Brad’s Note: At Wide Moat Research, we focus on earning income through all market environments. That’s why from time to time, it’s important to zoom out and see the macro picture and prepare for what’s ahead.
We’ve been covering the regional banking crisis and the ticking timebomb hidden within it for a few weeks. And you can learn our favorite way to play it here, before the presentation is taken offline.
Today, we’re continuing that story from another angle. We’re turning things over to our colleague Nomi Prins. As a former Wall Street banker, her take on Bank of America’s recent quarterly losses is extremely concerning.
The banking crisis is not over.
Please take the time to read Nomi’s analysis below to make sure you – and your finances – are prepared for what’s coming next.
By Nomi Prins, Editor, Inside Wall Street with Nomi Prins
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The Federal Reserve is gearing up for its last rate decision of 2023. We’ll have a verdict next month.
But while there’s a lot of anticipation around this, there’s a different story that seems to have gone unnoticed…
Bank of America took a massive hit recently – bigger than any other for a U.S. bank, ever… And yet, it seems everyone has forgotten about it already.
Bank of America is the second-biggest bank in the U.S. and the fourth-biggest in the world. As many as 69 million people have their money connected to it in some way.
So last month, when it reported unrealized losses of $131.6 billion for the third quarter, the story made headlines. Then, the reporting dried up just as quickly as it blew up.
But if you think the story’s over and all is well again in the banking world, you’re wrong.
This is the largest quarterly loss ever reported by a U.S. bank. And as a former Wall Street banker, I can tell you – that’s a big deal.
Just look at how it compares to Bank of America’s previous unrealized losses. The next table shows the yearly numbers for 2021 and 2022. For 2023, we broke it down by quarter (yearly 2023 numbers aren’t out yet).
So why is no one talking about this?
Maybe it’s because… After decades of the Federal Reserve distorting the real economy by creating trillions of dollars out of thin air – for the benefit of Wall Street… The true value of billions of dollars has lost all meaning.
But if you have any money in the markets, this is a warning sign you can’t afford to ignore. The good news is, if you understand what’s happening, you can position yourself to come out ahead.
Not a One-Bank Problem
The problems plaguing the banking industry today have to do with the Fed. But I’ll come back to that in a moment.
First, you should know that Bank of America isn’t the only bank teetering on a crumbling ledge. Its losses are tied to government-issued bonds – the same kind that most banks own.
This means that, like Bank of America, most banks are dealing with enormous losses they racked up over the past few years.
Just take a look at the chart below. It shows U.S. banks’ paper gains (blue bars) compared to their losses (orange bars), going back to 2008. Each bar represents one quarter of the year…
Until recently, unrealized losses were rare. From 2008 to 2021, there were only 16 losing quarters out of 56. You can see that in the chart above.
But then, in 2022, unrealized losses skyrocketed. That happened when the Fed started ramping up interest rates at the fastest pace in decades.
At the end of the second quarter, U.S. banks as a group sat on $558 billion in unrealized losses. That was up 8.3% compared to the first quarter.
They continued to spike into the end of 2022. And in the first quarter of 2023, Silicon Valley Bank and other banks collapsed.
But those numbers only tell part of the story. An estimate from Moody’s, one of the biggest credit rating agencies in the U.S., paints a grimmer picture.
Moody’s estimates that U.S. banks could be grappling with at least $650 billion of unrealized losses.
Moody’s has been closely monitoring the banking sector like a hawk, especially after downgrading 10 small and mid-sized banks in early August.
If their estimates are right, this would be a massive 15% increase compared to the $558 billion in losses I mentioned earlier.
Either way, banks are now saddled with paper losses that overshadow what they experienced during the heat of the 2008 crisis, as the chart before shows.
It’s a ticking time bomb. And, thanks to the Fed, it’s unlikely to be defused anytime soon.
A Problem of the Fed’s Making
While the bigwigs at the Fed won’t admit it, their actions are the main catalyst for the problems in the banking sector.
Last year, the Fed started hiking interest rates at the fastest pace in 40 years. And it pushed rates up to a 22-year high.
As rates rise, the value of U.S. government bonds decreases. That means any bank that bought bonds before rates went up saw a big paper loss.
For many years, government-issued bond prices were stable. Except for some tiny ups and downs, banks didn’t have to worry much about reporting hefty losses on their bond collections.
But that’s changed. Government bonds have plunged by more than 40% since 2020. This has translated into hundreds of billions of dollars in paper losses for major banks – including Bank of America.
Normally, a bank holding these bonds shouldn’t face any problems… As long as it keeps the bonds through maturity.
But what if the banks face a bank run and they need to process withdrawals quickly? Well, that means they have to sell some of those underwater assets right away.
That sums up what went down with the failures of Silicon Valley, Signature, Silvergate, and First Republic banks earlier this year. And it sums up what took down the major European bank Credit Suisse, too.
What This Means for Your Money Today
Fed Chief Jerome Powell keeps telling us the banking system is “sound and resilient.” But we’re not taking any chances.
The best thing to do in times like these is hope for the best… but prepare for the worst. How do you prepare?
First, make sure your deposits are FDIC-insured. You can find out which banks are insured through this directory.
Second, you must diversify some of your money into an asset that can preserve its value through a financial crisis. And gold has a long track record of doing that.
One of the more recent examples was during the 2008 financial crisis. As U.S. stocks plunged nearly 60%, gold prices soared 43%. Gold will continue to be a great store of wealth in the next crisis, too.
A simple way to get exposure is through a gold exchange-traded fund (ETF) like the SPDR Gold Shares ETF (GLD).
GLD is backed by physical gold. This means that GLD shares are linked to the actual metal sitting in vaults.
So, GLD is a great way to own gold without the hassle of storing it, transporting it, and keeping it secure.
The fund is listed on the New York Stock Exchange. So you can buy it through your brokerage account.
Regards,
Nomi Prins
Editor, Inside Wall Street with Nomi Prins
P.S. I spent 15 years inside our banking system – and reached the upper echelons of major firms like Goldman Sachs. And I saw that, when trouble starts brewing, the worst thing you can do is ignore the warning signs.
That’s why a fund like GLD is a great place to park some of your hard-earned wealth. But, for even more upside potential, you’ll want to get the name of my No. 1 gold stock today. In the wake of the 2008 financial crisis, select stocks shot up by as much 5 to 10 times. I believe they’ll do the same when the next crisis comes. To learn more, watch my free video report.