Monday, October 17, 2016

JP Morgan best 3rd quarter performance ever -- DB and Commerzbank cut 20% of staff

Banks are often the bellwether of an economy.  When the economy hums along the performance is great and when the economy is in trouble...well IB and DCM revenues are down and loan loss provisions are up.

The divergence between North American banks and European banks could not be starker.  I mentioned some weeks ago that Commerzbank (COBA) was cutting 20% of its labor force, turns out DB is doing the same.  I am relatively certain that the French banks will do the same, because they all work in the same pond.

First off, the North American economy, while not on fire, is humming along.  The big change in North America (read US here) is the shrinkage of the government portion of the pie.  The US government (Federal and state) have been slashing expenses right and left for the entire term of Obama's presidency.  Lets be clear the intent by the state legislators was to harm the Obama presidency, but also to cut cut and cut income tax for the the better off.  Some states have racked up huge deficits in the process and are cutting expenses to the bone (read schools and social programs).  There is no need to point out that America's conservatives are generally mean and as such cutting the "fat" is a good thing, it remains that the overall impact is that government portion as a percentage of GDP has been shrinking.

Yet unemployment in the US is very low, inflation is inexistent, and the labor force is growing again, a sign that things are not as dire as some would suggest (e.g ME).  There is no doubt that quantitative easing has been a strange pill, there is a mass of problems going forward, ZIRP is not a long term solution, but then again, with inflation in the sub 1% range interest rates would not be that much higher -- instead of 1.5% you may be at 3% -- not earth shattering levels.

No we are seeing a divergence between the North American model (yes it has its problems) and the European model.  Right now, aside from Germany, Europe is in trouble; from France to Italy with our friends in Greece and Portugal, things are difficult.  The upcoming departure of Britain from the EU may be significant, dependent on how painful Europe wants the experience to be!  This uncertainty will cause additional medium term problems to Europe's economy.

Note:  No position in any banks...


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