Within the fluff that was the CitiGroup earnings presentation were two nuggets of what of the banks are really up against. As I’ve been saying for over a year this issue is a consumer driven problem NOT a bank driven problem. The banks just happen to be the primary loser as the consumer collapses. The two charts are credit card and mortgage capital losses. We’re talking about a sharp acceleration in losses here. This effectively confirms that the bank earnings are a total sham. Credit losses are getting worse across the entire spectrum yet these banks are magically raking in profits. I don’t want to imply that the bank earnings are entirely fake (refinancing and lending due to the yield curve were stronger), but we keep seeing the same trend in all of these earnings reports – fixed income trading and other unsustainable profit drivers are the primary sources of revenue. The charts speak for themselves:
The important implication here is that the consumer is not rebounding. 20 years of excess has finally come to a stop. This is exactly what happened in Japan in the 90s. The Fed is now officially pushing on a string and the TALF and PPIP are destined to fail. The banks earnings have the appearance of strength, but don’t be fooled. As long as the consumer continues to keep a tight grip on their wallets banks’ balance sheets will continue to deteriorate (although M2M will allow them to hide much of the losses).
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.