The slow-burning banking panic | Financial Times

Good morning. Apple only posted OK first quarter results yesterday, ending Big Tech’s earnings season with a shrug. But its long-term stock chart still amazes. While other Big Techs remain down by double digits from their pandemic highs, Apple is down just 8% (Microsoft is only slightly behind, at 11%). Apple, like capitalism, continues to seethe. Email us: robert.armstrong@ft.com AND ethan.wu@ft.com.

Regional banks go crazy

Many US regional bank stocks have been performing very poorly lately. Is this because of legitimate questions about creditors’ business models, or is this a nonsensical, similar to a lemming out of mind?

Below is some background information on four of the most notable hits regional and, for comparison, about two banks that failed, First Republic and Silicon Valley. The data on the four is all as of 3/31, except for some securities and credit loss data, which is as of 12/31:

It is very clear that none of the four banks is as bad as First Republic and Silicon Valley were before their failure.

None of them have Silicon Valley’s staggering concentration of uninsured deposits, or its reliance on securities on the asset side of the balance sheet. Neither of them, like both failed banks, is insolvent if you factor in their unrealized loans and stock losses (although three of them look poorly capitalized on a mark-to-market basis). None of them had a filing flight anywhere near the scale that the First Republic did in its first quarter.

In the case of both failed banks, it looked like they would soon be “upside down”: paying more for their loans than they made on their assets. All four of the other banks listed above earn significantly higher yields on their assets than First Republic and Silicon Valley; those two were doomed in part by portfolios of mortgage-backed securities and low-yield mortgages. So if these four banks can avoid sharp increases in funding costs – which is what causes a run on deposits – they have profitable businesses (Wed. PacWest said their deposits were stable through the end of the first quarter).

There is, in other words, a lot to be said for the “brainless lemming-like lunatic” theory of the recent sell-off. But the freakout isn’t entirely mindless and lemming-like, for two reasons.

The banks that get beaten have weaknesses: PacWest’s exposure to the venture capital industry, securities and loan losses at Zions and KeyCorp, uninsured deposits at Comerica, and so on. Autonomous Research bank analyst Brian Foran calls what we’re seeing “the weakest gazelle problem”: The market is chasing the banks with the most vulnerabilities, even though under normal circumstances those vulnerabilities wouldn’t be fatal.

The other problem is that deposits are always vulnerable to escape. It is always possible to imagine that even if deposit levels hold up now, something terrible will happen tomorrow. There is just enough reality behind the mini-banking crisis for the freakout to persist.

How scary is the freight recession?

The commodity side of the US economy may not collapse, but it’s definitely not booming. Real spending on consumer goods has increased by 0.04% over the past six months, virtually no growth. Plus, there’s still all that inventory lying around; The ratio of inventory to business sales is 8% higher than at the start of 2021. Flat demand and oversupply mean less stuff to produce and even less to transport. Some call it an industrial recession or, equivalently, a commodity recession.

Bad signs keep popping up. The last concerns diesel consumption, which is downwind of road haulage and railroad activity. Myles McCormick of the Financial Times relationships Demand for distillates (a category that includes diesel and heating oil) fell 6% year over year in the first quarter, compared with a 2% decline in demand for consumption-sensitive gasoline. Other measures such as manufacturing production surveys e sale of electricity to factories they also contracted for the last semester or so.

The question is whether the freight downturn heralds a broader recession or is it just a temporary reset. Freight markets are usually a leading indicator of economic activity, but at a high level it wouldn’t be shocking if the market needed a moment to breathe after the supply chain craziness of the past couple of years. Global container shipping rates have gone back and forth and are now below 2019 levels (data from Freightos):

Still some high in the logistics industry I think the after-effects of the pandemic will not be short-lived. In his earnings call yesterday, Maersk’s chief executive said that although inventories are likely to shrink by the second half, he expects shipping to contract this year, driven mostly by weak imports into North America.

In the US, the freight downturn is most pronounced in trucking, as we noted last week. Some truckers earn less than their operating costs, forcing people out of the industry bit by bit. This dynamic was explained well Wednesday by Derek Leathers, CEO of trucking company Werner Enterprises:

If you look at where the spot rates are today, they’re 15 to 17 percent, maybe even up to 20 percent below the carrier’s operating costs. ..

These spot rates are simply unsustainable. [Small-scale owner-operators] they won’t make it. They bought high cost equipment during the peak of the market. And if today they are fully exposed to that spot market with both high driver salaries, expensive equipment, high cost of capital and, in many cases, variable types of loan arrangements that are now becoming much more expensive overnight and inclusive today, it will just be a very difficult time. So yeah, we believe it’s only so low it can go. And I said it a quarter ago, the cure for low prices is low prices. . .

Some of the less efficient operators will continue to exit, and that exit is now 31 consecutive weeks of net shutdowns. . . The question is how long it drags to the bottom before we see any improvement. And we still have the belief that this happens in the second half.

Lee Klaskow, a logistics analyst at Bloomberg Intelligence, says the downturn in freight is likely to persist into the second half of this year. He notes that end-consumer demand is not roaring, China’s export car has been slow to restart and it will take some time to reduce inventory in the US.

He added: “We are going through a normalization of demand and [freight] rates. From a year-over-year comparison, which gives people the feeling that the sky is falling, but the reality is that we’re breaking out of unsustainable levels. We appear to be approaching a bottom on the truckload side, although the bottom for [ocean shipping] it could be further.

Another six months of industrial weakness, however, would put pressure on the services sector to lift us out of the recession. Spending just needs to soften a bit to push us over the edge. (Ethan Wu)

A fix

The second graph in yesterday’s piece on Uber it was wrong due to a spreadsheet error. Here is the corrected version:

The corrected graph makes the point of the piece even stronger, but still Rob feels very stupid about it and is sorry.

A good read

This Reuters story shows Elon Musk’s Neuralink moving fast and breaking things, in particular pigs, sheep and monkeys.