Hi there—here is this week's update!
TL;DR - Too Long Didn't Read
-The looming debt crisis and what the warning signs are
-The largest U.S. banks are stockpiling $35 billion to cover loan losses
-Many government programs are ending over the coming weeks
-We’re in a bubble, and things are bound to get worse once reality sets in
This week we’re focusing on debt.
With the financial stress caused by COVID continuing to mount, there are increased concerns of a looming credit crunch, where people and businesses will not be able to pay their debt.
Here are some of the major warning signs:
-Corporate bankruptcies happening at a record-breaking pace
-Job losses moving from smaller firms to larger ones
-Delays in commercial real estate payments
-Deferred rent and credit card payments
-Developing countries delaying debt payments
U.S. banks preparing for losses
The largest US banks signaled that the worst is yet to come. They opted to stockpile more than $35 billion to cover loan losses as consumers and businesses start to default on their loans.
Banks have already granted temporary pauses on payments for mortgages, auto loans, and commercial loans. With this additional money, they are preparing for a wave of losses as payment deferrals and higher credit-card losses will continue to mount from elevated unemployment.
One example of this is JP Morgan’s loan-loss provision, which included $8.9 billion for loans that are predicted to default. Most of the bank’s loan-loss provisions were set aside for the consumer bank. Jamie Dimon, CEO of JP Morgan, said that a massive government-stimulus effort and expanded unemployment benefits are keeping U.S. consumers and business afloat for now, but that it will not last forever.
Government programs ending
Many government programs that have helped mitigate the economic fallout of the virus are due to run out in the coming weeks. Legislators are faced with the task of extending these benefits or winding them down.
Last week, weekly jobless claims came in at 1.3 million, marking the 17th straight week with over 1 million claims.
The $600 weekly unemployment benefit, which is helping millions of Americans, is set to expire at the end of July. Then, in early August, the $659 billion PPP loan program for small businesses is set to end.
A Goldman Sachs survey of those borrowers found that 84% expect to exhaust their funding by the first week of August and that only 16% are confident they can keep paying staff without more support.
It’s still unclear whether Congress will agree to extend these programs, and it could take months for banks to fully realize how many consumers and businesses will fail to repay their debts.
Next up, we have the end of student loan payment freezes and payroll support for airlines.
American Airlines warned 25,000 employees, roughly 29% of its workforce, about potential job cuts as they urge their employees to take buyouts or early retirement packages. Last week United did the same with 36,000 employees, while Delta said that 17,000 employees have volunteered to leave the company.
Airlines are prohibited from cutting jobs or pay rates until October under the terms of the federal payroll support they received from the government earlier this year.
We listened in on a private call this week hosted by one of the largest US banks and a prominent fund manager. The overall tone was bearish, and the major takeaway is that they’re viewing stocks as being overpriced and that we will likely close lower on the year.
Our view is that we are in a bubble. However, that doesn't mean the markets will crash tomorrow. With an economy that's running on fumes, there are many potential catalysts to burst this bubble.
Over the weeks, we've been trying to show you proof points highlighting the economy's weaknesses post COVID. These data points help explain why we believe the markets are losing steam. Although the markets and the economy are disconnected currently, we firmly believe they will realign at some point in the near future, and the markets will drop.
This is the time to add cash to your investment account. Our portfolio positioning allows us to move quickly when markets start to move downwards and opportunities start coming up.
We hope you’re staying safe and we’ll see you next week!
-Saul & The Round Team
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