Hello my friends. Today is October 18th and this is Markets Weekly. So this past week was a pretty volatile week in markets, but if you zoom out a bit and see that, you know, over the past few months, the equity market could only go up, but now it looks like there's some two-sided risk. Sometimes it goes down. So maybe a little bit of a change in the mood of the market.

Now this week, we're still in a government shutdown, so we don't have any official data. The betting markets are suggesting that the shutdown could go deep into November. So maybe we won't have data for some time and concerningly if no one's working, no one's collecting the data. So even when the government opens, we might not really get any official data. So we're going to be flying blind for some time today.

Let's talk about three things. First off, we have to talk about the regional bank scare that we had the past week where credit concerns were prompting a pretty big sale of a couple regional banks. Secondly, let's look at some private data to see where the economy might be heading. And lastly, we have to talk about the parabolic ascent of gold and silver.

All right, starting with the regional banks. So, if you look at this price index of regional bank stocks, you can see that there was kind of a tumble. So what happened was that a couple regional banks got sold significantly because there were reports that they had to write down some of their loans made to an investment fund that lost money.

Now this is occurring uh during a broader context where there seems to be a little bit more concern in the credit markets about uh you know maybe credit is not as good quality as as the pricing suggests. So credit spreads are still pretty tight.

Now, in the past few months, we've had the bankruptcies of two pretty large companies. We had, which was a company that basically specialized in lending uh to illegal immigrants, and also First Brands, which was a company that uh had a lot of business in auto parts. Now, those two companies are both privately held, so there they don't have the same public disclosures, but it's easy to see them as idiosyncratic.

So when it comes toricolor of course the president has a uh different immigration policy he's enforcing immigration law now and so you know when your clients are getting deported obviously that's not going to be good for business when it comes to first brands there's some allegations of potential fraud and there's always fraud in the corporate space right so you know maybe these two failures could just be idiosyncratic or you know maybe they're systemic of something that's a lot deeper and so with that cloud in mind the market was very jumpy when it came to reports that uh these regional banks had lost some money.

But over this past week was also a very big week for bank earnings. So we can take a step back and we can kind of look broadly to see whether or not there's a systemic risk. Maybe there's a whole bunch of bad loans or maybe these are just really idiosyncratic events and the market is getting a bit too jumpy.

Now first let's start with the mega banks. Obviously if you are a bank you have tremendous amounts of data. A lot of people have deposing accounts with you. You make loans. So, you have your finger on the pulse. Now, looking at Bank of America, you can see that, you know, they're saying credit quality is is really good. It's actually improving, right? So, they're a huge ginormous bank and but again, there's just one bank. What if it's just something in the regional banks?

So, if we look at the large regional banks, let's say Truest, what are they saying in their earnings presentation? You can see they're saying the same thing. credit quality is not just fine but it's getting better. Loan loss reserves coming down, charge offs also declining. Uh what about uh US Bank also a large regional bank saying the same thing and actually uh basically all the regional banks are saying the same thing as are the big banks. Credit quality so far in the banking system appears to be uh improving.

Now one thing to keep in note keep in mind is that after the great financial crisis the structure of the banking system has changed significantly such that when we do have credit issues they're really unlikely to come from the banking sector.

So in the great financial crisis the banks made a whole bunch of bad loans and those bad loans caused them to lose a lot of money which in turn caused a banking crisis that basically morphed into a great financial crisis. The regulators don't want that to happen because consumers, households view bank deposits as safe assets, even though technically they're not safe. You're lending unsecured to a bank. But when people put money in a bank, they think of it as safe. And so when you have issues in the banking sector, that causes panics. So they put on all these regulations to make sure that banks became much more conservative.

So today a lot of lending actually happens um through the what they call shadow banks. So for example before the great financial crisis the commercial banks made a whole bunch of mortgages. Today most mortgages are actually originated from mortgage lending companies that are not banks that are just basically private financial companies.

And you can say similarly with many other things right. So uh let's say that you are a middle market company. If you want to get a loan, you could go to a bank, but increasingly you or you could go to a private investor like a private uh credit fund and get a loan there.

Um if you look at this chart of bank loan growth over the past year, you can see that a tremendous amount of loan growth from the commercial banks is not to say uh corporations, but it's to what's called uh non non uh non-bank financial institutions. Well, non-depository financial institutions, basically financial companies that are not banks. And if you look at that chart, you can see there's a big jump. Part of it was because of a reclassification.

So in any case, banks like to lend to these private financial companies and then these private financial companies then lend to the real economy. So a lot of bank lending today is done indirectly.

And so when there are credit problems, let's say a company can't pay, it's a problem for the shadow bank for the private non-bank lender and then the private mom lender will have to deal with it. Now before it goes up to the bank level, the private lender is going to have to exhaust their resources. And so it's an extra layer of safety for the commercial banks.

So the commercial banks, they're lending to, let's say, a Blackstone or a Polo, basically these, you know, fancy sophisticated uh financial sponsors and then the credit funds managed by these guys then go and do the lending. So it's in my personal view very unlikely for there to be any credit problems in the regulated banking sector uh simply because so much of the risk has basically been moved to the private space and there you could have some issues but so far at least uh you see a little bit of that with the with the public traded business developed corporations the BDC's not having a good uh quarter but so far it seems Okay. So, we'll guess we'll watch that going forward.

Okay. The next thing we want to talk about is the state of the economy. So, we don't have any publicly collected data and probably won't have it until deep into November. And who knows, maybe the government prefers it this way. Um, but we do have some clues from some private data sources as to how the economy is doing.

Of course, we want to go first to the mega banks. The mega banks, like I mentioned earlier, have their finger on the pulse of the economy. But let's hear it from JP Morgan, the biggest bank of the them all, the one with the most uh I guess most data on the real economy. When asked about the state of the consumer on their earnings call, JP Morgan basically said the consumer is fine. Everything is okay. They don't really see any stresses.

And you know if you look at say card spending data from American Express you'll also get the same picture as well. Card spending is up. Now to be clear American Express and maybe JP Morgan probably has a more affluent slice of the consumer market.

But we also got the Fed's beige book last week. So even as the government shut down the Fed continues to work. And one of the things they do is they go and they talk to all their contacts in industry and try to get a qualitative sense as to how the businesses are performing.

Now according to the beige book the economy is you know it's not great but it's not bad. It's basically uh just kind of um install speed right now. So the beige book suggests that you know hiring is is is low but you know there's not like a huge amount of firing. Consumer spending among the affluent, good among the less affluent, not as great, but you know, it's it's still basically at stall speed. So that's kind of consistent with what's been happening over the past few months. So looks like it hasn't deteriorated so far.

But I think the biggest puzzle when it comes to the economy right now is the divergence between the labor data and GDP growth. Now when you look at the Atlanta Fed, uh again Atlanta Field still works. Their GDP now estimates are really high according to their GDP estimates everything is booming.

Now you can look at the stock market and maybe draw some conclusions there. But as we all know, the stock market is not the economy. It's honestly less and less related as time goes on. But at the same time, we also know that hiring is slow. So how can you have strong GDP growth when you're not having more workers, right? In order to produce more goods and services, you have to have more people working. So this is kind of a conundrum that I think is is the topic duour when it comes to the economy and also what the Fed is struggling as well.

If you're an optimist, you could say that maybe there's this huge productivity boost maybe due to AI that's causing companies to be much more productive without growing their labor force. Although I would point out that there are a lot of anecdotes that suggest that AI actually isn't really super productivity enhancing for most companies probably helps a bit in coding but then uh they also say that uh the engineers have to spend a lot of time to fix the bugs in the AI.

So uh one of these data measurements is wrong. Either GDP is too high or labor market is not as bad as people think. So this is something we'll find out probably not for some time since there's no official data and again maybe maybe the authorities like it that way.

Okay, the last thing we want to talk about is the parabolic ascent of gold and silver. Now if you are a subscriber to to my work, you know that I have a market view portfolio. The whole year basically we had no equities exposure but we did have about 50% weight in gold.

Now that sounded very strange earlier in the year, but hopefully a little bit less strange today. Gold has basically gone parabolic, far outperforming the equity market. And of course, it's little brother silver has as well.

Now, I think this is actually really good because I'm happy that gold is going up, but I think it's also really worrying. Uh when things go up slowly, that's great. you know, slow and steady wins the race. But once you reach this kind of parabolic ascent, you know, it doesn't really correct sideways. The parabolic asense usually correct violently downwards. And also, you don't really know uh when these when the correction ends or when the parabolic ascent stops.

Now, if you zoom out and look at silver, for example, you can see throughout the decades, it's just gone straight up, but every time it's gone straight up, it's also gone straight down. And to some extent gold does this as well. So what are the drivers for this huge rally in gold.

You know honestly in a bull market everyone is a genius. So everyone has their theories as to why the price goes up and then when they see the price goes up they think their theory is correct and then they say and then they feel like a genius and they buy more. But at the end of the day you know is that really why gold is going up? So again we talked about last time the debasement trade very popular gold is going up because the dollar is uh you know depreciating debasing going to zero but then again inflation is at 3% or more a better market signal would be uh the 10-year Treasury yield right around 4%.

If you were having a massive dollar view basement, if you were having a tremendous amount of inflation, you would not expect a 10-year yield to be at 4%, right? So, this this basement stuff is obvious nonsense. But people who believe that, you know, they're buying gold, gold prices go up, they feel smart, maybe they buy more.

Uh, another popular narrative is that, you know, maybe there's tremendous amounts of geopolitical risk in the world, but so far it looks like Middle East war risk is going lower. And in addition to that, it looks like the president wants to speak with President Putin again. So maybe there's a potential future deescalation in geopolitical risk as well. So that doesn't seem likely as well.

So at the end of the day, this is just momentum basically what drives a lot of assets today. Price goes up, so you buy more, you lever up, you buy more again. And that's probably why you can have these violent reactions like we saw on Friday where you had kind of a sudden tumble, especially in silver. Whereas people become levered um they feel greedy, lever up more and that makes it more volatile and more fragile.

Now one other thing that I'll note is that uh over the past few years uh a lot of people have commented that you know maybe that gold is not doing not performing as well because a lot of people who would buy gold people who are afraid of let's say the fiscal unsustainability who want to have quote unquote hard assets are instead buying crypto. Now, if you look at the price of Bitcoin now, it did well uh for most of this year, but over the past few months, it just really hasn't gone anywhere.

And and honestly, it looks like it's trending lower. And reports suggest that a lot of people were really levered last week. A lot of lost a lot of money. And so, if Bitcoin, if they're souring on Bitcoin, maybe some of those guys will go back to gold, which actually has performed very well uh so far.

Uh but in any case, you know, when you're going parabolic, you don't know how high you can go, but ultimately uh I think there's there's significant risk of a sharp pullback. And I'm not saying that Friday was the case. That actually seemed kind of mild. Um but that is probably coming going forward. So it's reason to be cautious. But again, not telling you it's bearish because you don't really know how high the parabola can go. All right. So that's all I prepared for today. Thanks so much for tuning in and I'll talk to you guys next week.