of rising interest rates. They take advantage of market volatility. But their transactions are down and the investment banking industry seems go nowhere.

In addition, loan losses are increased to cover future loan losses that will be incurred during the coming economic downturn.

Jamie Dimon at JPMorgan Chase (JPM) is refraining from any share buybacks in the near future, just to protect banks’ capital ratios.

Morgan Stanley’s (MS) second-quarter earnings report mirrored that of JPMorgan, although there was no mention of share buybacks.

Note: JPMorgan Chase has set its target return on tangible equity at 17.0% for the year. Today, it confirmed that target and reported that it reached that level in the second quarter of 2022.

Morgan Stanley announced that it achieved a tangible common stock yield of 13.8% in the second quarter.

These results are not too shabby considering that the public coverage of these results casts a shadow over the performance of banks.

In the Financial Times, the headlines read, “JPMorgan suspends share buybacks as earnings miss forecast.”

For Morgan Stanley: “Morgan Stanley earnings hit by slowdown in investment banking.

Stock prices

These negative results from the big banks played on the stock market and at 10:00 am the S&P 500 stock index was down more than 70 points; the Dow Jones Industrial Average was down more than 600 points and the NASDAQ was down more than 220 points.

The initial market reaction was attributed to the two big banks not meeting their profit targets for the quarter, the slowing economy and growing fears of further loan losses.

JPMorgan Chase, in particular, seemed concerned about the slowing economy.

Jamie Dimon, CEO of JPMorgan, said he saw “an economic hurricane on the horizon” although he “wasn’t sure how serious it was”.

Anyway, this morning investors seem to be on the negative side regarding the important bank results that have been released so far.

The fact that the year-on-year inflation rate for June hit 9.1%, the highest level in forty years, and which many analysts are now saying they would not be surprised to see the Federal Reserve will raise its key interest rate by a full 1.00 percent at the July meeting of the Federal Open Market Committee.

Note that the Canadian Central Bank raised its key interest rate by a good 100% earlier this month.

The Fed following this decision would not be at all a surprise in this environment.

The dollar reaches parity with the euro

And, finally, the cost of one euro fell below $1.00 on Thursday morning.

If you’ve read my posts over the past few weeks, you’ll know that’s no surprise to me.

Two things have been driving this award recently.

First, the Federal Reserve has pushed up the value of the US dollar against other currencies over the past two years. Thus, the value of the euro fell throughout this period.

Secondly, Europe is in economic trouble right now and this disjunction is causing more and more people to move their funds out of the continent.

The Russian invasion of Ukraine has just exacerbated the situation.

Many analysts believe that the dollar cost of the euro should fall further.

Some even claim that the price of one euro could drop to $0.9500.

This would truly introduce the world to the foundations of a new era.

But, with all the changes happening in the world right now, that wouldn’t be too surprising.

The future

The world changes. Until recently, the focus has been on the technological changes taking place and how these changes will lead to a restructuring of the world.

We now see a lot more happening in the economies of the world.

As I write about the past ten years or so, the world has been going through a period of credit inflation since the 1960s.

This environment of credit inflation changed the world as financial engineering came to dominate the corporate world, leading to a focus on investing in assets with funds redirected from fixed assets. which would contribute to the growth of labor productivity.

Stock prices hit one new all-time high after another. Housing prices have disappeared. The same is true for the prices of many commodities.

But, during the last period of economic expansion, from 2009 to 2019, the longest period of economic expansion on record in the United States, labor productivity growth was minimal.

In other words, all the savings in the economy did little to produce higher economic growth.

Over the past three years, the situation has gotten even worse.

The Federal Reserve, to protect the financial system and the economy, injected more liquidity into the United States than ever before in such a short period.

Dislocations and misallocations flourished. Imbalance came to dominate the economy.

We see the consequences of this historical behavior in what is happening in the world today.

We are in a period of radical uncertainty where we have very little evidence on which to base our projections for the future.

Change is the name of the game. In almost every area of ​​the economy there is an imbalance.

And this imbalance must be resolved. This is the project for the next few years.

This is the investment environment that we will all face.

And it’s a new world for policymakers and regulators in Washington, DC, and around the world.

It’s a world never seen before.