The New York Stock Exchange Trading Floor
Investors'
concern is palpable. This week, stocks declined sharply, especially
after the rollout of President Trump's Tariff Program on Wednesday.
Especially pronounced has been the decline in the NASDAQ Index,
which, up to now, has been leading the markets to higher prices.
But
a careful review of this Index shows that this week was merely the
exclamation point of what has been an ongoing decline.The
NASDAQ topped out for the third time on February 19, having
surmounted the 20k level. It had previously closed higher than 20k in
December and January.
While the current decline is concerning, it
represents only a 7% decline, one that Wall Street has not yet
considered the signature of a Bear Market. That may come later, but
we're not there yet.
The question that we need to ask,
however, is whether this stock market decline is forecasting a much
more serious systemic Financial Crisis, like the one we saw in the
period of 2007-09.
During that time, a market crash foretold general
troubles throughout our economy, most vividly demonstrated by the
failure of Lehman Brothers, one of the country's most well-regarded
and long-established investment banks. Most concerning, the contagion
spread to even the "Big 4" largest banks in the nation.
Citigroup was technically insolvent mainly due to the declining value
of collateral from many of its loans.
Today, concerned
investors look to the tremendous quantity of loans and leases that
Commercial Banks now hold on their books. Fourteen years ago, during
the Great Financial Crisis (GFC), Commercial Banks held $6.9 trillion
in loans and leases. A tremendous amount of leverage was put in
jeopardy when a substantial number of home mortgages were foreclosed.
The GFC showed us all that defaults, even in one sector of a bank's
loan portfolio, can impact the entire system.
Today,
Commercial banks' loans and leases have nearly doubled since the GFC
and stand at $12.7 trillion. Once again, real estate shows signs of
risk. But not home loans; today, it is Commercial Real Estate (CRE),
those large office buildings, shopping malls, and industrial plants,
that are teetering on the brink of default.
The internet is
full of videos of empty Malls and Office Buildings that make up the
bulk of CRE properties, most of which carry their own mortgages. Many
developers and property managers must now reach deep into their own
pockets to make those monthly mortgage payments. The question is, how
long can they continue before they run out of cash?
Of course,
should the CRE Market implode, it will substantially affect the
front-line lenders. That's how the dominoes began in the GFC. But
those mortgage lenders are just the first domino in our interlocking
banking system. A broad-based series of CRE defaults eventually work
up to the very top of the pyramid, the Big Four US Banks: JP Morgan
Chase, Bank of America, Wells Fargo, and Citibank.
When the
Big Four run into trouble, we'll know we're in a full-blown financial
crisis, just like in 2008. When Citibank became insolvent, the
Federal Reserve immediately stepped in to pump liquidity into the
system, a process they called Quantitative Easing.
On Friday,
March 4, the nation's chief banker, Chairman of the Federal Reserve
Jerome Powell, addressed a group of financial reporters in a speech
that had been on the calendar for months. In other words, this speech
was part of the Chairman's regular speaking agenda and not in
response to any specific concern over the new Trump Tariffs or stock
market reaction.
As reported on CNBC, Powell indicated his
lack of concern by saying:
"We do not
need to be in a hurry, and are well positioned to wait for greater
clarity.
"https://www.cnbc.com/2025/03/07/powell-says-fed-is-awaiting-greater-clarity-on-trump-policies-before-making-next-move-on-rates.html
He
said unemployment remains at the low end of the target, at 4.2%,
while inflation is slightly elevated at 2.5% (PCE inflation above the
2% target). As for the impact of Trump's Tariffs, the Fed is adopting
a "wait and see" attitude.
In other words, Powell is
not concerned with the mayhem on Broad and Wall Street at the New
York Stock Exchange. Recent comments from both Chairman Powell and
President Trump indicate that neither the Fed nor the Administration
is focused on stocks. Instead, they remain focused on the greater
risk of a financial crisis. And here, Wall Street may be flashing an
early warning that they haven't yet seen.
Using our Big Four
Bank Stocks as a proxy for the financial system, we see that the Big
Banks did not initially participate in the Market Decline. In
mid-February, investors were still relatively buoyant concerning the
financial system. However, that upbeat assessment may have begun to
change. In the past two weeks, the Big Four Bank Stocks have taken a
hit, down on average 15%, with nearly half of that loss coming in the
past week.
It is too early to suggest we're headed for a
financial crisis. Still, now is when any good analyst puts down
their markers, measuring the relatively healthy state of the nation's
finances and its proxy, the big banks. Over the next few weeks, watch
closely how the banks behave: Are there any special announcements of
rising loan defaults? Do the Banks expand their loan loss reserves?
Watch the stories of significant bankruptcies and layoffs. See if CRE
continues to decline: mall closings and office buildings are
foreclosed.
To refer to Chairman Powell again, we're in a
period of high uncertainty, with the odds of an economic and
financial decline increasing. Using stocks as a predictive tool is
fraught with distortion.
Markets often overreact, and such may be the
case with the latest reaction to Trump's Tariffs. However, by
watching both Stocks and the major Banks, we can get a pretty good
sense of whether this stock market decline portends a financial
crisis. **
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