Welcome to our Friday mailbag edition!
Every week, we receive some great questions from your fellow readers. And every Friday, I answer as many as I can.
Today, readers want to know: Are major global banks at risk of collapsing, like Lehman Brothers did in 2008? Should the Federal Reserve still exist?
All this and more in this week’s mailbag, so let’s dive in.
Up first, a question from reader Jovan S. about this video I sent you, from one of my old haunts as a global investment banker in the U.K…
Thanks for your video. Canary Wharf is a cool place. Can I ask you what you mean history will repeat again? Some banks will collapse? Hope not mine, HSBC. Wish you a great time in London.
– Jovan S.
Hi Jovan, I’m so glad you agree with me about Canary Wharf!
I have so many fond memories of that place from before it was the metropolis that it is today.
In the early 1990s, when I worked in the Bear Stearns offices there, we were some of the only bankers that worked at One Canada Square.
In fact, there were only two floors in use when I started – one for State Street Insurance, and the other for Bear Stearns. It has changed monumentally since then.
As for HSBC and other banks, I can’t give specific stock advice, but I will say this.
Major global banks, like HSBC, are facing a growing possibility that some of their larger customers might have trouble paying their debts or loans.
That’s due to rising rates, an energy crisis, and economic slowdowns. And it’s especially true for their customers in real estate and energy.
Now, I don’t believe most of the larger banks are going under anytime soon. But I do see more volatility in the banking sector as a result of their loan and credit positions coming under pressure.
These loans and debt were extended when interest rates were very cheap. The leverage and collapse of low-rate loans was at the heart of the financial crisis of 2008. This could happen again.
That said, banks also have more capital than they had then. That’s because of the quantitative easing (or QE) strategies that the Fed and other major central banks have adopted since.
So for that reason, if we do see crises in the banking sector, they might not be as acute as they were during 2008.
But with an energy crisis gripping Europe (including the United Kingdom, where HSBC has its headquarters)… and potentially parts of Asia and the U.S. as we head towards the winter… banks that are exposed to the energy sector could be in trouble.
We will be watching this very closely.
Switching gears, reader Edward C. wants to know whether the Fed should still exist – or be modified…
I have an Elite membership to Rogue Economics. You have shared that the Federal Reserve has added trillions of dollars to its balance sheet, and that this has created a difference between the stock market and the real economy.
Could the Federal Reserve take steps to reduce its balance sheet? If yes, what would those steps be and what do you believe would be the economic impact on the United States economy?
Based on how you have shared that the Federal Reserve has rewarded the wealthy and the U.S. financial firms and hurt the middle class, should the Federal Reserve exist today and/or should the Federal Reserve be modified in any ways?
– Edward C.
Hi Edward, thank you so much for participating in our Elite membership program.
I am truly honored to have your trust in me and my team, and I’m fully committed to helping you understand the markets and invest profitably over the long term.
Regarding the Federal Reserve, it has taken very tiny steps to reduce the size of its nearly $9 trillion balance sheet. At present that balance sheet – or book – stands at about $8.8 trillion.
The Fed is afraid of reducing that book too quickly. It doesn’t want to spook the markets even more – after already spooking investors with aggressive rate hikes this year.
If the Fed were truly serious about reducing the size of its book, it could actively sell those bonds, rather than just letting them “roll off their books.”
It will not do this. Nor will any other central bank in the world. That’s because dumping government assets into the markets would create even more uncertainty and turmoil.
As a result, no matter what happens to the stock market – whether it goes up or down – the gap relative to the real economy will continue to exist and grow. This is what I mean when I talk about The Great Distortion.
As for your second question, on whether the Fed should exist today or be modified… I believe that the Federal Reserve should be modified.
It shouldn’t be able to create money whenever it feels like it. It – and other central banks – shouldn’t be able to create economic instability by their policies and say it’s okay for the economy to “take some pain.”
I believe they should be an elected body, not an appointed one. That way the people of the United States, and around the world, have more influence over the central bank leaders that impact so much of their financial lives – directly or indirectly.
Next up, reader Ron R. has a question about a recent sit-down I did with geopolitical expert Peter Zeihan. Here in Inside Wall Street, I shared a preview of it with you.
Our full conversation lasted close to 45 minutes. In it, Peter made a prediction about what he calls “NAFTA 2.0.” As Peter put it:
Mexico is now in a position where it needs a lower-wage, lower skill base. Mexico needs a Mexico. And Colombia is the most likely candidate for that.
And so we’re going to be seeing North American NAFTA integration with the Colombian manufacturing space.
But Ron wants to know what this new trade deal will mean for people here in America…
The strengths of the NAFTA arrangements stated by Peter seem a good inventory of resource manufacturing and population benefits. These may result in an economic benefit.
Directing the economic strategy to raise North America and allies to sustain their top position will include a direction for the American population towards a robust middle class.
Is America headed towards the Imperialism of a late Roman Empire, expanding by presence of military exploits? Or are Americans aware of their ability for immediate change in voting a midterm sweep towards a conscientious government? Are the seeds of democracy finding root to enhance workers and the economy for the benefit of all stakeholders in our American experience?
– Ron R.
Hi Ron, thank you so much for your observations on America, democracy, and on the need for the U.S. to strengthen our workers’ financial stability, for the good of our general economy and country.
I believe, and I always have, that the stronger the foundational economy is – and that starts with its workers – the stronger the country is for all of its citizens.
Of course, the way that many developed countries, including the U.S., have attempted to strengthen their position in the world – by for instance focusing on geo-politics rather than geo-economics – has often been to the detriment of its citizens.
So, I believe it makes sense politically to create an environment whereby American workers are treated more fairly and make enough money to enhance their own lives. As well as to participate in, and thereby help propel, the upside of the economy.
If all economies did this, the world would be a generally better place.
That said, our government tends to ultimately deploy policies that have, over the years, benefited the wealthy and upper class relative to the middle and lower classes. Regardless of whether it’s run by Democrats or Republicans at any point in time.
The banking system and central banks bear a large part of the responsibility for this, regardless of which party is in power. I will be watching the midterm elections closely though, to see what happens with regards to messaging, and of course, voting preferences.
With respect to NAFTA, as Peter mentioned, these arrangements can be used to strengthen America and its allies from a military perspective.
[To access it – and get a copy of Peter’s new book, The End of the World Is Just the Beginning, at a discounted price – go right here.]
But what needs to be done beyond that, is to figure out ways to strengthen the real economy in the same manner.
Finally, reader Paul D. wants to hear more about nuclear energy – and its investment potential…
I read that you are about to issue a review on nuclear energy. Will you make any reference to thorium? Why is this metal not attracting more investment decisions (on the basis of economy and safety)?
– Paul D.
Hi, Paul. Thanks for your questions.
On the plus side, thorium is a potential alternative to uranium as a nuclear fuel. It’s three times more abundant than uranium – and therefore could be a cheaper alternative.
Another benefit is that thorium produces less nuclear waste than uranium – and the waste it produces is less radioactive.
That’s a big advantage, given that nuclear waste is hazardous. If we don’t manage it properly, it could be a risk to the environment and human health. (For more on that, catch up on my recent response to a reader’s question about nuclear waste here.)
But thorium also has limitations as a nuclear fuel. It has to go through a series of nuclear reactions before it can actually be used in nuclear reactors. In other words, extracting its “energy value” is difficult and expensive.
Without getting into the weeds, the trick is getting this to a commercial scale to ensure that it is done economically. It will require considerable R&D investment to get there, which is currently mostly happening in China.
All that said, I may write more about thorium in these pages at some point. So thanks for bringing it up!
And that’s it for this week’s mailbag. Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
Happy investing… and have a fantastic weekend!
Editor, Inside Wall Street with Nomi Prins