October 8, 2020
Third quarter earnings kick off next week with the banks.
JP Morgan and Citi will report on Tuesday. Bank of America and Wells Fargo will report on Wednesday.
These earnings should be very good. Remember, the Fed is absorbing all credit risk. And the Fed, Treasury and Congress have flooded the country with money. This all makes the banks, profit printing machines.
With that, even in a 31% economic contraction (in the second quarter), the banks put of big numbers (in some cases record numbers), while trying to manage those numbers down, by setting aside huge "provisions for loan losses."
As we discussed after the Q2 reports, in this crisis environment, if a worst-case scenario were to unfold, even the war chest of capital these big banks have set aside wouldn't come close to absorbing the losses. That's why the Fed, Treasury and Congress had to, and did, go all-in — and did so quickly — to neutralize the economic apocalypse scenario. And there is no pulling back. So, if they need to do more, they will.
What does that mean? It means the tens of billions of dollars that each of the big banks have earmarked as loan loss provisions, will ultimately be used at the discretion of the banks to juice earnings in the future, where they see fit.
So, with that in mind, they have operated through the third quarter with a glide path to profits, and won't have the excuse to build bigger loss reserves in this coming report. And they were operating in an economy that has done this over the third quarter …
As you can see above, the latest Atlanta Fed GDP model is forecasting a 35% annualized growth in the third quarter – a huge bounce back. If the fourth quarter grows at all, the economy should be at record output by early next year.