Back in April we published a comment, "Bank Earnings & Financial Repression," that introduced the concept of the Financial Repression Index.
In a related working paper available on SSRN, "The Financial Repression Index: U.S Banking System Since 1984," we define the index, which essentially shows the distribution of bank interest income between debt investors and bank shareholders.
At the end of Q1 2018, almost 84% of all income earned by banks on leverage went to bank shareholders as a result of the Fed's policy of "Quantitative Easing," while the remainder went to depositors and bond investors. Thirty years ago, that situation was reversed.
The secular decline in US interest rates has very clearly been paid for by depositors and debt investors, while the share of interest earnings apportioned to bank equity investors has grown. In the 1980s, almost three quarters of bank earnings on loans and investments flowed to depositors and bond investors. As recently as 2008, the distribution of profits was roughly 50/50.
The chart belows shows the Financial Repression Index updated through Q1 '18. Notice that the index has now turned downward after peaking at 90% of bank interest income allocated to equity holders.
With bank interest expense growing more than 50% year over year, net interest margin for banks will flatten and eventually turn negative in 18-24 months -- perfect timing for the next recession in the US. The chart below shows the components of net interest income for all US banks through Q1 '18.
Craig Torres of Bloomberg reported last week that former Fed Chairman Ben Bernanke, the father of QE, predicted that the US economy is headed for a recession by 2020.
Thanks Mr. Chairman.
This Hedgeye Guest Contributor piece was written by Christopher Whalen, author of the new book Ford Men and chairman of Whalen Global Advisors. Over the past three decades, he has worked for financial firms including Bear, Stearns & Co., Prudential Securities, Tangent Capital Partners and Carrington. This piece does not necessarily reflect the opinion of Hedgeye.