Moody Sheep Says, “Baa!”

Moody’s says to Fitch, “I got your downgrade right here!” [The Rude Awakening] August 09, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Moody Sheep Says, “Baa!” - Moody’s, the credit rating agency, downgraded ten regional banks… - … and put 11 others on “negative watch.” - Just when you thought the banking mess was behind us, Moody’s wanted some publicity. [Urgent Note From Jim Rickards: “You’re Running Out Of Time!”]( [Your exclusive “Pro level” upgrade to Strategic Intelligence is ready to be claimed.]( This is your chance to claim 3 exciting new benefits along with a whole new level of service. Hurry… you only have until the timer hits 0 to act. [Click here to learn more]( After the timer runs out, you’ll forfeit your chance to upgrade… and you may miss out. Please don’t waste any time. Just click below to see how to confirm your upgrade: [>> YES, I’d like to claim my upgrade.]( [Click Here To Learn More]( [Sean Ring] SEAN RING Good morning from bright, sunny Asti! We begin the family’s Grand Tour tomorrow, so I’ll be in Milan. From there, we will fly to Barcelona on Friday, staying for five days. Then we start train-hopping through Northern Europe. I will write on the road for the next two weeks, interspersed with contributions from my friends and colleagues at Paradigm. They’ve kindly agreed to ride shotgun and help out while I’m away. Byron King kicks it off on Friday with a follow-up to the gallium/germanium piece I wrote a few weeks ago. Byron, a Harvard-educated geologist, goes into much greater detail. I’m sure you’ll enjoy it. Today, we’ll look at Moody’s downgrade of ten regional banks, about six months too late. But since the publicity worked so well for Fitch, why not? Let’s dropkick the markets when everyone’s on vacation! What Did Moody’s Do? Moody’s, one of America’s credit rating agencies, downgraded the credit ratings of ten regional banks. Here’s the summary from their website: [SJN] Credit: [Moody’s]( The first column shows the new rating. The second shows the post-new rating outlook. The third column shows the previous rating. The fourth offers the prior outlook. STA = stable, and NEG = negative. RUR DOWN = “ratings under review: for downgrade.” It’s essential to see that none of the banks on this table are in danger of becoming “fallen angels.” That’s when an investment grade bond descends below baa3 into “junk status.” However, the market ignored that tidbit. We’ll see that a bit later. But first, why did Moody’s pick yesterday to do this? [URGENT: Exclusive $10 Offer From Jim Rickards]( [Click here to learn more]( Hi, Jim here. And for the first time ever, I want to give you [all of my best secrets… for under $10!]( This is your chance to get all of my moneymaking insights at one affordable price. [Click here for all of the details on my special $10 offer.]( [Click Here To Learn More]( Why Did Moody’s Do It? [Moody’s named three big reasons]( why they downgraded the banks: - Rising funding costs and declining income metrics will erode profitability, the first buffer against losses. - Most regional banks have comparatively low regulatory capital versus the largest US banks and global peers. - Asset risk is rising, in particular for small and mid-size banks with large commercial real estate (CRE) exposures. Let’s take each of these in turn. As Moody’s analysts write in financial jargon and gobbledegook, I’ll try to write in as plain an English as possible. Rising Funding Costs We know Chairman Pow has hiked the Fed Funds rate. Deposit rates followed that Fed Funds rate up. That means it’s more expensive for banks to acquire the funds to loan out. If it’s more expensive to get those funds, then their profit margins (for banks, it’s known as the net interest margin) are getting smaller. Analysts know net income or net profit as “internally generated funds.” That profit is the cheapest to generate. So net income is the first buffer against losses. If the banks lose much more, they’ll have to “tap the capital markets” by raising either debt or equity. With debt, banks pay coupons and repay the principal. With equity, banks pay dividends, and the equity holder gets the capital gains. That’s a much more expensive proposition. Low Regulatory Capital If you’re a bank, you must hold reserve funds against losses. The bigger the bank, the bigger the reserves. So I’d file this one under “No shit, Sherlock.” But in this high-rate environment, some regionals have significant unrealized losses not reflected in their regulatory capital ratios. Moody’s also expects a US recession in early 2024 that will worsen banks' asset quality and increase the potential for capital erosion. Asset Risk With CRE Exposure This is the big one. High CRE exposures are a crucial risk given sustained high interest rates, declines in office demand due to remote work, and reduced availability of CRE credit. If you’re wondering why newspapers suddenly print articles questioning the efficiency of “work from home,” wonder no more. Their betters have instructed them to write that crap to get people back into the cities and prevent the commercial real estate market implosion. If you can’t see the below chart clearly, it reads that a median of 46% of banks’ tangible common equity is exposed to CRE loans in the next eighteen months. Scary. [SJN] Credit: [Moody’s]( We’ve long said Powell’s hikes require time to filter through the system. Eighteen months from now seems like as good a time as any for the chickens to come home to roost. Market Reaction In last night’s [Five Bullets, friend and colleague Dave Gonigam wrote]( With that, the KBW Regional Banking Index is down nearly 4% on the day — dragging down the rest of the market with it. At last check, the S&P 500 is down 1% to 4,474 — all of yesterday’s gains wiped out, and then some. The losses in the Nasdaq and the Dow are even steeper, the Dow down 400 points and in danger of surrendering the 35,000 level. ➢ Not helping matters is news that China’s mighty export engine is sputtering: July exports are down 14.5% from a year earlier, to the lowest level since the Middle Kingdom’s early lockdowns of February 2020. Well, Jim Rickards kept telling us the China comeback story was overblown. The market chill is reaching into the commodity space, too — gold down a few bucks to $1,930, silver cracking below $23, and crude down about 1% to $81.15. [SJN] The KBW indeed fell off a cliff on the downgrade news. But it recovered half its losses by the end of the session. (In the above chart, one bar represents an hour’s move, not a daily move.) The rest of the indexes finished with small losses on the day. [SJN] Wrap Up I’m reluctant to call this a “nothing burger,” but it isn’t the bombshell everyone thinks it is. It looks like Moody’s took a play out of Fitch’s book to get some attention. I wonder if Standard & Poor’s will be next. To be sure, the banks are in trouble, but not immediate danger. Until those CRE loans come home to roost, we’ve got time—about eighteen months. Have a great day! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( In Case You Missed It… Biden Bucks Rejected! [Sean Ring] SEAN RING Happy Tuesday from lovely Northern Italy! As I was drinking my espresso at Fabrizio’s this morning, I fumbled onto Zero Hedge, as usual. And what I found… was good news! Yes, I found good news on the reliably downbeat and permabearish Zero Hedge! I’m going to talk about how the world is rejecting CBDCs. But first, I thought I’d share [a blog post I wrote over ten years ago]( about the time I trained a class in Lagos, Nigeria. In Nigeria, the Master Becomes the Pupil Oh, I don’t really consider myself a master at all. But when I go to a country to train delegates, I take full responsibility for my offering. Financial training can get quite complicated in that one must learn the rules of the country in which one is training – legally, ethically, and culturally. I’d been to Nigeria before, but this is the first time I really got a glimpse of the country from the locals. Before I left Singapore, my wife made me promise I wouldn’t leave the compound where I was staying. Alas, I broke my promise. It was totally worth it. I believe in taking calculated risks, and I’ve become pretty good at it over the years. (Finally understanding rudimentary statistics and behavioral finance goes a long way in the real world.) Most of my friends were incredulous when I told them I was returning to Nigeria, despite the fuel strikes and Boko Haram’s attacks in Kano. I figured it this way: though not impossible, it’s quite difficult to die on a plane. And Kano is nearly 750 kilometers from Lagos, my destination. For me, returning was an easy decision to make. Of course, I checked with my Nigerian friends on Facebook just to make sure it was ok. They said the MSM overdramatizes everything. I think they’re correct, especially since the BBC, ABC, and the rest are little more than government propaganda machines – boy, do those Keynesians need a war… And fast! I arrived in Lagos just under two weeks ago, and I wasn’t disappointed. My delegates are among the sweetest people I’ve ever met, and welcomed me back with open arms. For those two weeks, we discussed derivatives, commodities, compliance, corporate finance, and risk. But the real treats came when I wandered off the reservation. First, I stupidly forgot to get my yellow fever vaccination shot while I was in Singapore. I’m so used to traveling without worrying about stuff like that. But the last time I left Nigeria, I traveled almost directly to Australia and was quarantined. No, they didn’t put me in a cell, but I was given a big yellow piece of paper in case something went wrong during my stay. As I’m due to travel to Taipei almost immediately after I leave Lagos, I needed to get my shot quickly. My friends Robert and Tunji arranged for me to get vaccinated in Festac Town, which is where the Second World African Festival of Arts and Culture was held in 1977. It was a treat to drive, but to be honest, I thought the roads needed paving. And for a mere 1,000 Naira (pronounced NY-ra – about $8.00), my vaccination went quickly and painlessly. I also got to enjoy a night out on the town in Lagos, which my wife will definitely not be happy about. But I was accompanied by 5 strapping young lads, who not only paid the bill, but acted as bodyguards (though there was no need at all). The watering hole we went to was rather empty. But the company and conversation were good and flowing. While we were heading back I noticed the roads had no streetlights. That, along with the road conditions, made me think of infrastructure. Nigeria’s infrastructure needs an upgrade, to say the least. Not only were the roads and streetlights not in tip-top shape, there were frequent blackouts and no permanently running water where we were staying. (It had to be pumped manually.) This is a country with 160 million souls [in 2023: 224 million], the largest population in Africa. With all the wealth flowing from its high-grade Bonny Light crude, I wondered why this place didn’t look more like Dubai. According to Fiona Rintoul of [FT.com]( At the moment, …the average person spends 35 percent of their income on generating power, and companies spend 30 percent. But attempts to privatise the oil refineries and get them working at capacity in order to provide reliable electricity – or to tackle other infrastructure issues such as roads, education, and health – are hampered by corruption, and not just internally. Some Western interests do not want the black market trade in oil to cease. There is money to be made from importing generators. So the answer is rather simple: currently, Nigeria is at position 143 on Transparency International’s Corruption Perceptions Index. It’s hardly a flattering spot, and it explains many of the things I saw and heard there. My delegates, who are the newest members of a government agency, are hell-bent on creating an environment in Nigeria conducive to foreign direct investment. They passionately discuss cleaning up their capital markets in order to woo foreign investors. They devoured as much information as I could give them. They worked tirelessly on their projects and presented their findings with passion and intelligence. Most countries nowadays are trying to keep out the foreigners, it seems. But, folks, Nigeria is open for business. We took a day trip to the Nigerian Stock Exchange as well. We were given the opportunity to watch, from the gallery, the brokers entering orders on the floor. It’s a lot tamer than the London Metal Exchange, I thought, which only added to my delegates’ resolve to create a great investment climate in Nigeria. After our tour, we were treated to a talk given by the managers of the exchange. They seem optimistic about the future, as well. And with good reason: [foreign investors made 70 percent of trades on the Nigerian Stock Exchange in 2011](. Now they just need to get the locals back, who were badly burned during the 2008 selloff. (That’s when Africa realized, rather rudely and suddenly, its markets were correlated with the developed world’s markets.) One last thing really surprised me: I had no idea how deeply religious Nigeria’s people are. Whether Christian or Muslim, these devout people say Grace before eating, go to Friday or Sunday prayers regularly, and truly believe God will see them through. I was even admonished for not going to church! Perhaps their faith is the one ingredient that will ensure they build a great nation. To them I give this quote from St Augustine: “Pray as though everything depended on God. Work as though everything depended on you.” Ah, the old days when I used to run around the cool parts of the world. I reprinted this to show you that Nigeria is an economy that still needs to stand up. It’s far from being a developed country and light years from the cartoonish “Wakanda” aspiration. [New “WiFi Crypto” Token is Going NUTS!]( Only a handful of crypto investors know about this… But there’s a tiny, affordable device… That’s paid investors real crypto – every day, with zero work… Just for having a working WiFi connection! It sounds crazy, but it’s true… And [this 3:28 video]( explains everything. [Click here to view it NOW](. [Click Here To Learn More]( Running Before Walking One of the things that may surprise you about Africa is how developed it is when it comes to mobile payments. But it makes enormous sense to avoid carrying any cash around. Crime is real and omnipresent. But trying to force your country to adopt a central bank digital currency has proven to be a step too far. Ari Patinkin & John Berlau of [RealClearMarkets]( wrote the following: Nigeria rolled out its own CBDC, eNaira and, in the fall of 2021 and invalidated all paper banknotes, making the economy one of the first entirely cashless systems in the world. Nigerians were less than thrilled, as mass protests, boycotts, and utter rejection of the CBDC have ensued. Even though the Nigerian Central Bank released huge incentives for citizens to adopt eNaira, according to Kunwar Khuldune Shahid of the Daily Dot, only 1.5 percent of the downloaded wallets were used once a week in 2022. According to Nicholas Anthony from the CATO Institute, the Nigerian government “removed access restrictions so that bank accounts were no longer required to use the CBDC. Then… offered discounts if people used the CBDC to pay for [taxi]cabs.” No offer has swayed the population to this day. Nigeria’s political climate may be somewhat different from that of the U.S. and Europe, but the reasons for rejection of a CBDC carry some important similarities. A CBDC in which the government holds the ledger of the purchases and sales made with the electronic currency – whether issued by the Nigerian Central Bank or the U.S. Federal Reserve -- would grant the government total surveillance power over individual transactions. If Nigerians buy and sell anything using eNaira, the digital ledger will show the government their purchases. A CBDC in the U.S. would likely work the same way Given its poverty in comparison to the U.S. and Europe, the rejection of Nigeria’s citizens of a CBDC is a further blow to the dubious argument that issuance of CBDCs would somehow benefit the poor. Whatever benefits could be derived from the technology of the CBDC, Nigerians are concerned about their financial privacy and skeptical of government overseeing their purchases and sales. People worldwide agree that CBDCs greatly breach privacy regarding transactions between individuals. If the good but relatively poor people of Nigeria can reject their version of “Biden Bucks,” why couldn’t the United States? There’s no reason whatsoever. Even the ordinarily compliant Europeans are against the digital euro. Markus Ferber of the European People’s Party asked, “There’s one central question which hasn’t yet been credibly answered, which is what is the added value … what can I do with a digital euro that I can’t do with current payment options?” And if there’s no “benefit” besides the government being able to catalog your transactions, then there’s no benefit at all. Wrap Up Perhaps we’re not destined for a techno-dystopian future. Maybe there’s enough fight in us to save ourselves from the “elites” who think command and control is the way to go. And maybe, Africa will lead us out of the hole. Wouldn’t that be something? Have a great day! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@rudeawakening.info. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. 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