A Year of Living Dangerously

by Bruce O’Hara

June 20, 2024

There’s a longstanding superstition that bad events come in threes. Looking at the world around me, I’d have a hard time arguing against that. In 2024, we face at least four major trifectas of risk:

  1. The Banking Crisis Risk Trifecta:

a) US banks are carrying 517 billion dollars of unrealized losses on long-term US Government Bonds that fell in value as interest rates rose. Even non-US banks are in trouble – Japanese banking giant Norichukin just announced plans to sell 63 billion dollars in US treasuries and European bonds to cover 10 billion dollars in losses.

b) The work-from-home revolution has trashed the value of US commercial real estate. Properties that were bought for 200 million dollars ten years ago are sometimes selling for as little as a few million dollars. There’s trillions of dollars of loans to US banks owing on now nearly worthless commercial properties. (There’s also a sizeable amount of collateral damage – restaurants, malls, and gyms next to these deserted office towers are also starting to default on any debts they owe the banks.)

c) US banks are carrying trillions of dollars of 3% home mortgages in their loan portfolios, and will be carrying those low-rate mortgages for a very long time. Banks’ depositors can earn four or five percent interest if they take their deposits out of the bank and put them in money-market funds. Human inertia is the only thing keeping hundreds of US banks from going under if their depositors flee – either for higher interest returns – or in bank runs.

Each of the above crises represents a large systemic risk for the US banking sector. Taken together they represent a perfect storm of mega-losses.

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