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This morning, shares of JPMorgan Chase (NYSE: JPM) plunged after the banking giant reported quarterly earnings.
The headlines showed missed earnings and revenue expectations. JPM suspended buyback and raised cash to address any bad loans.
JPM Chairman Jamie Dimon generated headlines as he assessed the state of the U.S. economy.
"In our global economy, we are dealing with two conflicting factors, operating on different timetables," he said. "The U.S. economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy."
Dimon warned about high inflation, geopolitical tensions, plunging consumer confidence, the Federal Reserve's monetary policy, and capital liquidity.
None of his statements should surprise you or me... after all, we've discussed these issues before.
But someone did catch me off guard today. And we need to discuss this.
You see, someone at Morgan Stanley recently said the "quiet part" out loud... and this could finally be the clue we've been seeking on capitulation.
A Paradigm Shift
I doubt you've heard of Ted Pick.
Probably a nice guy. Went to Harvard Business School. He's a career banker who started at Morgan Stanley (NYSE: MS) in 1990.
After 32 years, he's now Morgan Stanley's Co-President/Head of its Institutional Securities Group. So, this guy has lived through many financial crises and uncertainty on Wall Street.
Today, Morgan Stanley reported earnings this morning. CNBC recapped a 55% drop in the company's investment banking division's revenues. This was largely due to quiet times for new IPOs, the end of the SPAC frenzy, and a huge decline in deal-making.
It was the first time that Morgan Stanley missed estimates in nine quarters.
CNBC quoted Pick from an interview I missed in June - right before the big momentum sell-off we tracked and traded for big gains on June 8.
Said Pick: "The banking calendar has quieted down a bit because people are trying to figure out whether we're going to have this paradigm shift clarified sooner or later."
What paradigm shift?
This is an open admission that Wall Street banks have relied on cheap money from the Federal Reserve dating back to 2008. The Fed has provided cheap capital, low-interest rates, and easy conditions for corporate debt to fund mergers and acquisitions.
The paradigm shift is a return to reality - termination of the Fed-driven illusion of growth.
Now that the Fed must aggressively confront inflation - for the first time in 40 years, these banks don't know what to do. Pick says that the Paradigm Shift is away from 2008 - but in reality - this goes all the way back to the 1990s.
The Fed started buying assets in 2002, creating cheap money credit conditions that helped fuel the housing bubble. Before that, banks relied on rampant speculation during the 1999-2000 IPO market to fill their pockets.
So, we're really talking about a 25-year shift in financial markets.
There are plenty of bankers who have spent their entire careers on Wall Street, and have zero understanding of what markets were like back in the 1990s.
This statement says everything about earnings and expectations for the months ahead. These banks and executives are still waiting on whether or not the Fed is done with easing for the first time in 15 years.
They've relied on it so much they openly admit how they are counting on the Fed to save them...
Thursday's Momentum Reading
Recap: Momentum remains red. Today, JPMorgan's and Morgan Stanley's ugly reports took the market down again. Jamie Dimon's comments were ugly, and it looks like lower for longer will be the story for the banks. We're seeing even more capital flow out of the technology space again on Thursday.
Three Things I'm Watching
Europe On Fire: I explained that Europe is a mess right now. Germany is running out of natural gas. The Euro (the economic bloc's currency) is now below parity with the U.S. dollar. And Dutch farmers are protesting insane climate policies that threaten the food supply. Well, here comes the next stage - as I've warned - the possibility of defragmentation. There's speculation that Italian Prime Minister Mario Draghi may soon resign. He warned that people across Europe would have to choose between buying energy and buying food by September. This energy crisis is getting worse - so don't be surprised if you see populism rise and chatter begin around Italy wanting to leave the EU.
Downgrade: Bank of America has downgraded the S&P 500 year-end target from 4,500 to 3,600. This projection is the most bearish now on Wall Street. This is just the start as Wall Street continues to unwind exposure and admits that the economy and valuations are in trouble. It's still incredible the level of denial coming out of major institutions - which signals that it's not really a denial, is it? It's intentional, as they are overexposed and are desperately trying to get out of the way.
Crude Woes: Oil prices pulled back again today as markets freak out about a recession and bigger questions about demand this summer. We're about to hit $90 per barrel, and now the downside after falls into the low $80s. Investors have to be comfortable taking possession of stocks at certain levels. As I've said, owning Devon Energy Corp (NYSE: DVN) at $45 per share would offer an 8.5% dividend. But there's other news... and that is that OPEC faces a very serious test in 2023 to meet production expectations. To meet expected demand, OPEC would need to produce at a five-year high. This is setting up for a short-term plunge and then another significant rally. Be patient, as oil prices will rebound with time.
Hot Long Shot
Listen, BlackRock is in trouble. The company owns a ton of stocks that trade at 20x times revenue because they manage so many ETFs with "innovative technology." I keep looking across the spectrum of companies that went public not too long ago, and they have the same problems. The stocks they own are unprofitable. The stocks have big market capitalizations and could face huge declines if interest rates accelerate. This crisis isn't slowing down.
So, I look at a very popular ETF in the Amplify Lithium & Battery Technology ETF which has a ton of unprofitable, expensive companies in it like Rivian Automotive Inc (NASDAQ: RIVN). The August 19, 2022 $13 put is under $0.30. It's a longshot, but this crap is so expensive and a reckoning is clearly coming. Don't buy too much... it's a longshot for a reason.
For investors who want their bets to have a higher probability of winning, join the World's Biggest Trade where I'll show you how to improve your chance at success.
What You Missed
With expectations of a 100 basis-point hike from the Fed, we want to focus on what is working right now.
While the peak inflation debate rages on, I feel most financial journalists miss the bigger story. Unfortunately, this will likely be a prolonged crisis driven by inaction and bad policy decisions.
Inflation is entrenched.
We are starting to see signs of panic from the heads of big banks that have become reliant on soft money policy from the federal reserve.
Have the chickens come home to roost? It sure feels like it.
Which brings me to what you missed.
My readers have seen me sing praises to the World's Biggest Trade room and its benefits each day. But what good is it if you don't get to see behind the curtain? What does the process of finding the World's Biggest Trade look like?
Here you go. I had Scott from my team pull a segment from inside our room yesterday.
I am thrilled we built this community when we did.
Can you imagine trying to do this alone right now?
I certainly can't.
The members of the World's Biggest Trade have become indispensable to me when it comes to trading in this environment.
I want to know that my friends have my back and I couldn't have asked for a better group of traders to call the Globetrotters.
I'd be honored to add you to the list, so click here to sign up and let's find today's big winner.
Don't forget to join me for Midday Momentum on Money Morning LIVE at 12:30pm ET.
P.S. Tonight, my friend Nick Black is going to show you the controversial investment strategy that grew his account to insane levels. This important event will put you in a better position to capture massive gains for your investment portfolio... in some cases over 6000%. That's not a typo. So make sure to tune in tonight, where you'll discover exactly how Nick got his account up to $780k and how you can get started doing the same.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.