February 5, 2025 | First, we have updated the WGA Bank Top Indices for Q1 2025. As you can see below, the WGA Bank Top 10 Index (WBSXW) has significantly outperformed the Invesco KBW Bank ETF (KBWB) over the past three years.
If we look at the 104 banks in our index test group by score and market capitalization, the skew towards large-cap names is as extreme as it has been in more than a year. The highest score bank starts from the left with Discover Financial (DFS) followed by JPMorgan (JPM) just over $750 billion in market capitalization.
Source: WGA LLC/Thematic
As the first month of the term of President Donald Trump ends, Scott Bessent has been confirmed as Treasury Secretary and Elon Musk has been given read/write access to the national payments system. Researcher Nathan Tankus broke the shocking story last week in a post for Rolling Stone, describing how Trump intends to gut the career staff at the Treasury and start selectively defaulting on Treasury payments. Remember, "Schedule F."
“The Bureau of the Fiscal Service is a sleepy part of the Treasury Department. It’s also where, sources say, a 25-year-old engineer tied to Elon Musk has admin privileges over the code that controls Social Security payments, tax returns, and more.”
Of note, the union representing Treasury employees has sued Secretary Bessent over giving Musk and his employees access to the payments system. "The lawsuit, which was filed days after Treasury Secretary Scott Bessent agreed to a plan giving department officials allied with Musk access to the system," Politico reports, "landed amid growing pushback to the Tesla founder’s slash and burn efforts to cut hundreds of billions in federal spending."
Even as President Trump toys with disrupting the Treasury’s ability to make timely payments, the dollar and gold are both surging to new highs. The global dependence upon dollars for payments and investments is allowing the dollar and gold to both increase. How is this possible? Because the era of dollar hegemony that suppressed both the price of gold and other currencies is about to end.
Think of the start of Trump II as a macro inflection point, like the arrival of President Andrew Jackson in Washington circa March of 1829. As we note in the upcoming second edition of "Inflated: Money, Debt and the American Dream," the eight year term of President Jackson left the US without a central bank and in fiscal chaos. Likewise, as we discuss in our latest conversation with Julia LaRoche, the Federal Reserve Board is playing a game of chicken with the White House over interest rates and market liquidity.
Simon White of Bloomberg sets the scene:
“Traders and investment managers are positioning for higher inflation and weaker growth. The net long position in Treasuries is rising sharply, while positioning in short-term rates futures is becoming very net short. Dollar and gold longs are near highs, while the net long in stocks is falling, yet still has plenty of scope to drag prices lower.”
What prices will be dragged lower? Bond and stock prices. Everything else will go higher thanks to inflation. Rising gold prices are an indication of growing unease at some of the policies taken or intended by the Trump Administration, but the strength of the dollar reflects latency on the part of global investors, who very literally have nowhere to run when it comes to fiscal instability in the US dollar system.
The real threat of tariffs announced by Trump is not inflation, but rather a LT decline in the use of the dollar as the global reserve currency. As the Trump Administration steers the US towards fiscal chaos, LT interest rates are moving higher, putting further pressure on the Fed, banks and other leverage investors who have the misfortune of owning low-coupon assets.
Fannie Mae 3s are trading at 84-18 this AM or 1.75% over the Treasury 10-year note. Bank of America (BAC) owns $507 billion in MBS with an average yield of 2.5%, but the average yield for $3 trillion in MBS owned by the US banking industry is just 2.9% or figure a 15 point discount to par. Rising yields are likely to push mortgage rates higher and, eventually, home prices lower, perhaps with a weaker dollar, but this adjustment could take years to materialize.
Remember, none of the traditional measures of fiscal and monetary policy make any sense in 2024. Economists worry about conventional notions, like the impact of tariffs on statistical measures of inflation, yet they miss the larger threat which is how President Trump intends to manage the fiscal posture of the US. Robert Busca notes in a recent comment on Substack:
“Changing relative prices via tariffs does not affect inflation unless the change in relative prices is dealt with in a strange way by the Monetary Authority. So that bends attention back to the Fed and how the Fed is going to respond to the Trump tariffs and to their impact on import prices which could turn out to be broad depending on the exact nature of the tariff or could turn out to be episodic across products.”
Remember, one of the favorite business negotiating tactics of President Trump is to withhold payment. As it becomes apparent that taxes and spending are the primary focus of the Trump White House, shares in the GSEs – Fannie Mae and Freddie Mac – are retreating from the exuberant highs of mid-January. Freddie Mac peaked at $7.15 on January 15th, but has since dropped more than 30% below $5.
Source: Google Finance
In the strange world of Washington, the GSEs will be released from conservatorship and the several hundred billion in common shares that will be owned by the Treasury will be sold to the public in order to finance more Trump tax cuts. A more likely scenario, however, is that the Treasury will exercise its option (which expires in 2028) and convert into common, leaving the US government the majority shareholder of the GSEs, indefinitely. The GSEs will be released from conservatorship, but the Treasury will own 80% of the equity and face a significant loss on the trade.
If, as we suspect, two years hence the Trump Administration’s fiscal hijinks have caused interest rates to rise and the dollar to fall, selling the shares of the GSEs will be a minor concern. In a world where US budget deficits are surging and the economy is contracting, global investors may be fleeing greenbacks into gold and foreign currencies. The long-only world of dollar-based ETFs and passive investing will be collapsing on itself. And President Trump will be doing a reprise of President Richard Nixon, imposing currency and price controls on a hyper-inflating US economy.
During his confirmation hearing, Treasury Secretary Bessent said: "Congress presently has the ability and responsibility for addressing and managing the statutory debt limit. I look forward to working with you and your colleagues to ensure that we do everything possible to protect the U.S. economy and guard against default on our nation’s debt. Honoring the full faith and credit of our outstanding debt is a critical commitment." Stay tuned.
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