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Epic Economist 9/26/23
"Biggest Banks Warn About The
Unprecedented Financial Chaos Ahead"
"You wouldn’t believe the amount of risk U.S. banks are facing right now. Some of the biggest banks in America are warning about unprecedented financial chaos in the final months of 2023. A new note released by Morgan Stanley points to trouble in equity markets as economic growth disappoints and consumer spending hits a wall. Morgan Stanley’s, Michael Wilson revealed a long list of reasons why he thinks the S&P 500 will face a double-digit crash this year.
The strategist notes that stocks’ valuations will be caught by declining consumer spending, resuming student loan payments, rising delinquencies in certain household cohorts, higher gas prices, and weakening data in the housing sector. Bank of America strategist Michael Hartnett shares the same view. He warned earlier this month that the possibility of an economic contraction remains high as the Federal Reserve continues to tighten credit conditions. Meanwhile, weaker-than-expected corporate earnings will deteriorate economic activity even further this fall, JPMorgan Chase & Co. predicted this week, with analysts seeing a major “profit recession” in the fourth quarter.
Morgan Stanley raised red flags on consumer stocks, one of the brightest corners of the market this year. The banks’ economists argue that the rally is already faltering, and stress that elevated levels of household spending can not be sustained in an environment of stalling wage growth, surging consumer debt levels, and rising unemployment. "The market is not trading well under the surface," Wilson said. "There are a lot of car crashes out there," he continued.
He predicts that any shock to the system can send the S&P 500 plummeting from nearly 4,500 points today to the low 3,000s - a drop of more than 25%. Wilson is not alone in sounding the alarm about stocks. A new Goldman analysis forecasts that the S&P500 will underperform in October, and generate dismal returns for the next 12 months.
Moreover, the implications of a commercial real estate crash this year can be seismic, for banks, real estate, and the economy as a whole. "The cracks are forming," Wilson said. "They're all over the place.” With lower occupancy rates and higher interest rates, commercial real estate seems to be falling apart. That’s why tbanks are now preparing for mass bank runs later this year. Banks have started paying up to protect their cash holdings from sinking further and to safeguard against future runs on deposits, according to Bank of America.
The risks are getting so high that last Tuesday, U.S. regulators unveiled plans to force regional banks to issue debt and bolster their so-called living wills, steps meant to protect the public in the event of more failures. “A bank run on one of these vulnerable institutions could cause a ripple effect, causing depositors to withdraw funds from other banks as well. This could lead to a broader panic and a loss of confidence in the banking system as a whole, potentially leading to a recession or even a financial crisis,” the regulator wrote. Everyone knows that something major is about to break. Now it’s time to run for the exits while we still can."
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