16 Banks Downgraded, China in Trouble – Truths as Tide Goes Out

Moody's Investor Service has just cut the credit ratings of 10 banks.  They also targeted 6 more for potential credit downgrades, including the well-known:

  • Bank of New York Mellon (BK.N), 
  • US Bancorp (USB.N), 
  • State Street (STT.N),
  • Trust Financial (TFC.N)

Moody's noted that many banks have been suffering from increased pressures to their profitability and may have trouble when it comes to generating capital internally.  They also made mention of a mild US recession coming in early 2024 that will put some banks and real estate portfolios at risk.  Commercial real estate is already particularly at risk due to high interest rates, difficulty accessing credit and the trend of working from home.

11 Major Lenders Also Given "Negative" Outlooks

The list includes heavyweights, such as:

  • Capital One (COF.N), 
  • Citizens Financial (CFG.N),
  • Fifth Third Bancorp (FITB.O).

We are currently in an environment in which credit is rapidly drying up, pushing borrowers to pay down their debts as fast as they can.  This accelerates the process of the money supply disappearing, and in turn makes the downward spiral move more quickly.  The Fed has not let up and has been hiking rates faster than they have in recent decades.  Now it seems rating agencies have become the next major thorn, downgrading the US's credit rating and now making sweeping downgrades to banks.

Tightening credit could also be the major culprit in the recent shocking data to come out of China:

China's Imports & Exports Both Suffer Double-Digit Falls

Analysts got a rude awakening on Tuesday when Chinese data showed a 14.5% drop in exports and a 12.4% drop in imports compared to last year.  More Specifically, their exports to the US and Europe fell over 20%, to each.  If China thought the worst is over, they may not have just cut their imports so heavily, which are used to process and produce goods to export.  July marks the 4th month in a row that China's manufacturing sector has contracted.

Not surprising then, yesterday we learned that the Chinese economy slipped into deflation, with consumer prices falling (0.3%) for the first time in more than two years in another sign of weakening demand. In a sign of more to come, their producer price index (PPI), which measures goods prices at the factory gate, also dropped by 4.4% in July y/y. That makes the 10th straight drop in PPI, and the first time since November 2020 that both the CPI and PPI have fallen in the same month signalling a likely protracted period of stagnation in the 2nd biggest economy in the world.

Tighter Conditions Can Reveal Truths

One of these ‘truths’ can be which banks are overleveraged and have no reliable means of generating revenue.  Another can be the repricing of assets.  According to the website USdebtclock, currently only 1 out of every 291 ounces of silver being traded (such as in banks) actually exist in physical form.  If increased distrust in financial institutions causes traders to withdraw their investments in physical form, most silver investors could be in for a shock.  Imagine the majority of the population finding out that they overestimated the supply of silver by 291X!

Major Announcements Tonight:

Jobless claims and CPI out of USA are coming out at 10:30 tonight (AEST).  Both of these have the potential to dramatically swing the prices of precious metals.