I spent a year of high school as an exchange student in Costa Rica. I lived with a truly wonderful family that provided just about everything I needed for a great experience— a father who was well known and respected in the community, a trailblazing mother in a traditional Latin culture, and an army of siblings willing to share their lifetimes of experience with me in only the way an older brother or sister can.
My Costa Rican family had a couple of farms, a beach house and house in the city of San Jose, and I attended public school, uniform and all, in Liberia. There were no grades in school; all the classes were pass/fail. This was the key to my whole year because it essentially meant that I never had to go to class.
You see, all of the mid-terms and finals were the same week for all of the subjects, so I would show up for school those weeks just to knock out the exams. During a normal week of school, I would go to classes in the morning and then go home for lunch, which is what most kids did. But instead of returning to school for afternoon classes, I would go to the bar with the local jeweler, a local “cattle rancher” who was actually growing massive amounts of weed on his property, and some guy who was selling arms to the Contras in Nicaragua.
It was a terrific learning experience in its own right, to be sure, but suffice it to say that I didn’t get around to calculus until I got home.
And those were the days when I actually went to school. Most days, I was off at one of the farms riding horses and making natilla or in San Jose going to the school dances at St. Claire and Calasanz or surfing and fishing at the beach. To be perfectly honest, I was partying like crazy, but I think my experience was valuable in its own way and was definitely part of why I learned so much more Spanish than my fellow exchange students-- I wasn’t just sitting in class listening to lectures, I was out actually talking to people-- lots of people.
One of the reasons I was selected to go to Costa Rica in the first place was because I was a good student, and I was a reasonably good kid. But let’s face it, I was seventeen in a country without my parents. There were some regulators in place such as my Costa Rican family, my school and the exchange program itself, but I still had plenty of room to find trouble. ...Just like a banker, I guess.
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Last week, Jamie Dimon released his annual letter to shareholders of JP Morgan Chase (JPM), and he definitely took a few shots at the regulators. And his competition. And pretty much everybody.
As a longtime shareholder of JP Morgan stock, I have always found his letters to be insightful, but the impact of his comments this year packed an even bigger wallop than usual. This year, Dimon sucker-punched his company’s competition by warning that the regional banks crisis-- which, of course, only affected non-JPM banks-- will linger for years. His comments sent JP Morgan’s competition, reflected in the banking index KRE, tumbling lower with the index falling 5% the day his letter was released.
Well played, Jamie, well played.
Jamie Dimon, The Most Interesting Man in the World
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Dimon correctly characterized the risks of the combination of inflation, war, and COVID in last year's letter, and this year he warned of trouble brewing due to unprecedented fiscal spending, quantitative tightening, and geopolitical tensions.
· “The current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come… Essentially, we may be moving, as I read somewhere, from a virtuous cycle to a vicious cycle.”
· “Ironically, banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements.”
· “Regarding the current disruption in the U.S. banking system, most of the risks were hiding in plain sight. Interest rate exposure, the fair value of held-to-maturity (HTM) portfolios and the amount of SVB’s (Silicon Valley Bank) uninsured deposits were always known – both to regulators and the marketplace.”
· “The stress testing based on the scenario devised by the Federal Reserve Board (the Fed) never incorporated interest rates at higher levels.”
Of course not, Jamie. …Financial stresses come and go, but the Fed is forever.
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JPMorgan, Citi and Wells Fargo report earnings this Friday, followed by Bank of America on April 18th. They’ll probably see net interest margin drop due to higher deposit rates and lower loan revenue, but they’ll also probably report aggregate deposit inflows due to their lower risk of failure compared to regionals.
Goldman Sachs and Morgan Stanley, which have businesses that skew more towards investment banking, trading and asset management, report earnings on April 18th and 19th, respectively.
According to Bloomberg estimates, first-quarter revenues at the six big US banks are expected to rise on average just over six per cent year over year while earnings per share are expected to increase by just over one per cent. I personally expect guidance for the coming quarter to be horrible, but the stocks will probably move based on where deposits have flowed.
In the current environment, we recommend:
· Maintaining broad diversification among financial industry holdings
· Portfolio weightings that favor large money center financial institutions over regional banks
· Underweighting consumer credit
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