Anthony Di Iorio, a co-founder of the Ethereum network, says he’s done with the cryptocurrency world, partially because of personal safety concerns.
Di Iorio, 48, has had a security team since 2017, with someone traveling with or meeting him wherever he goes. In coming weeks, he plans to sell Decentral Inc., and refocus on philanthropy and other ventures not related to crypto. The Canadian expects to sever ties in time with other startups he is involved with, and doesn’t plan on funding any more blockchain projects.
“It’s got a risk profile that I am not too enthused about,” said Di Iorio, who declined to disclose his cryptocurrency holdings or net worth. “I don’t feel necessarily safe in this space. If I was focused on larger problems, I think I’d be safer.”
Back in 2013, Di Iorio co-founded Ethereum, which has become the home of many of the hottest crypto projects, particularly in decentralized finance — which lets people borrow, lend and trade with each other without intermediaries like banks. Ether, the native token of the network, has a market value of about $225 billion.
He made a splash in 2018 when buying the largest and one of the most expensive condos in Canada, paying for it partly with digital money. Di Iorio purchased the three-story penthouse for C$28 million ($22 million) at the St. Regis Residences Toronto, the former Trump International Hotel & Tower in the downtown business district.
In recent years, Di Iorio jumped into venture-capital investing and startup advising. He was also for a time chief digital officer of the Toronto Stock Exchange. In February 2018, Forbes estimated his net worth was as high as $1 billion. Ether’s price has more than doubled since then.
Decentral is a Toronto-based innovation hub and software development company focused on decentralized technologies, and the maker of Jaxx, a digital asset wallet that garnered about 1 million customers this year.
Di Iorio said he has talked with a couple of potential investors, and believes the startup will be valued at “hundreds of millions.” He expects to sell the company for fiat, or equity in another company — not crypto.
“I want to diversify to not being a crypto guy, but being a guy tackling complex problems,” Di Iorio said. He is involved in Project Arrow, run by a high-school friend that’s building a zero-emission vehicle. He is also consulting a senator from Paraguay.
“I will incorporate crypto when needed, but a lot of times, it’s not,” he said. “It’s really a small percentage of what the world needs.”
Di Iorio grew up with two older siblings in north Toronto, Ontario. He graduated with a degree in marketing from Ryerson University. Di Iorio began developing websites during the early 1990s, and eventually entered the rental housing market as an investor and landlord in Toronto, Ontario. In 2012 he sold his rental properties in order to invest in Bitcoin, and began to organize companies in the field of cryptocurrency.
He first learned about bitcoin from a podcast called Free Talk Live in 2012. According to The Globe and Mail, he “had an anti-authoritarian streak” and questioned “the fundamentals of mainstream economics.” Di Iorio bought his first bitcoin the same day for $9.73. He created the Toronto Bitcoin Meetup Group which held its first meeting at a pub in the same year.
It was at this first meeting where he met Vitalik Buterin who went on to be the founder of Bitcoin Magazine and one of the original creators of Ethereum. As the Meetups grew from about eight attendees to hundreds, Di Iorio formed the Bitcoin Alliance of Canada.
Money is the engine of the economy. It is the facilitator of trade and specialization. However, few people ask themselves: where does our money come from? This article discusses the process of money creation at banks and central banks. The analysis is based on the respective balance sheet.
How the Federal Reserve creates money out of thin air — a balance sheet analysis
This section shows how money is created at the Federal Reserve (Fed), the central bank of the United States. The Fed acts as the bank for the government and as bank for other commercial banks. The Federal Reserve is known to be the “lender of last resort” with the ability to bail out commercial banks. The following analysis is based on the balance sheet of all Federal Reserve Banks combined as published in the annual report 2019 by the Federal Reserve.
The balance sheet of the Fed consists of assets on the one side and liabilities on the other side — just as any company’s balance sheet. The sum of all assets must always be equal to the sum of all liabilities. This is based on the concept of double entry bookkeeping which requires two entries in the balance sheet for every transaction. Assume you are keeping a balance sheet for your personal finances. When you go shopping and pay with cash for food, then there are two entries: a reduction in cash and an increase in food. This fact of every transaction requiring two entries will be important in the further analysis.
Treasury securities and the general account of the treasury
First, we discuss the entries of the Fed’s balance sheet relating to treasury. On the asset side there are „Treasury securities“. On the liability side there is the entry „Treasury, general account“. Treasury securities are bonds issued by the government with varying length and interest rate. The Federal Reserve Bank bought more and more of these government bonds over time thereby providing funding to the government. In 2019, the Fed has claims on the government of more than USD 2.4 trillion. The government is expected to pay this sum with future tax payments by the people since this is the major revenue stream of governments.
But how did the Federal Reserve fund the money for buying government bonds? By creating it out of thin air. Here comes the double entry bookkeeping into play. On the liabilities side, we find the operational account of the treasury which sums up to USD 403 billion. We see that the Fed can easily create new money by expanding the credit sheet. The book value of the government bonds is placed under „treasury securities“ as assets . This process involves an intermediary bank that buys the government bond from the government which is then sold to the Federal Reserve. Thus, the process is in fact even more complex. An illustration of the process can be found in the end of the article.
The central bank also creates money by issuing a credit to banks. The value of the loan is noted on the asset side of the central bank and the money loaned is added to the deposit account of the bank on the liabilities side.The process is explained in the figure below.
The government may issue unlimited amounts of government debt and thereby finance its activities. The Fed may infinitely buy government bonds thereby closely collaborating with the government. The annual report states that any surplus of the Fed’s income is transferred to the Treasury which clearly lines out that the Fed works for the government (see screenshot below). In contrast, any company who takes on more and more debt would face higher interest rates due to increased risk. At a certain stage, the company would not be able to take on more debt. On the other side, the government can loan money infinitely through collusion with the Fed who buys treasury securities to the lowest interest rate.
Federal Reserve Notes
Printing new money can be either exercised through book money or by literally printing new money, i.e. Federal Reserve notes. The annual report of the Fed says that “Federal Reserve notes are obligations of the United States government“ which means that by holding a Federal Reserve note one owns a claim on future tax payments — this concept lies at the heart of government backed money. Essentially, the taxpayer is the collateral for Federal Reserve notes. In 2019, the Federal Reserve notes outstanding accumulate to more than USD 1.7 trillion.
Mortgage-backed securities in the Federal Reserve balance sheet
We have discussed the most important entry on the balance sheet of the Federal Reserve which is the claim on the government bonds on the asset side and the general account of the treasury on the liability side. The Federal Reserve, however, does not only hold government bonds as collateral for the Federal Reserve notes. The second largest entry on the assets side of the Fed’s balance sheet are mortgage-backed securities. The entry „Federal Agency and Government-Sponsored Enterprise Mortgage-Backed Securities“ comprises purchases of mortgage-backed securities from “government-sponsored enterprises” such as the Federal National Mortgage Association (Fannie Mae) & Federal Home Loan Mortgage Corporation (Freddie Mac). This means that the Fed owns the claims on house owners’ debt obligations. In general, the buyer of a mortgage-backed security (MBS) has a claim on the real estate in case of credit default. So in case of defaulting MBS, the ownership of the real estate is transferred to the Federal Reserve Bank.
But where did the Federal Reserve receive the funds for buying MBS? The central bank may simply create the money to buy assets as discussed in an article from the Bank of England. The central bank does so by adding the value of the assets on the asset side of the balance sheet and by inserting the funds for the assets to the seller’s bank account. Quantitative Easing works according to the same principle: The central bank buys government bonds from other banks thereby creating the funds out of thin air. The bank accounts can be found in the row “Depository institutions“ which is further explained in the next section.
Bank accounts at the Fed and the reserve requirement
Banks are obliged to hold a certain percentage of their liabilities as reserve at the central bank called “reserve requirement”. The reserve requirement of all banks combined is noted in the row “Depository institutions” on the liability side of the central bank. The central bank primarily holds government bonds and MBS as a reserve for the banks’ deposits. This means that the people’s savings are not more secure with higher reserve requirements since these savings are backed by not necessarily “safer” investments. Essentially, savings can be only considered “safe” when assuming unlimited bank bailouts.
In 2019, the total sum of bank deposits at the Fed accounted for more than USD 1.5 trillion. The percentage of reserves banks need to hold in reserve at central banks is set by central banks. In March 26, 2020 this percentage was set to zero. This means that banks are not required to hold any money in reserves for the debt they give out. However, for being able to serve the claims of customers, they should hold a certain amount of money as reserve. The amount of money which banks hold at central banks that exceed the minimum reserve is called “excess reserve”. The Fed has not charged negative interest rate for excess reserves yet but the ECB has already started to do so. This means that banks holding money at the ECB have to pay for doing so. This puts great strain on banks so they have an incentive to give out more debt to make money from the debt related interest.
Can commercial banks create money individually out of thin air?
There is an ongoing discussion on whether commercial banks may create money individually out of thin air in the process of credit creation. This section first discusses the theoretical background followed by empirical evidence supporting the hypothesis that commercial banks create money out of thin air. It also reflects the view of central banks, which clearly shows that banks can create money from nothing.
Banks as custody providers and investment vehicles
The theoretical part refers to Rothbard’s analysis on money creation in his book „Man, Economy, and State with Power and Market“ first published in 1962, page 801 forth following. Rothbard started his argumentation with banks acting as custody providers during the gold standard which means that gold was used as a currency (in contrast to government-backed fiat money which is essentially backed by future tax payments).
Rothbard explains the concept of money creation with the hypothetical example of the „Star Bank“ offering custody services to the public. For storing 5000 ounces of gold, the bank issued warehouse receipts covering exactly 5000 ounces.
Now the bank decided to perform investments with their clients’ money to increase their revenue. The bank lends out the saver’s money to others, in turn the bank offers an interest rate to their customers. The bank now acts as an investment vehicle. Since the savers want to withdraw their money every now and then, the bank holds some gold in reserve. This gold in reserve is not used for investment purposes. So the bank acts as both: custody provider and investment vehicle.
If more people want to withdraw their money than the bank has reserves, then the bank goes bankrupt. This happened in the past in so-called „bank runs“. This problem could have been mitigated by the bank clearly separating their business as investment vehicle and as custody provider. In such a scenario, the customer can decide which portion of his money he aims to invest and get interest for and which portion of the money he aims to place in custody where he needs to pay custody fees for the service. Also, the bank should be required to be transparent about which investments the people’s money flows to, which is not the case in the current financial system.
The process of money creation through credit creation at commercial banks
In the process of credit creation, an entry on the asset side of the balance sheet is created depicting the claim of the bank on the debtor. Since the system is based upon double entry bookkeeping, a corresponding entry is required. This means that the money that is lent out has to come from somewhere.
The process of credit creation is explained with another example of the Star Bank illustrated in the screenshot below. The asset side shows that 5000 ounces are kept in custody and 1000 ounces of gold were given out to debtors (I.O.U’s from Debtors — I.O.U. refers to “I owe you”). The liability side shows that warehouse receipts worth 6000 ounces of gold were given out. We assume that exactly 1000 ounces more gold were inserted by customers which was then lent out. This means that the debt money originates from the savers depositing their money in the bank. So, the money was merely shifted from saver to debtor where the bank acts as financial intermediary.
This is no problem when the bank first asks their customers whether they agree with this particular investment because in the end, these customers bear the risk of default. The bank becomes the investment vehicle and intermediary for this particular transaction.
But what if the bank creates more warehouse receipts than the total sum of the gold the bank holds in custody and the gold lent out? This is „the creation of new money out of thin air, by issuing receipts for nonexistent gold“ which is called „monetization of debt“ (Rothbard, 1962, p. 809). We use the example above, however, now assuming that the bank created 1000 pseudo warehouse receipts that are not covered by gold. In fact there are only 5000 ounces of gold but the bank acts as if there were 6000 ounces of gold by giving out 6000 pseudo warehouse receipts. In the process of lending out money, 1000 new warehouse receipts were created which are not covered by gold. These are fake money certificates created in the process of debt issuance. So essentially, the bank has issued more money certificates than it can actually redeem. If more customers claim their gold than the bank holds in custody, then the bank goes bankrupt if it is not bailed out.
According to Rothbard „It is, in fact, difficult to see the economic or moral difference between the issuance of pseudo receipts and the appropriation of someone else’s property or outright embezzlement or, more directly, counterfeiting. Most present legal systems do not outlaw this practice; in fact, it is considered basic banking procedure.“ (Rothbard, 1962, p. 809)
When banks engage in fraudulent behavior, they would normally lose customers. Also, other banks would stop lending money to the fraudulent bank. This allows sound checks between banks on their risk and credibility. This was stopped through the nationwide check-clearing system called „Federal Reserve“ which can bail out even the most fraudulent bank. The Federal Reserve published a document explaining its purposes and functions which says the following:
„By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in 1907. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks [Note author: if the banks were solvent they would not need a bailout]. To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system.“ (Source: Federal Reserve System Publication, Purposes and Functions)
For evidence on whether commercial banks may individually create money out of thin air, we may either look into the source code of the banking system or we look at empirical data. The source code is unfortunately undisclosed. So we may only look at empirical data.
Empirical study on whether commercial banks may create money out of thin air
This section refers to the study “Can banks individually create money out of nothing? — The theories and the empirical evidence“ by Professor Richard Werner. In this study, the cooperating bank granted a loan of 200 000 EUR of maturity under 4 years to Richard Werner. A snapshot of the balance sheet was taken before the transfer and on the next day when the transaction was completed. The study showed the following balance sheet movements of the „Raiffeisenbank”:
We see an increase of around 170 000 EUR on the liability side in the entry „claims by customers“. This entry corresponds to the „pseudo warehouse receipts“ in the analysis of Rothbard. It is quite unlikely that customers inserted so much money as savings on the day regarded. But what else could have moved this entry so much? Let’s remember the mechanism of how central banks created new money — maybe a similar mechanism is applied with commercial banks. Central banks create new money by recording the issued loan as an asset on the asset side and by entering the corresponding money into the banks’ accounts. Commercial banks could make use of the same principle: They can note the loan amount on the asset side and insert this money in the bank account of the debtor. In this process, the credit sum would be added to both sides of the balance sheet: the “claims on customers” on the asset side (the debt) and the “claims by customers” on the liability side of the bank (the loaned money).
A snapshot directly before and after the transaction would have given us more clarity but this is the best to work with for now. The 170 000 EUR of increase in claims by customers is close to the credit sum but does not cover it entirely. So let’s have a look at the other major movements on the balance sheet. Apart from the increase in the claims by customers, we see an increase in cash on the asset side and a decrease in „claims on financial institutions“. This indicates that other banks paid the debt they had with the „Raiffeisenbank“. Since we do not have the balance sheet of all customers and debtors of the Raiffeisenbank, it is not possible to say with absolute clarity which transaction was a pseudo transaction and which was not. But we can have a look at what the central authorities say on Money creation.
Central banks’ view on money creation in the banking system
Both articles have found that banks and central banks create money by issuing debt. More precisely, the debt is noted on the asset side as a claim on the debtor and the related money is inserted in the deposit account of the debtor. This fits very well to what was explained above.
Both articles have found another mean for money creation namely in the process of buying assets. When a bank or central bank buys an asset, the asset is placed on the asset side of the balance sheet and the related money is placed in the account of the seller of the asset on the liability side.
Concluding, we have great evidence that both banks and central banks create money out of thin air in the process of credit creation and also in the process of asset purchases.
Next, we look at the occurrence of pseudo receipts in history.
Pseudo receipts in the history of money
The most prominent case of pseudo receipts happened during the Bretton Woods System which was in place from 1944 to 1971. In this time period, the US dollar was fixed to gold at USD 35 per ounce of gold. All other currencies were in turn fixed to the US Dollar. The Federal Reserve held the gold in reserve to which the US dollar was pegged to. This means that the Federal Reserve was the only custody provider that held the gold in reserve which is an extreme centralization of trust. Everyone trusted that the Federal Reserve does not create pseudo warehouse receipts, i.e. more US dollars than are covered by the gold reserves. In the 1960s, the first speculators did not trust the Fed anymore and assumed that more US dollars were created than there were gold reserves. This has led to a revaluation of currencies and eventually to the collapse of the Bretton Wood System. Now, the US dollar is pegged to nothing and the Fed may print infinitely.
Note: Here you find one source on Bretton Woods (notice the framing „speculative attacks“ and „confidence problem“ by the public instead of „deception“ and „fraud“ committed by the Fed).
Money alternatives that cannot be created out of thin air
We learned that depositing one’s money in service custody allows the custody provider to easily instigate fraudulent behavior by issuing fake warehouse receipts. We can prevent this by holding our assets in self-custody. But which alternative money is most suitable for self-custody? In the following, Bitcoin and gold are compared as money alternatives.
Bitcoin can be sent over distance almost immediately without a third party. Gold either requires physical shipping which is very slow and comes with a great risk of losing the funds or the gold is held in service custody and merely the ownership is shifted. Storing one’s money in custody requires trust in the custody provider to not issue pseudo receipts. Bitcoin in turn can be held by the individual and can be sent over distance directly to the recipient. Bitcoin does not depend on a trusted centralized authority — Bitcoin is trustless. Moreover, if bitcoin are stored at a custody provider who gives every customer a separate Bitcoin address, then the customer may verify whether the bitcoins are still there 24/7 over the network. This is why Bitcoin is superior over gold even in the situation of custody.
According to Bloomberg, central banks have bought more and more gold just recently. Some people are arguing that the government may introduce a new coin that is backed by gold when the fiat system crashes. But wait! Didn’t the central banks create more US dollars than there was gold in reserve during the Bretton Woods System? Yes. If your government says that a new fiat is issued which is backed by gold where gold is stored in a centralized custody, why should you trust them not to create pseudo receipts if they did so in the past?
Bitcoin is the way out.
I would like to thank Murray Rothbard for his extraordinary logic in laying out the concept of money and its creation. I also thank Professor Richard Werner for conducting the empirical study on money creation at commercial banks. Great thanks to my proofreaders Ben Kaufman, Keyvan Davani and Márton Csernai. I highly appreciate your support in improving this article. Any feedback from subsequent readers is highly welcome!
Note on fractional reserve banking
It is important to differentiate between two different definitions of fractional reserve banking:
Reserve refers to the percentage of money held in custody which is not lent out. So, a portion of the savers money is held in custody (reserve) and the rest is invested.
Reserve refers to the percentage of money actually covered by the underlying asset. Gold standard: Only a portion of the money certificates is backed with the underlying asset, the rest are pseudo warehouse receipts. Fiat system: The bank may create money in the process of debt issuance.
Note that with fiat money, it is difficult to differentiate money and money substitutes because both are based on nothing and essentially fake. This is why the definition “money may be created in the debt issuance process” is used.
In a monetary system where money cannot be created through accounting fraud in the process of debt issuance, debt and credit simply show the obligations between people. In such a system, money would be distributed from e.g. the savers account to the debtors account where the bank acts as financial intermediary (see first example by Rothbard in this article). So, fractional reserve banking as per the first definition does not lead to more money created. However, money in custody and money invested should be clearly separated thereby laying on a sound monetary system that is scarce. Bitcoin enables this.
The implications of the second system where money may be created out of thin air by banks and central banks have found deep consideration in the article. We have strong evidence that banks and in particular central banks create new money in the process of debt issuance through accounting fraud. Even the reserves behind the central bank money, which among other things consists of the banks’ minimum reserves, can be used by the central banks for risky investments, which makes the whole concept of minimum reserves ad absurdum. We may conclude that both definitions of Fractional Reserve Banking hold in the current system. The first concept of Fractional Reserve Banking is organic to a sound monetary system. The latter is inorganic and can be only facilitated with fraud or unsound money coming with great distortions to the economy.
Note on whether fiat money is debt or money
Emil Sandstedt brought up the very interesting question on whether fiat money is money or debt during our Podcast with Keyvan Davani. I would consider fiat money as both: debt and money and I lay out why in the following.
Federal Reserve notes are per definition part of the “monetary base” which is the most superior money. Money is in fact differentiated into certain categories (monetary base, M1, M2, M3). So, Federal Reserve notes are money in the narrow sense. In general, the longer the deposit maturity of a savings deposit, the lower its rank in the monetary hierarchy per definition. However, Federal Reserve notes are a claim on future tax payments (see chapter Federal Reserve Notes). Since future tax payments are a form of debt, Federal Reserve Notes can be considered both: money and debt.
Per definition, the other forms of debt generated through credit creation are not considered money in the fiat system but rather as a “counterpart of M3”. On the other side, one can buy things with the money that one received through the credit. So this money can be used as a medium of exchange. This is a reason why this debt can be considered “money”.
This article has not focused on this differentiation for reasons of simplicity. In the end, what one calls calls “money” is based on definitions. Since money created through debt issuance can be used for payments, it is valid to consider it as money as it was done in this article. But also, it is justified to call central bank money as debt since these are a claims on future tax payments — claims on debt. Therefore, I like the term “debt money” implicating that the fiat system is based on debt and that this money is used as a medium of exchange.
Interesting side note: Only central bank money is considered money by government decree.
Illustration of quantitative easing
Quantitative easing involves the purchase of government bonds by the central bank. But the treasuries are first sold to the secondary market. In the process below the treasury is first bought by a pension fund, then by a bank called “Citibank” and then by the Federal Reserve. Alexander Bechtel explains this process very well in this video.
By Stefanie von Jan / Freedom and truth seeker, economist for a free market for money, deep into Austrian Economics and Bitcoin, advocate for safe and beneficial technologies
A brief look at how money has evolved over time from being printed on valuable substances (commodity money), to merely representing those valuable substances (commodity-backed money), to not representing anything at all (fiat money). Created by Grant Sanderson. View more lessons or practice this subject at http://www.khanacademy.org/economics-… AP Macroeconomics on Khan Academy: Welcome to Economics! In this lesson we’ll define Economic and introduce some of the fundamental tools and perspectives economists use to understand the world around us!
Khan Academy is a nonprofit organization with the mission of providing a free, world-class education for anyone, anywhere. We offer quizzes, questions, instructional videos, and articles on a range of academic subjects, including math, biology, chemistry, physics, history, economics, finance, grammar, preschool learning, and more. We provide teachers with tools and data so they can help their students develop the skills, habits, and mindsets for success in school and beyond. Khan Academy has been translated into dozens of languages, and 15 million people around the globe learn on Khan Academy every month. As a 501(c)(3) nonprofit organization, we would love your help! Donate or volunteer today! Donate here: https://www.khanacademy.org/donate?ut… Volunteer here: https://www.khanacademy.org/contribut
Third-quarter earnings season officially kicks off this week with big banks, airlines and consumer-staple firms set to report on Tuesday, and though Wall Street’s eyeing improvements over the previous quarter, a sustained economic recovery is still ultimately contingent on widespread vaccination.
Big banks and airlines–two of the coronavirus pandemic’s worst-hit industries–kick off earnings season on Tuesday, with JPMorgan Chase, Citigroup and Delta Air Lines all set to report before the opening bell.
Expect weak and uneven sales growth, and a collapse in profit margins, to characterize third-quarter results, Goldman Sachs said in a weekend note to clients, adding that it still expects election results will have more of an impact on stocks than earnings, and that ultimately, vaccination is “essential for the normalization of the economy.”
Goldman believes there’s a 48% chance that there will be enough doses of an FDA-approved coronavirus vaccine to treat 25 million Americans by the second or third quarters, the most likely time lines, followed closely by 42% odds that this will happen by the first quarter.
Meanwhile, wealth management firm Glenmede said Monday that although it estimates 77% of economic activity lost due to social-distancing mandates has been regained, it only expects earnings will see a small rebound from an “abysmal” second quarter.
Glenmede doesn’t expect earnings will reach new highs until the second half of 2021, which the firm adds is “not so coincidentally aligned with estimates for vaccine delivery.”
In a Monday note to clients, LPL Financial had similar hopes, saying, “The combination of efficiencies gained during the recession, the strong performance of the winners and the tremendous progress in Covid-19 treatment and vaccine development, all suggest we may be only a year away from reaching normalized earnings, though we fully recognize the risk that time line may end up being too aggressive.”
The coronavirus pandemic has been a boon for stocks in software, biotech and consumer staples (think: Procter & Gamble, whose shares are at an all-time high and up 17% just this year), but it’s been terrible to a bevy of firms reporting this week, particularly in the banking and airline spaces. The best-performing sectors this year, as tracked by S&P 500 ETFs through Friday’s close, include technology (up 32%), consumer discretionary (up 23%) and communications (up 13%). The worst-performing sectors are energy (down 36%) and financials (down 16%). JPMorgan, the nation’s biggest bank, led by Jamie Dimon, reports tomorrow and has seen shares plummet nearly 28% this year.
21%. That’s how much Goldman said it expects third-quarter earnings per share will fall among S&P 500 firms, compared to a 32% drop in the second quarter and a 15% fall in the first.
“In many respects, the economy’s recovery since this spring has been pretty remarkable. . . . Consensus estimates show an expectation that earnings reach new highs in the second half of 2021, perhaps not so coincidentally aligned with estimates for vaccine delivery,” Glenmede’s Jason Pride and Michael Reynolds said on Monday. “Consumers are driving the pandemic recovery, but the U.S. economy is not completely out of the woods yet.
There are pockets of the economy that continue to struggle, and an additional round of fiscal stimulus could put the U.S. economy on a gentler and less painful path toward full recovery once a vaccine becomes widely available.”
What To Watch For
Banks dominate the 12% of S&P 500 earnings due to be reported this week, Bank of America noted in a Monday research note. Among firms reporting Tuesday are Delta Air Lines, JPMorgan Chase, Citigroup, BlackRock and Johnson & Johnson–all before the opening bell. Bank of America, Wells Fargo, Progressive and United Airlines are slated to release earnings on Wednesday, while Morgan Stanley, Charles Schwab and Walgreens are scheduled for Thursday. Any signs on Tuesday from JPMorgan and Citi that the economy is on the mend will help bank stocks and the overall market, says Marc Chaikin, founder of Philadelphia-based quant investment research firm Chaikin Analytics.
I’m a reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business journalism and economics while working for UNC’s Kenan-Flagler Business School as a marketing and communications assistant. Before Forbes, I spent a summer reporting on the L.A. private sector for Los Angeles Business Journal and wrote about publicly traded North Carolina companies for NC Business News Wire. Reach out at firstname.lastname@example.org.
First the good news: The biggest US banks have had time to brace themselves for a wave of losses.
The bad news: They are still bracing themselves to withstand a wave of losses. Their earnings this week suggest the worst is yet to come for the American economy, and that Washington may need to provide even more support for workers and businesses.
Six of the biggest lenders all expect heavy credit defaults and soured loans, as shown by their loan loss provisions, which jumped 43% from the already hair-raising totals in the first quarter to a combined $36 billion in the second quarter.
Loan loss provisions aren’t, as they sound like, a special pot of money set aside for when loans go bad. It’s more like the amount of money banks expect to lose on their loans; it demonstrates the losses their capital may have to absorb in the months ahead and is subtracted from their earnings.
Approaching the moment of truth
For now the dire picture is merely a forecast.
Four months after lockdowns started smothering the world’s largest economy, bank losses have barely ticked up. JPMorgan Chase, for example, reports that charge-offs in its consumer business are little changed from a year ago.
Meanwhile, banks with powerful trading desks profited as stock prices gyrated and companies flooded the bond market with borrowing. JPMorgan said its markets unit had a record $9.7 billion of revenue, a 79% increase from 2019. Morgan Stanley had record profit, while Goldman Sachs said its fixed-income, currency, and commodities division had more than $4 billion of sales, its best quarter in nine years.
The big consumer lenders have yet to be battered by defaults and missed payments because of a ferocious wave of government support—including more than $2 trillion of aid to businesses and the unemployed—and because the banks themselves have offered forbearance and paused loan repayments for some of their customers. Bank of America said it has handled around $30 billion of requests for loan payment deferrals since the crisis set in, and that those requests have fallen by 98% since they peaked in April.
“You look at the banks and they are preparing of Armageddon and nothing is going wrong yet,” says David Ellison, a portfolio manager at Hennessy Funds. He’s optimistic the lenders can work through heavy credit losses—they got a lot of practice in 2009—but they will still have to contend with low interest rates, which makes their bread-and-butter lending businesses less profitable. They also increasingly have to compete with private equity firms that often target the same commercial clients.
If the government doesn’t agree on ways to continue supporting the economy as the initial relief programs expire, “things could start to fall off” for the banks, Ellison says. “And that’s where the banks are saying, ‘If that happens I have to be prepared for it.’”
JPMorgan Chase added $6.8 billion to its credit reserves and is more pessimistic about the economic downturn than it was three months ago. It expects heavy losses in the coming months that extend into 2021. “May and June will prove to be the easy bumps in terms of this recovery,” CFO Jennifer Piepszak said in an earnings call this week. ”And now we’re really hitting the moment of truth, I think, in the months ahead.”
Bank of America’s top executive expects the recession to extend “deep into 2022.” On an earnings call today (July 16), CEO Brian Moynihan said the lender expects US unemployment to end the year at 10% before gradually declining to 7.5% in 2021.
Wells Fargo, Citi
Not quite everything is gloomy. Wells Fargo CEO Charles Scharf said debit card spending made it back to pre-Covid levels in May; in the last week of June, debit card spending was up 10% from a year ago. But credit card spending remained subdued, some 10% lower in June from a year ago. Transactions using commercial cards were even weaker, down 30% during the last week of June, he said.
Citigroup’s CEO thinks the economy will only limp forward until a vaccine is available. “Normalization to me is, am I willing to get on the airliner, am I willing to get in a subway, am I willing to go into a crowded venue to watch a sporting event or a concert or what it may be,” Citigroup chief Michael Corbat said this week in an earnings call. “And I think realistically, when we get to that third bucket, I just don’t see that coming. And I would say many don’t see that coming until we feel like there’s an antivirus vaccine that’s available for the mass population around that.”
In the meantime, the carnage is expected to be widespread. Banks around the world are forecast to have more than $2 trillion in credit losses through 2021, according to analysts at Standard & Poor’s. Some $1.3 trillion of those losses are anticipated to come this year, more than double that of 2019.
“The unprecedented level of fiscal support that many governments across the world have deployed in response to the pandemic-related slowdown has been a key factor in supporting their citizens and economies during lockdown periods,” the S&P analysts wrote. “Perhaps the greater danger at this time is the reduction of such support too early, resulting in a longer and deeper economic contraction.”
It’s not clear that officials in Washington, having already committed trillions of dollars, are ready to spend even more. Beefed-up unemployment benefits have been a key plank of America’s response to the crisis, providing an extra $600 a week to workers who qualify. That program will fade away at the end of July unless politicians agree on a way to extend the aid. The government also dished out half a trillion dollars of loans through the Small Business Administration (SBA) to keep businesses afloat—a program that was built on the fly and riddled with inefficiencies but is widely credited with helping to keep the economy afloat.
Karen Mills, who ran the SBA during the Obama presidency, says more money is urgently needed for small enterprises. She forecasts that as many as 30% of these little operators are at risk of closing their doors for good. “We know already there are a number of businesses on the edge,” she said. “The next tranche of funding from the government is critical.” Critical to small businesses, certainly. And also important for their banks.
U.S. equity futures edged higher, potentially lifting Wall Street to fresh record peaks again this week, as investors await the first of six major tech sector earnings reports later today that could make-or-break the recent stock market rally. Here are five things you need to know before the start of trading on Wednesday July 17.
1. Netlfix and FAANG
Netflix (NFLX – Get Report) , the first of the six major tech companies — along with Microsoft (MSFT – Get Report) — in the so-called FAANG complex of stocks will report second quarter earnings after the close trading today, with analysts likely keying on it outlook for online streaming subscriber additions in a suddenly competitive market.
Netflix itself is forecasting online subscriber growth of 5 million for the three months ending in June, a figure that would boost its worldwide total to just under 155 million, but the near-term loss of hits such as ‘Friends’ and ‘The Office’ could take its toll on growth rates in the coming months, as will the addition of rival streaming services from Disney DIS, Apple AAPL, and Comcast (CMCSA – Get Report) .
Microsoft will follow with its earnings report Thursday, while Facebook (FB – Get Report) , Amazon (AMZN – Get Report) , Google parent Alphabet (GOOGL – Get Report) and Apple will all update investors will quarter reports over the next two weeks.
The FAANG stock earnings — which comprise nearly a fifth of the S&P 500’s $26 trillion market cap –are expected to be a crucial test for Wall Street as benchmark test fresh record highs, thanks in part to hopes of deeper monetary support from the Federal Reserve, even as broader corporate profits suggest slowing growth in the months ahead as the U.S.-China trade war takes its toll on American businesses.
Bank of America (BAC – Get Report) will publish second quarter earnings Wednesday, with Morgan Stanley (MS – Get Report) rounding out the sector’s biggest players with three months results on Thursday, as investors digest a mixed bag of readings of the health of the country’s lenders amid a slowing — but solid — domestic economy and the likelihood of even lower interest rates.
Tuesday’s trio of big bank earnings — JPMorgan (JPM – Get Report) , Goldman Sachs (GS – Get Report) and Wells Fargo (WFC – Get Report) — all managed to top Wall Street forecasts for top and bottom line growth, but each signaled concern that Fed rate cuts would likely make near-term profits even more difficult to achieve.
Investors today will be looking at one of the sector’s key measurements — net interest margin — for signs of weakness in not only Bank of America, but also smaller rivals such as U.S. Bancorp (USB – Get Report) , PNC Financial (PNC – Get Report) and BNY Mellon (BK – Get Report) .
3. Bitcoin Bashed
Bitcoin prices tumbled well below $10,000 in overnight trading Wednesday as lawmakers on Capitol Hill grilled big tech executives and hounded social media giant Facebook FB over its plans to launch a its new ‘Libra’ digital currency next year.
Facebook’s unveiling of Libra earlier this month helped bitcoin rise past $14,000 amid a renewed rally in cryptocurrency markets linked to the hope that wider use of various digital coins would allow for faster adoption of bitcoins in everyday transactions.
However, with regulators and central bankers around the world expressing doubts — or outright hostility — to Facebook’s Libra ambitions, and President Donald Trump suggesting cryptocurrencies are “based on thin air”, bitcoin prices have fallen more than $5,000 from their early July peak.
“I know we have to earn people’s trust for a very long period of time,” Facebook’s David Marcus told lawmakers Tuesday. “We know we need to take the time to get this right.”
Marcus will appear before the Senate Banking Committee later today.
4. Oil’s Well?
U.S. oil prices bounced higher in early trading following data late Tuesday from the American Petroleum Institute which showed domestic crude inventories fell by 1.4 million barrels in the week ending July 12. If confirmed later today by the Energy Information Administration, the declines will stretch to a fifth consecutive week, the longest in at least 18 months.
Prices were further pressured by the slow return of production capacity in the Gulf of Mexico, where more than half of the area’s output, or around 1.1 million barrels per day, remains offline in the wake of storm Barry, which hammered the Louisiana coast this past weekend.
WTI futures contracts for August delivery, which typically dictate the direction of U.S. gas prices, were marked 29 cents higher in early New York trading at $57.91 per barrel.
5. Apollo Holo
The Smithsonian National Air and Space Museum will celebrate the 50th anniversary of the Apollo 11 moon landing mission with a with a life-size projection of the Saturn V rocket on the Washington Monument in a three-day tribute to astronauts Neil Armstrong, Buzz Aldrin and Michael Collins.
“The Washington Monument is a symbol of our collective national achievements and what we can and will achieve in the future. It took 400,000 people from across the 50 states to make Apollo a reality,” said Ellen Stofan, the Air and Space Museum director. “This program celebrates them, and we hope it inspires generations too young to have experienced Apollo firsthand to define their own moonshot.”
A 17-minute program outside the Smithsonian Castle, slated for July 19 and 20 will also recreate the Apollo 11 mission’s launch following Congressional approval for the displays earlier this year.
“I don’t feel this time is different. If we have another financial crisis, there isn’t even a plan A. We’re still coming out of the last financial crisis,” Kenneth Rogoff. Are the overheated markets headed towards another financial crisis? Dimensions to be addressed: – Concerns over leverage and liquidity – Implications of passive investing – Transforming financial services business models · Michael Corbat, Chief Executive Officer, Citigroup, Citi, USA · Fang Xinghai, Vice-Chairman, China Securities Regulatory Commission, People’s Republic of China · Anne Richards, Chief Executive, M&G Investments, United Kingdom; Young Global Leader · Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy and Professor of Economics, Harvard University, USA · David M. Rubenstein, Co-Founder and Co-Executive Chairman, Carlyle Group, USA · Jes Staley, Group Chief Executive Officer, Barclays, United Kingdom Moderated by · Tom Keene, Editor-at-Large, Bloomberg Television & Radio, USA http://www.weforum.org/