Cockroaches in Credit? | Jack & Max on Zion’s Cali CRE Write-off, Big Bank Earnings Blowout, and First Brands Update
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
This podcast episode dives deep into recent banking earnings and emerging credit concerns across financial markets. The hosts analyze concerning developments at regional banks like Zion and Western Alliance, which reported losses from a California real estate deal gone bad, while examining the strong performance of major banks like JPMorgan and Bank of America. (00:30) Despite positive earnings from the big banks, there's growing unease about potential credit issues, particularly in the non-bank financial institution space and private credit markets. The discussion explores Jamie Dimon's warning about "cockroaches" in the system and the heated response from private credit executives. (02:46)
- The main themes center around the dichotomy between strong major bank earnings and emerging warning signs in regional banking and alternative lending markets, with particular focus on the interconnection between traditional banks and the growing private credit ecosystem.
Speakers
Jack (Host)
A financial analyst and podcaster focused on credit markets and banking. He demonstrates deep expertise in financial statement analysis and has extensive knowledge of banking sector dynamics and credit risk assessment.
Max Weathie
Business partner and co-host from Other People's Money podcast. He brings significant experience in financial markets analysis and investment strategy, with particular expertise in alternative investments and market dynamics.
Key Takeaways
Credit Markets Are Showing Early Warning Signs Despite Strong Headline Numbers
While major banks like JPMorgan and Bank of America reported strong earnings, regional banks are experiencing concerning losses from specific deals. (00:59) Zion Bank and Western Alliance both reported losses from the same California real estate investment fund, with allegations of fraud against the fund managers. The market's jittery reaction to relatively small losses ($50 million for Zion) suggests underlying nervousness about credit conditions. This demonstrates that in a "priced to perfection" environment, even minor negative news can trigger significant market reactions, as small losses can indicate broader systemic issues beginning to surface.
The Private Credit and Banking System Have Become Dangerously Intertwined
Jamie Dimon's warning about non-bank financial institutions reveals a critical shift in how risk is distributed across the financial system. (17:58) Rather than banks directly owning risky loans, these loans have migrated to private credit funds, but banks still provide leverage to these funds. This creates a complex web where banks are exposed to the same underlying risks but through an additional layer of intermediation. When private credit deals go bad, banks face losses on their loans to the funds that own the problematic assets, potentially amplifying systemic risk.
Consumer Credit Metrics Are Improving But May Mask Underlying Tightening
Bank of America's credit card delinquencies dropped to 2.41% from 2.54% year-over-year, while their total net charge-off rate decreased to 47 basis points from 58 basis points. (13:06) However, credit card purchase volumes only grew 2.7% year-over-year, matching inflation exactly, indicating zero real growth. This suggests that while delinquency rates are improving, it may be because banks are pulling back credit to riskier customers rather than genuine consumer financial health improvement. The combination of lower delinquencies with flat real spending growth indicates a more cautious lending environment.
Market Sentiment Indicators Show Extreme Risk-On Behavior
Charles Schwab's data reveals that cash as a percentage of client assets has dropped to just 9%, down from 13% in 2022. (24:46) Interactive Brokers reported margin loans up 39% year-over-year, indicating significant leverage in the system. These metrics demonstrate classic bull market behavior where investors minimize cash holdings and maximize leverage. This creates vulnerability during market corrections, as leveraged positions must be unwound and cash-light portfolios lack defensive positioning. The fear and greed index reached extreme greed levels in July before recently hitting extreme fear, showing rapid sentiment shifts.
Federal Reserve Policy Path Creates Unusual Economic Conditions
The Federal Reserve is positioned to cut interest rates into an expansion with strong earnings growth and an ongoing AI capital expenditure boom. (32:11) Fed fund futures show 99% probability of cuts in October with 94% probability of additional cuts, yet long-term uncertainty remains high. This creates an unusual scenario where monetary policy is easing during economic strength rather than weakness. Combined with AI-driven capital expenditure that shows no signs of slowing, this could fuel additional risk-taking behavior and asset price inflation, particularly benefiting growth assets and highly leveraged strategies.
Statistics & Facts
- Bank of America's credit card delinquencies decreased to 2.41% from 2.54% year-over-year, while credit card purchase volumes only grew 2.7% (matching inflation exactly, indicating zero real growth). (13:06)
- Interactive Brokers reported margin loans increased 39% year-over-year and 9% quarter-over-quarter, indicating significant leverage buildup in the system. (25:09)
- Charles Schwab client cash holdings dropped to 9% of total assets, down from 13% in 2022, showing extreme risk-on positioning. (24:46)