Is GE Capital the Canary In the Coal Mine?
Evidence is mounting quickly that a 2008-style Financial Panic is a distinct possibility before the end of 2019. Something is VERY wrong at GE Capital (GECC), the financing subsidiary of General Electric (GE). With nearly $500 Billion in assets, GECC would rank 7th between Morgan Stanley (MS) and USBancorp (USB) if it were a commercial bank (https://www.worldatlas.com/articles/the-largest-banks-in-the-us.html).
GE closed at $7.01 on Friday, just 35 cents higher than it’s low in early 2009. This fact alone, ought to be enough to raise concerns. In early 2009, the Dow Jones Industrial Average (Dow) was trading below 7000 and GDP was contracting. THEN, it was understandable.
That GE should trade at $7 with the Dow near 25,000 and the economy recently delivering “solid results” is shocking. If a recession is as imminent as the evidence indicates, a further substantial deterioration in value for GE seems certain.
GE and GECC were downgraded to BBB+ from A, by Standard & Poor’s on October 2nd. The stock has fallen an ADDITIONAL 50% since then. A downgrade to Junk (BB, B or C) seems inevitable. A bankruptcy is hardly out of the question.
Keep in mind that the World’s Financial System is interconnected. If GE ceases to be able to honor ITS obligations, its sheer size makes it certain that the collateral damage could be massive.
Foreign Banks Approach All Time Lows
American banks and investment banks continue to make new lower lows: “Is Another Financial Crisis Dead Ahead?” (https://markonomics101.com/2018/12/06/is-another-financial-system-crisis-dead-ahead/).
Other than GECC, there are very few concerns about either the large money center banks or investment banks. While most have shed 20-25% in a matter of weeks, so far only Citigroup has warned about lower revenues or earnings for the upcoming quarter. As of February 2018, Citibank was ranked fourth in the U.S., with total assets of $1.84 Trillion.
Keep in mind however, that “Bank Accounting” is typically far LESS reliable as a market indicator, than non-financials. Most, if not virtually all of a Bank’s assets are never “marked to market”. Bad loans stay on the books at 100%, until a market event such as a default or restructuring occurs.
This was especially deceptive when the value of mortgages tanked in 2008. Financial institutions are typically so highly leveraged that even a small adverse move in the value of collateral or creditworthiness of its borrowers can render it insolvent.
That said, the SLIDE SHOW below has the charts of 4 of the top 10 Foreign Banks. Deutsche Bank (DB) looks alarmingly like GE, but is trading WELL BELOW its 2009 lows of $18.
Deutsche Bank is almost the size of Citigroup. Barclays (BCS) is almost the size of Citigroup. Mitsubishi Financial (MUFG) is the largest non-Chinese Bank in the World with more than $2.5 Trillion in Assets. UBS Group (UBS) is the smallest with $950 Billion(https://www.worldatlas.com/articles/the-largest-banks-in-the-world.html).
All four Banks are profitable. Deutsche Bank and Mitsubishi Group both reported substantially lower year over-year-earnings. Barclays and UBS, on the other hand, reported better earnings. Investors are understandably skeptical.
Bank Loan Portfolios ARE MARKED DOWN by INVESTORS
There exist nearly a dozen ETF’s that track Senior Bank Debt. Invesco Senior Loan ETF (BKLN) tracks an Index of 100 Leveraged Loans. The fund yields about 4% and has $6.6 Billion in Assets (https://finance.yahoo.com/quote/BKLN?ltr=1). Blackstone’s Senior Loan ETF (SRLN) has assets of $3.2 Billion and yields about 4.5% (https://finance.yahoo.com/quote/srln?ltr=1).
The charts of SRLN and BKLN are alarming. It’s highly likely that the sudden plunge across this sector is indicative of either deteriorating credit quality or illiquidity. Either way, it establishes that bank loan portfolios are losing value!
This is also another clue that a Recession is imminent, if we have not already begun one. If borrowers are already at risk of credit impairment, here at Dow 25,000, what would happen at Dow 20,000 or even Dow 15,000?
The implication is hair-raising. It is entirely possible that many banks would become insolvent. Even Big Ones. Will they be “Too Big To Fail Again?”
A Financial Panic would affect just about everyone, everywhere. You can bet Markonomics101 will be sorting through the data.
Be Informed, Not Misled