If you read the 58-page draft of the Republican Party’s official party platform you’ll come across a surprising one-liner: “We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment.”
But before Republican big-bank haters get excited, everyone should know that’s not presidential candidate Donald Trump’s one-liner.
In fact, it just might turn out to be a joke.
Based on who Mr. Trump is reportedly considering for Treasury Secretary in his would-be cabinet, it’s highly unlikely, Republican platform rhetoric aside, a Trump Administration would be even remotely interested in resurrecting Glass-Steagall.
Frighteningly, but not surprisingly, there’s a huge Goldman Sachs nexus connecting the end of Glass-Steagall to the future prospect of reviving it, with Donald Trump squarely in the middle.
Here’s how a former Goldman Sachs operative murdered Glass-Steagall for $125 million, why another former Goldman Sachs Treasury Secretary would keep it buried, and what Donald Trump, if elected, should do about it.
Judging by the headline financial news these days, however, the big banks are back. They’ve almost all reported earnings beats this quarter, some by a good amount, and analysts are saying the hard row’s been hoed and they’ve planted fresh seeds. And when you look at their stock prices, some of the TBTF banks look like downright bargains.
But price doesn’t tell you anything. There’s a lot more to look at with the big banks.
And if you look really closely, well, you won’t believe what you really see…
Analysts Are in on the Game
The big banks are looking better, but they’re not exactly looking good.
Sure they are beating on their earnings, but that’s not a big deal. In fact, it’s a bad deal.
Banks are notorious for “working” the analyst community. How’s that, you wonder?
Think about it. Where do Wall Street analysts that you see on TV mostly come from? The big banks. They know the game, they all play it. The truth is, they invented it. I’m talking about the earnings beat game.
All the analysts know each other. It’s easy for them let each other know that their own bank’s earnings aren’t going to be great. That causes other analysts to start ratcheting down their earnings estimates.
Then when earnings come out – BANG – they beat “consensus analysts’ estimates.”
And their stocks usually enjoy a pop. It’s such a lame game that you’d think the investing public would have caught on by now.
But they haven’t – it just happened again.
If you want a clear view of banks’ earnings, you can’t look to the analysts because most of them are in the pocket of the TBTF banks. You have to look backwards.
Here’s what you’ll see if you look that way today…
Compared to 2015, the Q2 “Beats” Don’t Look so Hot
JPMorgan Chase & Co. (NYSE:JPM) beat analysts’ earnings and revenue estimates registering earnings per share (EPS) of $1.55, while estimates averaged $1.34. They beat consensus revenue estimates of $24.16 billion by registering revenues of $25.2 billion. So what, those are game numbers. Last year over the same period JPM EPS were $1.54, so that’s not much of a real gain. Their revenues last year were $24.3 billion, which means their revenue gain was only 3.7%. For the biggest bank in America that’s boasting how well it’s doing, that doesn’t move the needle.
Other banks are in the same boat.
Citigroup Inc. (NYSE:C) beat EPS estimates of $1.10 by coming in with $1.24. They beat on revenues too, but only by .004%. Compared to the same quarter last year, ESP was down almost 18% and revenues were down almost 8.5%.
Bank of America Corp. (NYSE:BAC), same thing. They beat EPS estimates of $0.33 by coming out with $0.36 per share. They beat analysts’ revenue estimates of $20.414 billion by coming in with revenues of $20.6 billion. The truth? Compared to last year’s second quarter, EPS were actually 20% lower and revenue was almost 8% lower.
Another reason EPS and revenue numbers are misleading in the big picture is that they can be grossly manipulated in ways the public, and other analysts really could never understand.
Yes, I’m saying they all manipulate their numbers almost all of the time.
Come on, they’re the banks, we know how they operate. Or have you forgotten?
To get the picture, I look at their stock charts. That tells me the real story.
And the story on the banks right now is that they’re nowhere and certainly not worth the risk they pose, no matter how their earnings have beaten consensus estimates, no matter how their revenues look this quarter.
The Goldman Sachs Group Inc.’s (NYSE:GS) recent chart action is telling us it’s range-bound. Here’s the three-month chart:
More importantly, in the bigger picture, it’s gotten below its three-year support, and broke down through the “neckline” of a head and shoulders pattern. I wouldn’t touch it. Here’s the five-year chart:
BAC looks awful. The stock has support at $15, crashed through that and now can’t get above that level. Even if it does, where’s it going? To $18? Who cares?
Except for Morgan Stanley, which is at least showing tiny signs of life, getting off the long sideways floor it’s been staggering along on, the rest of the big banks look the same.
They can’t get out of their own way – and even if they do, where are they going?
Digging past the headline numbers and into the various earnings reports is telling.
Banks are releasing loan-loss reserves to pump up their numbers. They’ve been cutting staff and lowering compensation expenses to make their numbers look better. But most of them are having worse years in 2016 than they did in 2015.
But because they passed the most recent stress tests and are buying back shares and talking about increasing dividends, investors think they’re starting to look good.
Don’t be fooled.
Banks’ net interest margins (NIM), a critical metric for them all, are still shrinking for the most part, not growing.
And the talk about how the Fed hiking rates will fatten their NIM, forget it.
If the Fed raises rates, and the jury’s out on that move, there’s no way banks can budge their net interest margins more than a couple of basis points, at most. That’s because the cost of money for them will rise commensurately, if not faster, than what they can charge on loans. There’s just too much money in the system and too much competition to lend to better borrowers.
There’s no reason to own any of the banks unless you’re in the mood to speculate, or you buy Wells Fargo & Co. (NYSE:WFC) for its dividend and are willing to add to your position there on dips, which isn’t a bad idea.
On Wednesday, I told you about the hack that drained $55 million in cryptocurrency from the crowdfunded Decentralized Autonomous Organization (DAO), and that a vote by members about how the handle the hack was forthcoming.
Voting by token holders on the future of the DAO wasn’t as exciting as the Brexit vote, but it may have mattered just as much.
Token holders in The DAO (who in a parallel universe known as reality would be called investors, since they converted dollars into a cryptocurrency known as ether and bought tokens, which in this parallel universe would be called capital voting shares) overwhelmingly voted to exit the would-be investment fund by reversing time in their digital Ethereum world, so it’s like the hack – and the $55 million theft – never happened.
Of course it was a no-brainer vote, right?
Who wouldn’t vote to get all their dough back from a hacker who stole $55 million worth of ether from the $155 million crowdfunded pool?
Not everyone. Some folks voted to let the hacker keep what he stole… for the sake of the future.
The DAO vote, like the Brexit, will have far-reaching consequences for your financial future.
Here’s what happened…
Breaking Down the DAO Vote
In the DAO world the vote was about a so-called “fork in the road.”
A “yes” vote to reverse the hack so everyone gets their ether tokens back is called a “hard fork,” while a “no” vote would have resulted in a “soft fork.”
Let’s take a look at each…
The Hard Fork
Proponents of the hard fork, including some of blockchain Ethereum’s founders (from which the cryptocurrency ether comes and was the basis of the “smart contract” upon which The DAO program was built) argued that reversing the chain of events that in the blockchain Ethereum world are supposed to be “immutable” wasn’t a knock on Ethereum, but an admission that the program based on Ethereum was fatally flawed.
That argument, which I agree with, postulates that Ethereum is kind of like the Internet and the DAO was a program running on it. If there’s a problem with a program on the Internet it doesn’t have anything to do with the Internet functioning normally.
Proponents of the hard fork also argued that by not returning what amounts to about 4% of all the ether in the Ethereum world, that “trapped” currency would impact future use of ether as a means of exchange.
The Soft Fork
On the other hand, soft fork proponents argued that in the reality of The DAO the hacker, the thief, did nothing wrong. In fact, he, she, they, were just being rewarded for their activities which were technically, in programming terms, within the rules set out in the DAO’s code.
In other words, if a smart contract is immutable, it should be immutable and irreversible, otherwise a precedent is being set that protects smart contract code mistakes with a full refund.
The hard fork was taken, overwhelmingly, and the hack was reversed.
What does it mean for blockchain technology?
What It All Means for the Future of Blockchain
Now, all blockchain technology and the promise of smart contracts are facing their own fork in the road.
Since it appears that no code is 100% safe, and we’ll never know if any code ever is because coding is a science – which means that its only proved until it’s disproved – will blockchain continue down the path it’s on and take over the world as we know it?
Will smart contracts, based on supposedly immutable code, that we know can potentially be mutated, fulfill their promise of changing how the world works?
Based on the DAO vote, the jury’s definitely still out.
But that’s not going to stop the blockchain and smart contract juggernaught that’s been unleashed.
It just means investors in blockchain technology, investors in cryptocurrencies, and investors who rely on smart contracts better know when they come to that proverbial fork in the road which one to take.
And that means this story is far from over. Stay with me at Wall Street Insights & Indictments as we cover the evolution of blockchain and smart contract technology – and how you can profit.
The concept of a leaderless non-entity entity – in effect a software program running what amounted to an investment fund based on a cryptocurrency called ether, hived off a blockchain platform known as the Ethereum – was a long-shot from the beginning.
While the idea that a decentralized autonomous organization could raise money, cryptocurrency actually, which investors in turn received “tokens” against, representing their investment capital, attracted over $150 million via “crowd-funding is fantastic.
Too bad The DAO, which was supposed to allow token holders to vote on funding other Ethereum-based programs and businesses and hopefully earn a return on those investments, got hacked – literally – to death.
Here’s what happened, and what investors need to know now…
There is a “Lehman” moment out there somewhere – just as sure as there are black swans in the world.
Brexit was scary for markets around the world… but it was not a Lehman moment.
It was, as I’ve said, a “Bear Stearns” moment, a terrible harbinger of impending financial disaster.
Once again, it’s about the banks…
Except this time, it’s not the big American banks – we’re not talking about the likes of JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp. (NYSE:BAC), or Citigroup Inc. (NYSE:C), though they won’t be immune from contagion effects.
On Wednesday, I told you that the next Lehman moment could be brought about by the irreparable insolvency of one or two big Italian banks, or even a few of the big British banks. Both the European Central Bank and the Bank of England have been scrambling to obfuscate just how dire things are in Western Europe. Of course, a look at their balance sheet tells a different story – the numbers just don’t add up.
But the more likely – and far more frightening scenario – is that the entire global financial system will be brought to its knees by a single bank.
Here’s what’s really going on, what to watch for, and what to do if world’s most dangerous bank continues to falter.
Not too long ago, I told you that the Federal Reserve’s “equity market-inflating plans all have a dark side: what the Fed does moves markets; and now what the Fed says moves markets, too.”
The same is true for Central Banks around the world – we’re seeing it right now in Europe. Central bankers know that everything they do, and every statement they make, moves the markets.
That means they need to be careful what they say in public – or markets might move in unexpected directions.
And that leads to a lot of central bank game-playing… and if ordinary investors don’t know the rules of the game, they’re going to lose.
There are lots of market games being played all the time, but one in particular is deadly.
It’s the Game of Lies. And it’s “on” big-time.
When central bankers tell the world that all’s well with the banks they “regulate” (read: backstop and bail out) while those banks are asking for life-support systems, it’s the beginning of the end for markets.
Here are some of the latest lies – fresh off the lips of central bank desperadoes – that are in reality a dire market warning of the first order.
Before I get to the big central bank lies we’re going to look at today, I need to tell you about how the Game of Lies gets started.
You see, it’s always preceded by the “extend and pretend” game. And the Game of Lies is really just a way to keep that game going.
When the “extend” play game becomes exhausted, and the “pretend” play starts being severely questioned, that’s when the Game of Lies kicks in.
Here’s how it works…
The most basic “extend and pretend game” played by banks is rolling over loans borrowers are struggling with.
Struggling borrowers, including borrowers with currently non-performing loans (NPLs), meaning they’re not paying anything on them, can be “helped” by banks extending borrowers more credit and a longer repayment schedule accompanied by a lower interest rate.
However – and this is something ‘s overlooked far too often – adding to the principal on a loan that a borrower’s not able to pay back by extending them more credit and charging them less interest for a longer period of time is sometimes generous to a fault.
If the loan can’t be paid back in the first place, extending terms isn’t likely to accomplish anything for the borrower other than not forcing them to default on the loan, which may result in severe consequences.
But extending the loan is a necessary game for the banks.
Non-performing loans (I’m using NPL as a general term, though there are all sorts of names for when loans are “late,” “delinquent,” “in arrears,” etc.,) because NPL is the stage when it’s a good guess the non-performing borrower isn’t going to magically (without agreeing to the magic of having their loan extended) keep making payments, and those NPLs have to be recognized by banks.
That means banks have to “reserve” or “provision” for them, and that means setting aside cash to offset the expected loss. That, in turn, hits bank’s profitability in all kinds of ways, and ultimately can cause banks to lose money and go under.
That’s exactly what’s about to happen in Italy…
Big Central Bank Lie No. 1: The E.U. Doesn’t Need Formal Policy Coordination
The “extend and pretend” game is faltering all over Europe, but in Italy, things are even worse.
Italian banks have approximately $396 billion of NPLs. That’s four times what the banks had to deal with in 2008!
So what has Mario Draghi, head of the European Central Bank, been saying about the dire condition of Italian banks and the rest of the European Union’s banks taking it on the chin?
On the heels of the Brexit vote and turmoil, in a major speech at an ECB forum in Sintra, Portugal last Tuesday, Draghi told participants: “We may not need formal coordination of policies but we can benefit from alignment of policies.”
That’s a lie.
The only way the European Union can survive is if there is formal coordination of policies – and Draghi knows it.
What policies is he not talking about?
The desperate need to “federalize” the debts of European Union member banks and backsliding countries.
In other words, use the political and taxing power of a mega-enhanced Brussels to bail out all the E.U.’s struggling and increasingly insolvent banks and buy member countries’ government debts to keep them from repudiating their debt.
We’re really there.
Big Central Bank Lie No. #2: British Banks Are Healthy
Earlier this week, Bank of England Governor Mark Carney said at a globally televised press conference, “Banks have more capital than they need for the economic environment they are in.”
He went on to say, the BOE “strongly expects” banks to support the economy with fresh loans after the Brexit vote.
While some folks might call those pronouncements questionable, I call them lies.
First of all, if banks had “more capital than they need,” why did the BOE just reduce the reserve requirements British banks were told to add to as recently as March?
The BOE’s Financial Policy Committee, in calling the outlook for the stability of financials “challenging,” lowered bank capital requirements to free up over $200 billion of cash to, as they said, keep the economy flush with credit.
Lower capital requirements allow banks to finance and roll over loans, but more importantly and more to the real point, it allows banks to carry assets on their balance sheets with more borrowing and less equity.
In effect, lowering capital requirements allows banks to further leverage themselves by borrowing from other banks, or in the credit markets, to continue to finance their books.
That’s fine in good times, when bank equity (their share prices) is increasing. But adding leverage at the exact time bank share prices have been plummeting is a desperation move.
It’s proof that Mark Carney is lying about banks having more capital than they need.
His lies are about to get revealed.
As of this morning, three U.K. property funds with more than $9 billion in real estate assets have suspended redemptions by investors. They’ve stopped investors from cashing out. They lowered the so-called “gates” on folks wanting to sell shares.
That’s a sign of severe stress, which will extend and ripple through the banks.
If investors can’t get out of their property investments, and others will try to liquidate other property investments so as to not be barred at the gates themselves, the underlying value of the property held by funds and throughout the country, will likely come under pressure.
Guess who lent to the buyers of all those properties? That would be the banks.
If the U.K. economy’s not doing well and about to get hit further by property depreciation, perhaps on a huge scale, saying the banks have enough capital for the economic environment they’re in, is, in my book, a lie.
The bottom line is this: Central bankers in London, Brussels, Washington, and around the world are telling lies so markets don’t panic.
We heard these kinds of lies over and over again from all of America’s big bank CEOs leading up to the 2008 meltdown, during the meltdown when all the big banks were technically insolvent, and every day since the crisis.
Now the lies are at the central bank level.
That means the markets are teetering on the edge of a knife. All that remains is another “Lehman” moment to trigger Humpty Dumpty falling off the wall again.
On Friday I’ll tell you what could trigger the next Lehman moment, how that could cause a NIRP (negative interest rate policy) explosion here in the U.S., and how to prepare yourself for the fallout from all of it.
Brits voting on June 23, 2016, to exit the European Union wasn’t a “Lehman” moment.
Sure, global equity markets lost a combined $2.08 trillion on Friday June 24 and Monday, June 27, the first two trading days after the votes were tallied.
And the Dow Jones Industrials Average lost 870 points in those two days, falling almost 5%.
But the vote wasn’t a so-called Lehman moment (a reference to the infamous September 15, 2008 bankruptcy filing by Lehman Brothers that triggered the global financial crisis) because equity markets have already bounced back.
The Dow’s soared almost 4.5% from Tuesday through the close of the market on June 30.
U.S. equity benchmarks are again a couple of percentage points from their all-time highs.
While the Brexit vote has come and gone, market turmoil, globally, is here to stay.
So much for making new stock market highs here in the U.S. and riding the next leg of the old bull market higher…
So much for turning to emerging markets, or currencies, or commodities, or bonds…
Everything’s up in the air now. Everything.
If you didn’t figure out how to play the Brexit and didn’t make lots of money on the Brexit outcome, you’re going to need lots of help navigating the markets going forward.
Fortunately, for me and my newsletter subscribers I knew how to play the Brexit vote and we made a couple of very smart, low risk and high reward plays that netted us two triple-digit wins, which we banked on Monday.
If you understand what the Brexit vote was about and what’s changed across the world, you’ll be able to make lots of big trades like we did.
The political intelligentsia, elitists, bond and equity markets misjudged the will and determination of the people, the free people of the United Kingdom of Great Britain that is, of which I am one, though I am a “permanent resident” of and reside in the magnificent United States of America.
We want Great Britain to exit the European Union, not all of us mind you.
But, those of us who cherish our freedom, who cherish the rights of citizens of sovereign nations to determine their own future and not be yoked to some cabal of political elites serving the global banking oligarchy, wanted out of our chains.
This is the U.K.’s Independence Day.
If you don’t know what was really at stake in Britain, it’s not your fault.
That’s because those same political elitists, the officers of the cabal that would have free people and free markets serve them and their true masters, the world’s big banks, own the media for the most part and anesthetize the public by shooting them full of socialist promises of free everything, everything, that is, except true freedom.
What’s not being talked about is…the truth.
Here’s what you won’t hear or read anywhere else. Here’s the truth about the Brexit.