QUESTION: Property is in a hole, interest rates are going up and we have crazies in control (or not in control) of parts of the US government, so are you concerned about US banks?
ANSWER: Yes.
Maintaining bank stock multiples is about confidence and there is a lot to be concerned about in the US:
- recent political activity (border and military bills) suggests that Republicans would now generate a real crisis if it damaged the Democrats’ prospects in this year’s elections, and causing a debt crisis is the biggest possible crisis (although some think it would blow back on the Republicans);
- interest rates aren’t going down, and likely to go up, this year due to low unemployment and higher inflation;
- property defaults are going to happen;
- the US government needs to get debt levels down and it isn’t going to happen without structural reforms; and, finally,
- unlike most banks in OECD countries, the US runs theirs on socialist principles with respect to house mortgages but free-enterprise principles for bank executive remuneration, and this creates a moral hazard that eventually governments will not want to continue funding!
The bottom line is that US banks will need more capital over time. Although some US banks are better than others, it is difficult to justify any except Morgan Stanley.
Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.