Alli financials sent Bank shares sharply lower yesterday when it said that unemployment has shown up in its loan book the bank CFO told an industry conference that quote our challenges have intensified during this latest quarter leading its shares to plunged by about 20% at one point that's because everyone knows the evidence has turned decisively against the economic situation this is very likely why in my view Warren Buffett has been continuously selling down his gar gantan Holdings of Bank of America stock that continued again today and while Buffett has remained silent on the matter you don't need to be a stock market Legend to see where this is going recession can be and often is a game Cher delinquencies have already been on the rise along with the unemployment rate over the past year now both are threatening to jump together and investors can feel that tension for many their last hope and hold out is oh boy the fed's r Cuts this is one key reason why Market rates have dropped as much as they have J Powell is nobody's last line of defense except maybe Congress and the government the economy the banking system the financial system that's all up in the air which is why there are new bank rules being written and argued over and I'll give you a brief synopsis and update about what that's all about nothing positive and reassuring I assure you recession and unemployment are also bad news for commercial real estate remember that one I've got an update there too Bank stocks as a group had been soaring in July especially after the June CPI report came out which sent Market interest rates sharply lower lower rates are thought to be good for stocks and Bank shares most of all but then in Late July just before the chaos of early August suddenly Bank shareholders seem to have had a second thought about why rates were going lower and what that might mean for their Bank holdings Bank stocks aren't exactly crashing here but sharply lower even plunging interest rates is failing to catalyze any buying and what Ali Financial CFO said is just scratching the surface about why that is in fact it's not just Ally there are concerns growing all over the industry that with the economic cycle turning so too will the credit cycle here's what Bloomberg reported just yesterday US Banks scored a big break from Regulators on New Capital rules only to ruin their own celebration with downbeat outlooks on Lending fears that a Goldilocks era of healthy borrowers and fat and Loan margins is ending swept onto the market stage Tuesday is financial stocks tumbled it made for a jarring split screen with the Federal Reserve dialing down proposals for how much Capital banks will have to hold against certain assets just as Banks signal that the performance of some assets is set to worsen their statements will likely Stoke debates about whether the industry will experience a soft Landing as interest rates tick down and whether proposed rules are tough enough for worst case scenarios over the longer term and this is something they've been calling basil endgame and just to give you a brief synopsis of what this is about basically after last year's banking crisis Regulators realized they have no idea what banks are doing Capital ratios which were invented a very long time and completely failed to do much of anything in the first crisis in 2008 those were supplemented by liquidity coverage ratios which were exposed as again worthless in last year's banking crisis because credit s most of all the complicated Global dealer bank that it is had ample liquidity coverage according to that ratio was well capitalized and it failed anyway so Regulators very briefly here and this is a complicated topic and one I've gone over repeatedly at our Deep dive analysis because we really need to take a deeper look at it but but the overview is simply Bank Regulators around the world don't know how to regulate these complex Banks because they're not really Banks they're bookkeepers who get into a lot of different things things that we talk about at Euro doll University so their solution to to try to get a handle on what banks are doing is to have them hold a massive amount of capital so that they're basically protected at least according to these counter rules against every possible scenario Under The Sun It's basic like basically like taking Banks and bubble wrapping them and never letting them out of that bubble Banks had pushed back against the basal rules as they were originally written these new proposed rules and the wind that the media was talking about is that Regulators got together and decided that the new rules were indeed too onerous in fact it was estimated that it would require Banks to raise about a third more capital and so they watered down The rules a little bit maybe to around 9% those are the estimates I've seen so Banks had convinced Regulators that they were being way too harsh only to now suffer these the initial stage of what looks to be a credit cycle change which could ignite the debate all over again basil endgame isn't completely done yet but again it doesn't actually matter because this isn't it's regulars have no idea what banks are doing banks are doing what they're doing anyway and a lot of what they were doing was based on the idea of a soft Landing that's now increasingly out the window but no one ever asked the really tough questions about all of this starting with what good are Bank Reserves if you have trillions of these Bank Reserves and we still have to worry about Banks and we have to quote unquote toughen rules to the point that that were basically bubble wrapping Bank institutions and by the way these are questions that we've already answered at Euro doll University in our memberships we talk about what is QE what is QT what is money what are Bank Reserves for that's what eural university memberships bring to the table so over at Barkley's 22nd annual Global Financial Services conference Alli Chief Financial Officer Russ Hutchinson had had some comments which had the entire Marketplace and financial media talk talking for good reason now it sent the company stock Ali stock down 20% at one point I think it finished about 16% down which is an enormous move for such a large Financial firm because of what he said and he was quoted as saying over the course of the quarter our credit challenges have intensified our borrower is struggling with high inflation and cost of living no surprise and we've been dealing with that for quite quite a long time but then he added and now more recently a weakening employment picture so delinquencies had already been on the rise up until now and here's Ally a leading especially auto loan lender saying yeah now our now our borrowers are struggling with not just High Cost of Living as they had before now we're seeing the effects of unemployment and remember he's saying that's during this recent most recent quarter and during this most recent quarter the unemployment problem hasn't really gotten out of control it's just beginning to become a more noticeable issue even the mainstream is now paying attention to it in other words if they're already seeing this type of deterioration which was well above what Ali financials models was expecting then as unemployment continues to be a bigger and bigger problem as we go forward that explains the big reaction in the stock market as well as what's going on in all the other markets including Commodities like energy as well as the the unwinding the rapid and serious unwinding on the treasury curve Hutchinson even added as that pool of struggling borrowers in those later stage delinquency buckets has grown it gives us pause and as I said it gives the markets pause tremendous pause too because this is not just about Ally This is not just a One bank issue this is a systemic problem that's related to the macro environment that is no longer on a path to a soft Landing it's a it's a huge wakeup call for a lot of people including those running these Banks now previously the Federal Reserve Bank of New York in its regular household debt and credit report in the update for the second quarter of this year they had shown already especially auto loans because that's the one that keeps coming up but also credit card delinquency rates too but for auto loans specifically F frb Andy's data showed that over the last year approximately 99.1% of credit card balances in 8% of auto loan balances transitioned into delinquency those are large numbers according to their newly delinquent category 7.95% of those newly delinquent loans which was the highest since the since the fourth quarter of 2010 were 30 days behind and then the seriously delinquent category which is which are those loans which are more than 90 days 90 plus days behind that reached a total of 2.88% which was the highest since the first quarter of 201 10 and about the same as the second quarter of 2008 so that was a sharp recession signal a downgrade in the quality of credit performance back at the second quarter and remember Hutchinson just said the deterioration is in the latest quarter they're just now seeing the effects of unemployment recently so the fed's data up until the second quarter of this year is going to be getting even worse into the third quarter especially as unemployment continues to rise incomes continue to suffer and consumers and borrowers and auto auto loans and everything else in in the credit environment in the credit system are going to suffer the consequences of the macro shock and even before we got to Ally the day before on Monday Bloomberg reported that City group had comments on credit credit performance as well credit losses are rising as us consumers shift spending to basic needs and away from purchases that aren't vital and that's according to City Group inc's Chief Financial Officer another CFO Mark Mason the nature of spending is evolving Mason said at a conference hosted by Barkley St conference's Ally it's going from discretionary to a more staple type spend net credit losses have climbed in City's large cards business and payment rates have started to quote come down a bit he said adding that it's within ranges previously discussed by The Firm so as far as City goes they were anticipating a rise in a deterioration in credit performance but we still haven't seen the full weight of the turn in the economy either that's what's got everyone so nervous about this potential not just recession scenario but how that's going to play out for banks that are they really prepared for something like this because they've been heavily heavily into soft Landing the artificiality of the supply shock and everything else and then the basil rules come in the basal endgame simply to just Cloud everything up even more all of this is most likely why Warren Buffett has quite conspicuously because he's forced to report it sold down his huge pile of Bank of America shares it's been the talk of financial media ever since it happened around the middle part of July right before everything went down in early August the credit cycle was already starting to change as the economic cycle there's tons of evidence that was changing back before all this too you put these two things together and makes perfect sense you don't want to own Banks heading into a recession and Mr Hutchinson's comments the CFO of Ally are exactly why they think everything is manageable at the start but if the credit cycle is just now beginning to turn as the economic cycle is just now beginning to turn where do things go from here they don't get better and certainly Federal Reserve rate Cuts aren't going to help the CEO of Bank of America Brian Moran was actually asked about Warren Buffett's stock sales at the same Barkley's conference and according to CNBC he said I don't know what exactly he's doing because frankly we can't ask him and we wouldn't ask him but on the other hand the Market's absorbing the stock we're buying a portion of the stock and so Life Will Go On Bank stocks certainly aren't crashing neither as Bank of America's but they aren't Rising either even as interest rates go further and further downward which is supposed to be good for stocks as a whole and Bank stocks most of all if we look at at the NASDAQ Bank stock index for example what you see is that just as I said at the introduction Bank stocks had been doing really well June into July especially July after the CPI came out when when interest rates originally started to go lower the idea was very simple lower interest rates lower funding costs for banks higher debt interest margins and then suddenly around the end of July just before everything started going Warren Buffett's already selling his Bank of America's shares the Yen carry trade liquidations all of that stuff recession fears suddenly Bank stocks are sideways to lower even as interest rates go much much much much lower so the exact reason why Warren Buffett is selling his bank America shares only he knows and and anybody else who works with it Berkshire haway but again it doesn't take a stock market Guru or Legend to really figure out what's happening here getting ahead of the economic cycle because it's going to lead to the credit cycle that we're already seeing playing out even at these early stages and of course that leads us to one other macro sensitive part of credit and lending and assets and Bubbles and everything else that's commercial real estate commercial real estate has gone almost completely silent extended to pretend had it very quiet last year until the early part of this year but now it's gone completely under the radar for I mean understandable reasons given the fact that everybody's focused on the economy unemployment everything else but commercial real estate hasn't gone away it certainly hasn't been magically fixed if anything banks are very quietly disposing of what assets and loans and exposure that they possibly can but there's all sorts of indications just underneath the surface that are difficult to find suggesting that they can't even do that much there was a report earlier last month from Bloomberg about what Deutsch Bank was up to in commercial real estate deuts Bank AG is trying to offload up to a billion dollars in US commercial property loans off its balance sheet just as rising interest rates have dented profits in its real estate portfolio that's not really the problem according to people familiar with the matter the frankfurt-based bank is marketing the loan book to this is the key unlock some Capital relief said one of the people who asked not to be identified because the details aren't public unlock some Capital relief that means balance sheet constraints that are being caused by commercial real estate likely as the modeled values of these loans or whatever exposure it happens to be continues to go lower which means they're forcing the bank to hold more Capital against it threatening to potentially shift the risk waiting of the assets involved if they're loans if they actually some other kind of collateralized arrangement any number of potential things but the bank wants to get out of this before everything really goes down and they're not the only one it's not just Deutsche Bank we've seen and for example the Federal Reserve h8 statistics on the aggregate balance sheets of commercial banks in the United States Banks want to get out but they're having trouble disposing of these assets according to the to the h8 statistics total CR loans are down about 10.1 billion since around May 8th the week of May 8th so that checks with the turn in the economy and everything else and just $10 billion again that's not a big number but it's they would like to do more if they possibly could and the biggest hit so far has been in construction and Land Development which makes a lot of sense given what construction and Land Development would be about and again this is commercial real estate not residential real estate that's where banks have focused their their attempts to extricate themselves from the industry from this part of the uh the asset markets we see also a decline in office properties which is called non-farm non-residential loans so banks are still getting out as much as they possibly can it's just that as this this report on doche bank has said they're not really able to do it at least not at the prices and rates that the would allow them to avoid taking major hits to everything on their loans and everything on their books so commercial real estate which is highly macro sensitive it sounds like it has actually been locked down even more because of it as little as as what was happening beforehand there's even less of it happening now so the second the second phase of the commercial real estate is ongoing and the the the less they actually gets done in it the more likely they get into the third stage the more likely that third stage is going to be messy and the more likely it's going to be messy in that third stage as the economy turns toward higher rates of unemployment and recession there is nothing that was surprising or very complicated about this recession is bad for credit cycle it's just that's the way it always is and what Alli financials said was basically as bad as the credit cycle had been up to the point it's been deteriorating slowly but steadily up until now suddenly things have accelerated at the same time the jobs Market has softened and weakened unemployment's rising and everything else again no surprise here an Ali Financial is not some isolated case we see dribs and drabs of information from all over the banking sector all over the economy as we're still in the early stages of the economic cycle becoming full-blown contraction people who have been just ignoring all the warning signs in favor of the soft Landing narrative are suddenly now paying close attention and being forced to pay close attention while they also hold out one last hope that the Federal Reserve will be able to save everyone when history conclusively shows the Federal Reserve and its rate Cuts never save anyone at any time or anywhere this is why JP Jackson hle spent so much of his time trying to sell you on rate Cuts Steve and I talked about that in the video link below as always thank you very much for joining me huge thank you your University members and subscribers and until next time take care