Taking Scalps

Major League Baseball continues its grind through the dog days of summer.  By now, the hunt for a playoff spot is long gone in many cities.  Teams are below .500.  They can’t even make it via the wildcard.

In Atlanta, however, Braves fans are invigorated.  The team has the best record in baseball.  It’s also running away with the National League East.  With just 30 games left, as of this writing, the Braves lead the division by 13.5 games.  At this point, it’s near impossible to not make the playoffs.

Many Braves ballplayers are having career years.  Matt Olson leads the league in runs batted in by a wide margin.  He’s second in home runs.  Ozzie Albies.  Austin Riley.  Marcell Ozuna.  All are on fire.

On the hill, Spencer Strider mows down opposing batters like whirling dervishes at the Battle of Omdurman.  He leads the league in both strikeouts and wins.

The most sensational performance, however, is being put on by Ronald Acuña Jr.  The 25-year-old right fielder is a terror on the bases.  He leads the league in – on base percentage, stolen bases, and runs.  In short, he gets on, steals bases, and scores more effectively than everyone else.

Acuña also recently became the fourth player to steal 60-plus bases and hit 20-plus homers in the same season.  Rickey Henderson was the last player to reach this feat in 1990, seven years before Acuña was born.

What’s more, if Acuña hits one more homer, he’ll be the first player ever to steal 60 bases and hit 30 homers in a single season.  We put the chances that he pulls this off as highly likely.  Perhaps by the time you’re reading this, it will have already happened.

Live, Work, and Play

Baseball has been around for a long, long time.  Whether you like the game or not, it is a thrill to see someone achieve the impossible.  Moreover, it is something for people to cheer for as autumn approaches and the banking sector races towards yet another crisis.

The homefield ballpark for the Atlanta Braves, which opened in 2017, is called Truist Park.  It’s modern, functional, and has a pleasing aesthetic – including water features, self-checkout concessions, and its very own Wi-Fi network.

The Battery Atlanta, a mixed-use entertainment area, was constructed adjacent to Truist Park.  It was all made possible by the glory years of abundant, cheap credit.

This is the sort of 15-minute city – live, work, and play – that central planners are enamored with.  They think this type of urban design is an improvement over sprawling suburbs.  They want to build these all over the place.  And they want you to ditch your car and live in one – and never leave.

At The Battery Atlanta, for example, within a few hundred steps, you can shop till you drop.  You can also stuff your face with countless food and confection options.  But that’s not all…

You can shoot tipples of fermented grain, take in a movie, go bowling, perfect your golf swing, complete an escape room, and much, much more.

After all that, you can head into Truist Park and watch the Braves take scalps.  All the while, you can do the Tomahawk chop in unison with 40,000 other happy souls.

Some say this is mocking Native American culture.  But for Braves fans, it is all great fun.

Something Terrible

The name – Truist – comes from Truist Financial.  The banking company, which is headquartered in Charlotte, North Carolina, has only been in existence for about four years.  However, its roots date back to the 19th century.

Truist Financial was formed in December 2019 as the result of the merger of BB&T (Branch Banking and Trust Company) and SunTrust Banks.  The bank operates over 2,780 branches in 15 states.

Truist is the 9th largest bank in the United States with $514 billion in assets.  Its services run the gamut of both consumer and commercial banking, securities brokerage, asset management, and mortgage and insurance services.

This all sounds impressive.  And the shiny Truist Park sign structure towering over Braves games is a prominent sight.  But behind the shine and big asset numbers something terrible may be happening.

In early August, Moody’s, the credit rating agency, made various updates on 27 U.S. banks.  Specifically, it downgraded the credit ratings on 10 small to mid-sized banks, it changed the outlooks on 11 other banks from stable to negative, and it placed another six big banks on review for potential downgrades.

The six banks now under review include, Bank of New York Mellon, U.S. Bancorp, State Street Corp., Northern Trust Corp., Cullen/Frost Bankers Inc., and the Braves ballfield namesake, Truist Financial Corp.

Moody’s rationale for putting these banks on review for potential downgrades varied by lender.  For Truist Financial and U.S. Bancorp, low capital buffers were cited.  For State Street and BNY Mellon, significant outflows of non-interest-bearing deposits were the reasoning.

Taking Scalps

Quite frankly, we don’t know what is meant by putting banks on review for downgrades.  Do you know what this means?

Maybe this is Moody’s way to soften the shock of forthcoming downgrades to some of America’s marquee banks.  Who knows?

Whatever it is, it can’t be good.  Most likely Truist and the other banks under review are holding a book full of loans that aren’t cutting it.  Here’s why.

Rising interest rates have put the squeeze on net-interest margins.  The interest earned on loans no longer covers the interest paid out to depositors.  Spreads have gone negative.

After 18 months of Fed rate hikes, the borrow short and lend long business model isn’t working.  Short term yields are higher than long term yields.  And banks, having borrowed short to lend long, have negative carry.

The simple solution for banks like Truist would be an abrupt and concerted decline in short-term interest rates.  This would return their net-interest margins and make everything A-OK.

Yet it seems unlikely this will happen anytime soon.  This week it was reported that the Fed’s preferred inflation metric – the Core PCE Deflator – increased 4.2 percent in July from a year ago.  That’s up from the 4.1 percent reading in June.

So, the Fed must continue its higher for longer rate hiking cycle to eradicate the consumer price inflation of its making.  But how much more of this can the big banks take?

Higher rates mean even greater negative carry.  Higher rates also mean a greater risk of credit rating agency downgrades.  Higher rates practically guarantee a forthcoming banking crisis.

The share price of Truist Financial stock is down about 30 percent year-to-date.  It has a P/E ratio of 7.06 and a dividend yield of 6.88 percent.  Is the potential reward at this price worth the risk?  How lucky do you feel?

Braves fans, no doubt, are riding high.  Their team stands to win it all.

But investors in Truist Financial, like settlers facing down the Creek Indians at Fort Mims Alabama on August 30, 1813, are beyond exposed.

By our estimation, it shouldn’t take much – say another 50 basis points – and they’ll lose their scalps.

[Editor’s note: Is the Pentagon secretly provoking China to attack Taiwan?  Are your finances prepared for such madness?  Answers to these important questions can be found in a unique Special Report.  You can access a copy here for less than a penny.]

Sincerely,

MN Gordon
for Economic Prism

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