Bank Earnings Fall, Stock Prices Fall, Euro Drops Below $1.00

Bank earnings appear to be dropping for the second quarter of 2022.

Oh, the large banks are benefitting from rising interest rates. They are benefitting from volatile markets. But, their deals are down, and the investment banking business seems to be going nowhere.

Furthermore, loan losses are being raised to cover future loan losses to be experienced in the coming economic slowdown.

Jamie Dimon, at JPMorgan Chase (JPM), is holding off on any stock buybacks in the near future, just to protect bank capital ratios.

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

Note: JPMorgan Chase has set its target for return on tangible common equity of 17.0 percent for the year. Today it confirmed this target and reported that it hit that level in the second quarter of 2022.

Morgan Stanley reported that it hit a return on tangible common equity of 13.8 percent in the second quarter.

These results are not too shabby given the fact that the public covering of these results casts shadows on bank performance.

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

For Morgan Stanley: “Morgan Stanley profits hit by investment banking slowdown.”

Stock Prices

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

The initial market response has been attributed to the two large banks missing their profit targets for the quarter, the slowing economy, and the rising fear of further loan losses.

JPMorgan Chase, especially, seemed concerned about the slowing economy.

Jamie Dimon, JPMorgan Chief Executive Officer, said he saw “an economic hurricane on the horizon” even though “he wasn’t sure how serious it would be.”

Anyhow, this morning investors seem to stand on the negative side when it comes to the large banking results that have been released so far.

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

Note that the Canadian Central Bank raised its policy rate of interest by a full one percent earlier this month.

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

Dollar Hits Parity With Euro

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

If you have been reading my posts over the past several weeks, you will know that this is no surprise to me.

Two things have just recently been driving this price.

First, the Federal Reserve has been pushing up the value of the U.S. dollar relative to other currencies over the past couple of years. So, the value of the euro has been in decline all during this time.

Second, Europe is, economically, in a mess right now and this disjunction is resulting in more and more people moving their funds out of the continent.

The Russian invasion of Ukraine has just exacerbated the situation.

There are many analysts that believe that the dollar cost of the euro should go even lower.

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

This would really present the world with the foundation of a new era.

But, with all the changes that are now taking place in the world, this would not really be surprising.

The Future

The world is changing. Up until recently, the focus has been on the technological changes that are taking place and how these changes will result in a restructuring of the world.

Now we are seeing that there is a lot more going on in the economies of the world.

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

This environment of credit inflation has changed the world as financial engineering has come to dominate the corporate world and this has led to a focus on the investment in assets with monies re-directed from real capital assets that would contribute to the growth in labor productivity.

Stock prices have hit one new historical high after another. Housing prices have gone out of sight. So have the prices of many commodities.

But, during the last period of economic expansion, 2009 through 2019, the longest period of economic expansion in the U.S. on record, the growth of labor productivity has been minimal.

That is, all the saving in the economy has done little to produce higher economic growth.

In the past three years or so, the situation got even worse.

The Federal Reserve, to protect the financial system and the economy, pumped more liquidity into the U.S. than ever before over this short a period of time.

Dislocations and misallocations flourished. Disequilibrium has come to dominate the economy.

We are seeing 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 to go on in making up our projections of the future.

Change is the name of the game. In almost every area of the economy, there is disequilibrium.

And, this disequilibrium must be unwound. This is the project of the next several years.

This is the investment environment that we are all going to be facing.

And, this is a new world for the policymakers and regulators in Washington, D.C., and around the world.

It is a world not seen before.