Variant Perceptions

Category: Macroeconomics

Dimon on housing

I could not have said it better, with such a command of the facts, while impromptu in a conference call Q&A. Demographics help the United States, it is not turning Japanese.

And he does not fall in the temptation of making a prediction. Impressive.

Yes, so let me answer the first in part. I think what you need to see is employment. That’s what you need to see because employment, in our opinion, will drive household formation.

But if you look at the other factors, okay, we’ve been destroying more homes than we build in the last several years. We’ve added 10 million Americans. We’re going to add 3 million Americans every year for the next 10 years, that’s 30 million Americans who need 13 million in drawings or something like that.

Household formation has been half what it normally is, and most economists tell you that’s going to come back with job creation. And the so-called shadow inventory is coming down, not going up.

So for all the chatter about it, it is very high. Rental in half the markets in America is not cheaper to rent than to buy — it’s cheaper to buy than to rent. Housing is an all-time affordability and my guess is, is that mortgage underwriting will loosen, not tighten.

So if we put all of those things together, you’re going to have a turn at one point. Look, I don’t know if it’s 3 months, 6 months, 9 months. But it’s getting closer.

PS: Having read it twice, this was a feisty conference call. You just have to feel sorry for the analysts. Let me add a couple of extras, here is a good one after a nonsense question,

As I said, we’re not macroeconomists, okay? If you want to know about that you should seek that out yourself.

On media looking for an angle,

By the way, I just got a note that one of the newspapers out there thinks that we haven’t done a full disclosure on Europe. The reason we didn’t add our European business, it’s pretty much like it was last quarter, not much has changed, so if anyone’s interested.

On Basel confusion,

Let me answer your confusion here a second, okay? We’re running Basel I, Basel II, Basel 2.5 and Basel III. Remember, the European banks early on in effect of Basel 2.5. So they just have to go from 2.5 to 3, where the American banks had to go from 1 to 3.

And so when they say it has to get to 9%, it’s not Tier 1 Common, it’s Tier 1 Core, which is slightly different, by June of 2012, that’s an accelerated, getting there already. And they’ve already got, I’d say most of Basel III in there, maybe a little longer than that. But I think most of Basel III is already incorporated in Basel 2.5.

On headcount growth,

No, we’re not pulling back.

In the overhead number, I think we already mentioned the $50 billion is, I believe, going to be pretty consistent so far for next year. And the headcount, let me split it 3 things.

We are always gaining efficiencies which you don’t see. In tech, ops, overhead, a whole bunch of stuff.

And we’ve added and we break it out, and you’ve got to do it by business, with branches. So we’ve added 3,000 salespeople in branches in Consumer, some of that is in the new branches, some of that is in existing branches. We’re adding private bankers, we’re adding branches overseas. We opened 20 branches overseas, mostly for TS&S. So all those things add people.

And for the biggest add, which we’ll not be adding any more, was to handle default. So there’s — I’ve got the total number, we’ve added 15,000 people the last 2 years, maybe more, just to handle default mortgage, in mortgage. That number has probably peaked and I think you’ll see it coming down in the next couple of years.

And add this recent “issue” of releasing reserves,

we have a $9 billion reserves we don’t need, okay? So until we get through all of this, I’m sure we’ll just add them up. But basically, the numbers have gone too good over time to leave up that amount of reserves under current accounting. There’s going to be a change in accounting. But that’s not — we’ll worry about that when we get there.

Analysts must like to be handed their heads off. They were jumping over themselves to get into that queue. But that was not all, there is some clear thinking in this conference call of a man that wants to do the best for shareholders.

Dividends is a small decision from capital standpoint, so that raise a little bit here, that’s not going to be material. We still — we started the dividend again, we’d like to increase a little bit every year. It’s a board decision.

And the stock is very cheap and particularly below tangible book value, I’d like to buy a lot back which, of course, we can’t do. By the time we’re allowed to buy a lot of stock back, I’m sure it’s going to be much higher priced and then we may change our decision about that.

So you can get a little frustration in my — in about how we’ve had to do our capital buyback. But we are getting more clarity from the Fed. The Fed has asked for these stress tests. The stress test, all the banks have put in their CCAR and we are going to tell you what that is when we get it back. 

So, but I’m not going to change the statement I made at the Goldman conference, which was, we hoped to be able to do a little more than we did in 2011.

Jamie Dimon’s conference calls and letters shoot from the hip and are always fun. I wish he had not also taken the role of spokesman for the industry so I have to be skeptical of his views regarding regulation. What can I say, he let it go and that is what is probably going to appear on the headlines.


Charting Banking XXII: three years after Lehman

Three years after Lehman concerns about the banks’ state of affairs have resurfaced once again. The strange thing is that the performance has been very predictable: a steady improvement in all fronts. Once again we are going to take advantage of the pret-a-porter graphs from (I am very lazy). But this time it includes a couple of new charts to address the capital ratios improvement.

Let’s start with our usual guests the Texas ratio and 30-89 days delinquencies.



It does not look like the crisis is deepening, doesn’t it? 30-89 delinquencies in particular are at levels not seen since Lehman collapsed. When people talk about the credit issues of the banking system it really surprises me. The fundamentals are definitely improving.

One of the most common accusations is that banks are “extending and pretending”. Well, loan  extensions are a normal part of a bank operation. Good clients with good credit normally get extensions. Despite all the talk of recent years, there is a good difference between liquidity issues and solvency issues.

But I understand people’s concern with restructured loans, if credit standards and interests payments are reduced for lenders  it might indicate credit deterioration. It is still part of good banking, especially when rates are zero so there is room for helping lenders while maintaining spreads, but it is an issue that should be addressed.

The problem is that the bankregdata ratio that I have been publishing includes restructured loans. It was the conservative way. Though, considering the improved conditions I think it is time to show the progress without restructured loans. And it has been dramatic.



I do not even know where the “extend and pretend” argument comes from. I understand that Japanese banks were very slow in recognizing their commercial lending problems in the 90s, because of cozy keiretzu connections, and all the resulting problems.

However, Japanese banks had non-performing assets reaching 8%. US banks are nowhere near those levels and most have been building reserves, modifying and extending good loans, charging-off the bad ones, foreclosing the zombie ones and disposing REO.


And not including reestructured loans:



It has not been a pretty process but all the headlines about robo-signing and wrong foreclosures are not the result of banks being slow. Even more, for most of them there is not even the incentive to delay when their capital ratios give them space for maneuver to accelerate issues and leave the crisis behind.



And I have not yet counted the very large reserves built over the last 3 years, maybe I should.



Most banks are most probably over-reserved.  It also hints that most current provisions, that are depressing banks’ earnings, are fake expenses.

Not that there is anything wrong with that, better be safe than sorry. An overcapitalized and over-reserved banking system is better for all of us. It reduces systemic risk and provides a buffer in case of external shocks … like Europe.

And from an investor point of view, these reserves can provide a nice margin of safety. Most of the credit problems have been recognized and more than 50% of them are already in the past. So if an investor underestimated some hidden issues … there are lots of reserves – and cash from operations – to take care of them.

We have to be careful though, each bank is its own animal. Maybe on the aggregate the system is being managed conservatively; but each bank as an investment has to be addressed individually.

Munger on ideology

Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind. You see it a lot with T.V. preachers (many have minds made of cabbage) but it can also happen with political ideology.

When you’re young it’s easy to drift into loyalties and when you announce that you’re a loyal member and you start shouting the orthodox ideology out, what you’re doing is pounding it in, pounding it in, and you’re gradually ruining your mind. So you want to be very, very careful of this ideology. It’s a big danger.

I have what I call an iron prescription that helps me keep sane when I naturally drift toward preferring one ideology over another and that is: I say that I’m not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people who support it. I think only when I’ve reached that state am I qualified to speak. This business of not drifting into extreme ideology is a very, very important thing in life

Of course the self-serving bias is something you want to get out of yourself. Thinking that what’s good for you is good for the wider civilization and rationalizing all these ridiculous conclusions based on this subconscious tendency to serve one’s self is a terribly inaccurate way to think.

Of course you want to drive that out of yourself because you want to be wise, not foolish. You also have to allow for the self-serving bias of everybody else because most people are not going to remove it all that successfully, the human condition being what it is. If you don’t allow for self-serving bias in your conduct, again you’re a fool.

Darwin paid particular attention to disconfirming evidence. Objectivity maintenance routines are totally required in life if you’re going to be a great thinker.

USC Law Commencement 2007 

I do not like  to discuss political and macroeconomic issues in this blog, much less religious ones, considering the highly ideological component. You convince no one, learn little, and in return do not make many new friends … though some might say that is the whole point of blogging.

But considering the seriousness of the situation, and its implications for investors, let me post the question. Should not we at least be thinking about the disconfirming evidence of the last few months and see if they fit our mental models?

  • Treasuries rally after an S&P downgrade
  • TIPS 10y at 0% despite the spending and monetary stimulus
  • Business investment and consumer spending anemic despite the free money

Was not CRE the next shoe to drop?

And having taken a look to the banks, I cannot avoid drumming another one of our recent themes.

Last year I ranted and complained about the air time given to this nonsense that CRE was the next shoe to drop. Check out the cap rates by sector (lower is better). CRE is doing badly indeed.   Hat tip  CRE Console

And the CRE news from the banking front are also very good. These are some indicators from bankregdata. Let’s start with the percentage of CRE loans non-performing. It peaked two quarters ago and has started to decrease.

And the percentage of 30 to 90 days delinquencies to total loans, an early indicator of potential problems, has been stable and stability is all the banks need to  improve. Remember that pre-tax pre-provision earnings are in the background increasing reserves and capital.

Also the banks, despite continuing a slow decrease of total loans, have stabilized the proportion and absolute amount of  CRE loans.

So much for impending doom. I think the ball is on the pessimist court and their only shot left is a contagion of sovereign defaults. Though, I have not seen any compelling case of a mechanism that would  infect American commercial banks.

Latin American, Canadian and Asian commercial banks were not affected by the 2008 crisis. Why American commercial banks would be affected by a European crisis with so much time to prepare? With several American banks priced for doom, I really would love to know.

Once again, the banking sector is improving

We left our discussion on banking several months ago with everything indicating that banks were improving each quarter. However, just one widely expected bad Case Shiller number (mortgage markets continue to be under pressure) and the market reaction once again  is to think that the banking sector is in its last days. Bank of America is at new 52w lows and Citigroup is at prices not seen since mid last year.

Well, it seems that I will have to repeat the message once again: the mortgage market is only one piece of the puzzle. Banks continue to improve their balance sheets while their bad loan inflows are decreasing.

And I actually thought that it was time to interrupt the Charting Banking series. How wrong I was.

Two more Japan charts

For those that like to talk about Japan lost decades, you may consider it only one lost decade. After solving the banks nonperforming loans problem, the Japanese sustained a very strong recovery on a per worker basis – that accounts for Japan’s demographic handicap -.

And Japan achieved this despite mild deflationary headwinds. If people wants to compare the current US economic situation to Japan, it seems like 2002-2008 might be a better fit than the 90s lost decade, quantitative easing included.

All of these graphs are from the excellent Adam Posen presentation at the London School of Economics from May this year.

Charting Banking XIX: history of financial crisis

Via Barry Ritholtz we get precisely the information we were looking for: how recurrent are financial crisis. I only have one question: where is the Latin American debt crisis in this chart? OK, American banks  suffered and their stress appears just there at the beginning of the 80s, but where are Mexico, Argentina, Brazil, Chile, Bolivia, etc. At least it does not change the point that these crisis are very frequent.

FSI: Financial Stress Index; Source: IMF Direct

This point is very much related to Martin Wolf’s question: must large capital inflows always end in crisis?

Capital inflows can distort loans to deposits ratios and end in underwriting terrible loans. And every time the banking system is compromised there are consequences. The excellent book by Kenneth Rogoff and Carmen Reinhart shows how pervasive are these occurrences.

I am not an economist and will not dare to attempt to answer Martin Wolf’s question. However, as an investor I wonder:

  • Given that not even a sophisticated American financial system managed to isolate the banks from these inflows, what chances other countries have of avoiding a financial crisis?
  • Given how recurrent are these episodes, is not there a possibility of waiting for the next episode, profit from it, move then to safe investments, and wait for the next crisis?

Charting Banking XV: Fed survey on lending practices

The Federal Reserve just published a week ago the quarterly survey on bank lending practices. Well, what is this survey?

Survey of approximately sixty large domestic banks and twenty-four U.S. branches and agencies of foreign banks. The Federal Reserve generally conducts the survey quarterly, timing it so that results are available for the January/February, April/May, August, and October/November meetings of the Federal Open Market Committee. The Federal Reserve occasionally conducts one or two additional surveys during the year. Questions cover changes in the standards and terms of the banks’ lending and the state of business and household demand for loans. The survey often includes questions on one or two other topics of current interest.

In an historic perspective, the results were encouraging compared with other periods of tightening standards like the early 1990s and 2000s. They were also slightly positive for all type of loans: an improving trend with Commercial and Industrial loans ahead of the pack. Competitive pressures are being felt and this is the best incentive for banks to come back to the market:

The July survey indicated that, on net, banks had eased standards and terms over the previous three months on loans in some categories, particularly those categories affected by competitive pressures from other banks or from nonbank lenders. While the survey results suggest that lending conditions are beginning to ease, the improvement to date has been concentrated at large domestic banks. Most banks reported that demand for business and consumer loans was about unchanged.

In the next installment we will review total loans and the loans/deposits ratio to check if this willingness to lend is being reflected in the actual data.

The Great Gift of Uncertainty

Continuing with the short posts until I finally manage to transition to the new laptop. Peter Bernstein’s “The Great Gift of Uncertainty” describes the views on risk and uncertainty of two stubborn economists with strong ideas about almost everything, usually on opposite sides of the argument, that had to live in very uncertain times. And I think it is a good reminder that traditional value guidelines like cheapness, quality or downside protection are probably better compasses that inflationary and deflationary macro views that change with each new piece of information.

Dean Foods: this is not good

Strange things happening in the milk category,

Yes, I’ll give you what is an anecdote. But it is one of the things frankly, that I am somewhat worried about. And that is if you go back and you look at our fluid milk volumes several quarters ago, and you track them on a weekly basis, we used to see, as you would expect, was a truly stable category with complete household penetration. You used to see very flat volumes week to week, right? So very little change in average daily sales.

We’re now seeing a different pattern. And that pattern is at the beginning of the month, we’re seeing sales rise above the trend line. And by the time that you get to the end of the month, sales are down in what are meaningful percentages for a category like this, that’s flat, it has been for 30 years. So you’re seeing inter-month volume volatility, or a volume pattern emerging. And the only conclusion, I think, you can draw from that is there are people who are big consumers in this category, they’re just running out of money, starting at the end of the month.

And you’ll recall, during the month of June and in part of July, the Congress stalemated over extending unemployment benefits for a large number of people. We saw that in our business in soft volumes. So that’s really my concern about the category is that there are still a very large number of households in the U.S. who are very constrained in terms of disposable income, and they’re cutting back wherever they can. And they’re not cutting back just one category, they’re trimming around the edges everywhere. And we see soft category volumes. – CEO Gregg Engles

Conference Call 2nd Quarter 2010

This strange pattern in a basic good that only just recently started being deeply discounted by retailers to drive traffic does not speak very well of the  consumer’s economic prospects. Consumers constrained, businesses hoarding cash, banks not lending yet, government tied up … The only glimmer of hope from this conference call:

And I think as Gregg mentioned in his prepared comments, we do see, to some degree, bifurcation of our categories. Our more premium categories are growing. Our more value-oriented categories seem to be flat. And so I think, we’re going to continue to see that as we move forward. I think the recession has affected different classes of folks in different waysCOO Joseph Scalzo

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