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Pierre Aury warns there is a financial crisis looming that would make 2008 look like ‘a seaside picnic on a beautiful spring day’
In our last column we said that shipping is not an adiabatic system: it is a derivative of the world economy/geopolitical situation which is affected by decisions of lunatic politicians that no AIS signal is going to help predict.
In this column we will look at what the macro situation could throw at us in the short to medium term and especially on the financial front.
Remember the end of 2008? The world international financial system stopped functioning for a short period of time. As a direct consequence the freight market went to zero due to trade finance drying up overnight.
There are a growing number of articles regarding a potentially bigger financial crisis looming. Some of these articles are mentioning unrealised losses sitting in the accounts of US banks to make that case quoting the FDIC. FDIC stands for Federal Deposit Insurance Corporation. It is the US agency tasked with insuring deposits made in about 5,000 banks and savings associations in the US (basically all banks and saving associations except the 12 state reserve banks who are part of the federal reserve system).
The graph above (made with data from the FDIC) shows the level of unrealised profits or losses of US banks, in billions of dollars. It shows a massive increase of unrealised losses compared to 2008: 550 versus 50 or 11 times more. Let us now compare this near half a trillion with US banks profits: over the same period and excepting 2008 US banks have reported quarterly aggregated profits ranging from $16bn to $82bn. In 2023 US banks reported earnings of $256bn. In short if the unrealised losses of US banks were realised over a 10-year period this would represent “only” 25% of their average annual earnings. Still comparing the half trillion reported by the FDIC but this time with the bonuses paid by US banks in 2009, yes you read correctly in 2009: US banks paid $140bn in bonuses that year! Another comparison can be made with the $204bn of fines and damages paid by US banks in the wake of the 2008 crisis!
The FDIC number must as well be compared with the unrealised losses of the Fed: $1trn (with $100bn crystallised in 2023) or the near quadrillion (one thousand trillion!) notional value of the worldwide derivatives market which is 10 times the world’s GDP.
Have the lunatics taken over the asylum? This half a trillion FDIC number is a sum but not something that will in itself trigger a 2008 like crisis. Banks have, for some obscure reasons, the ability to legally cook their books so much in fact that most of the time your average bank’s balance sheet is something with nothing right in the left column and nothing left in the right column with the regulators turning a blind eye. This ability to massage accounts is a powerful tool to delay a looming crisis. But if something was to trigger a new crisis its consequences would make the 2008 crisis look like it was a seaside picnic on a beautiful spring day.
In 2008 the trigger was the drop of the real estate market. What could it be in 2024, 2025 or 2026? Our bet is that the level of indebtedness in the system which has reached unsustainable levels will be the catalyst for the next financial debacle. Simply put the world is buried under $300trn of debt and counting.
Stay tuned: we will explain why this is a problem next month. Meantime, enjoy your holidays.
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