#345
Is Winter Coming Early?

Q2 earnings kicked off in earnest this week, and big banks have provided further proof of the strategic benefits of diversification. The second quarter was expected to be the banks' biggest test in over a decade. Facing soaring unemployment, and with businesses preparing for what could possibly be a deep, sustained downturn, investors entered earnings season with caution.

However, we have seen JPMorgan shares jump on the back of stronger than expected capital markets results, with fixed-income trading revenues surging 99%, while the other Morgan saw a nearly 170% increase. At Citi, trading revenue climbed almost 60% in the quarter. Goldman Sachs fared even better; its quarterly revenue was the second-highest on record at $13.3b. Its traders and investment bankers posted near-record revenue to keep firm wide profits steady. In fact, Goldman is in a better position to weather this first leg of the crisis precisely for lacking a big mortgage or credit-card business, which reduces exposure to unemployment surges or extremely low interest rates.

Fintech has played its catalytic role, as the “tech” continues to allow for greater “fin” efficiency. With traders increasingly able to work remotely, access to information becoming more pervasive and floors going fully virtual (not to mention the start of decentralized solutions), the horizon of possibilities has widened since 2008, despite increased regulatory restrictions. Had Covid-19 hit a decade earlier, it is difficult to imagine a similarly functional (and socially distant) response.

Nevertheless, while diversification is benefiting the bulge brackets in the form of stellar trading results, we are simultaneously seeing these same players set aside record amounts for loan losses. Let’s not forget that a sustained recession would eat into capital reserves as loans go bad, and this could happen at an alarming pace. Regardless of the Fed’s best efforts, the money printer can only go brrrr for so long. And as time goes on, the same sound might introduce the start of a long winter.