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The BAN Report: Oil Prices Tumble / Fed to Continue Hikes / Are We in a Recession? / Revenge Travel Blues / Companies Re-Evaluate Office Needs

Oil Prices Tumble

With higher rates crimping demand, oil prices have fallen by about 20% from their peak a month ago.

Contracts for Brent crude, the international benchmark, dropped $10.73, or 9.5%, to $102.77 Tuesday. West Texas Intermediate, the U.S. standard, finished down $8.93, or 8.2%, to $99.50 a barrel, its first close below $100 since early May and its largest one-day percentage decline since April.

Just under a month ago, Brent futures were trading above $120 a barrel, with global supply pressured by fallout from Russia’s invasion of Ukraine.

The war shows no immediate signs of winding down, but traders’ attention is shifting to the possibility that a downturn in economic growth could cool demand for fuel. Consumer spending and industrial orders showed signs of slowing in data released last week, underscoring investors’ building concerns about the possibility of a recession.

Average gasoline prices across the U.S. have retreated to $4.80 a gallon, off records above $5 a gallon that drivers saw last month, according to AAA. Gasoline is still more than 50% higher than a year ago, however, leading drivers to cut back.

However, some feel this is short-lived. Goldman thinks this is short-lived:

"We believe this move has overshot," Goldman Sachs commodities strategist Damien Courvalin stated in a new note to clients. "While risks of a future recession are growing, key to our bullish view is that the current oil deficit remains unresolved, with demand destruction through high prices the only solver left as still declining inventories approach critically low levels."

JP Morgan warned that global oil prices could reach a “stratospheric” $380 a barrel level if Russia retaliates by cutting output.


Predicting the price of oil is above our pay grade, but where prices go will depend on whether higher rates crimp demand enough. But, a drop of 20% in oil prices is good news for consumers and it’s a welcome relief to see gas prices below $5 a gallon again!

Fed to Continue Hikes

According to the minutes from the Fed’s June meeting, Fed officials are determined to keep raising rates, even though there are clear signs of slowing demand.

Minutes from the Fed’s June meeting, released Wednesday, made it clear that officials are eager to move rates up to a point where they are weighing on growth as policymakers ramp up their battle against inflation.

The central bank will announce its next rate decision on July 27, and several key data points are set for release between now and then, including the latest jobs numbers for June and updated Consumer Price Index inflation figures — so the size of the move is not set in stone. But assuming the economy remains strong, inflation remains high and glimmers of moderation remain far from conclusive, a big rate move may well be in store.

The Fed chair, Jerome H. Powell, has said that central bankers will debate between a 0.5- or 0.75-percentage-point increase at the coming gathering, but officials have begun to line up behind the more rapid pace of action if recent economic trends hold.

“If conditions were exactly the way they were today going into that meeting — if the meeting were today — I would be advocating for 75 because I haven’t seen the kind of numbers on the inflation side that I need to see,” Loretta J. Mester, the president of the Federal Reserve Bank of Cleveland, said during a television interview last week.

The Fed raised interest rates by 0.75 percentage points in June, its first move of that size since 1994 and one fueled by a growing concern that fast inflation had failed to fade as expected and was at risk of becoming a more permanent feature of the economy.

While the big increase came suddenly — investors did not expect such a large change until right before the meeting — policymakers have begun to signal earlier on in the decision-making process that they are in favor of going big in July.

Part of the amped-up urgency may stem from a recognition that the Fed is behind the curve and trying to fight inflation when interest rates, while rising quickly, remain relatively low, economists said.

“It is starting to look like 75 is the number,” said Michael Feroli, the chief U.S. economist at JPMorgan Chase. “We’d need a serious disappointment for them to downshift at this meeting.”

Fed interest rates are now set to a range of 1.5 to 1.75 percent, which is much higher than their near-zero setting at the start of 2022 but still probably low enough to stoke the economy. Officials have said that they want to “expeditiously” lift rates to the point at which they begin to weigh on growth — which they estimate is a rate around 2.5 percent.

Despite being late to the party, the Fed appears now committed to raising rates and getting inflation under control. Another 75 basis point increase would essentially get rates to a level where they will start to crimp growth.   So long as unemployment remains low, there is no reason for the Fed to slow down.

Are We in a Recession?

The traditional definition of a recession is two consecutive quarters of declining GDP growth and most economists believe that the second quarter US GDP will be positive after declining GDP growth in ‘Q1. But it does feel like a recession to many businesses and workers.

The recession calls are getting louder on Wall Street, but for many of the households and businesses who make up the world economy the downturn is already here.

Take Gina Palmer, who runs She Salon on Atlanta’s busy Northside Drive west of downtown.

She’d ordinarily expect her business to be alive with the din of customers on a Friday morning. But on that day late last month, it was largely empty and quiet, save for a few employees. With summer break moving into full swing, her clientele is preoccupied with affording summer camps for their kids amid soaring food and gasoline costs.

“When people look at their budgets, the first thing they cut is self care,” Palmer said. “I’ve seen my clients go from having weekly appointments to bi-weekly, and my bi-weekly clients are now coming in every six weeks.”

Declining consumer confidence often signals a recession.

A 2021 paper co-authored by Danny Blanchflower, a Dartmouth College economics professor and former BOE policy maker, said that declines in US consumer expectations gauges of 10 points or more, from either the University of Michigan or Conference Board surveys, are predictors of recessions going back to the 1980s. The Conference Board measure is down almost 30 points this year.

Nouriel Roubini, often known as “Dr. Doom,” is as downbeat as ever.

Most of those who have come late and grudgingly to the hard-landing baseline still contend that any recession will be shallow and brief. They argue that today’s financial imbalances are not as severe as those in the run-up to the 2008 global financial crisis, and that the risk of a recession with a severe debt and financial crisis is therefore low. But this view is dangerously naive.

There is ample reason to believe that the next recession will be marked by a severe stagflationary debt crisis. As a share of global GDP, private and public debt levels are much higher today than in the past, having risen from 200% in 1999 to 350% today (with a particularly sharp increase since the start of the pandemic).

Under these conditions, rapid normalization of monetary policy and rising interest rates will drive highly leveraged zombie households, companies, financial institutions, and governments into bankruptcy and default.

The next crisis will not be like its predecessors. In the 1970s, we had stagflation but no massive debt crises, because debt levels were low. After 2008, we had a debt crisis followed by low inflation or deflation, because the credit crunch had generated a negative demand shock.

Today, we face supply shocks in a context of much higher debt levels, implying that we are heading for a combination of 1970s-style stagflation and 2008-style debt crises—that is, a stagflationary debt crisis.

The bad news is a recession is both a likely and necessary investment to tame inflation. If we do have a recession, we would be entering a recession in which consumers and businesses have never been as well prepared as they sit on high levels of cash. Bank’s balance sheets are strong and can weather the inevitable rise in defaults. We still believe that there will be a moderate recession followed by a modest recovery. Because inflation will persist for a while, the Fed will not be able to loosen like what we saw after the brief and severe recession in 2020.

Revenge Travel Blues

I can’t remember a summer in which I’ve wanted to travel less.    Travel feels like the month of January at gyms, and I would rather wait for the madness to die down. The good news is people are traveling, but it has been unpleasant.   And the unpleasantness is reducing bookings later in the year.

A season of “revenge travel,” which has seen consumers on both sides of the Atlantic spend their lockdown savings on indulgent vacations after two years of being grounded, has been overshadowed by the aviation industry creaking under the strain of staff shortages and strikes.

With thousands of flights canceled or delayed in the US over the July 4 holiday weekend, and the end of the school term in Britain later this month threatening to become the next flashpoint across Europe, there is now a danger that some people decide to sit out their summer getaway. While the next few months will still be strong for airlines and tour operators, the turmoil may take some shine off of the rebound.

EasyJet Plc, which on Monday announced the departure of Chief Operating Officer Peter Bellew, said two weeks ago that it would rein in its capacity after London Gatwick and Amsterdam Schiphol airports, its two biggest bases, capped flights to help cope with staffing shortages. It is not alone.

Across Europe, airports and airlines are pruning their schedules. British Airways will pull an estimated 800 more flights this summer, as it aims to reduced last-minute cancellations, Bloomberg News reported on Tuesday. Meanwhile, Scandinavian airline SAS AB said it had filed for Chapter 11 bankruptcy in the US, a day after its pilots union announced it would start striking with immediate effect.

TUI AG, the world’s biggest package-tour operator, is seeing demand above pre-pandemic levels. Thomas Cook, now reborn as a British online travel agent, is continuing to take bookings for later this summer. But there are signs that the snarl-ups are crimping some consumers’ enthusiasm to take a trip.

Although still well above 2019 levels, there was a slowdown in demand in June in the US and UK, for both international and domestic travel, according to an analysis of Google travel insight data by Sanford C. Bernstein & Co. Traffic to and TripAdvisor Inc. also decelerated in June, Bernstein said.

Hotels are seeing strong demand from leisure travelers. The optimistic case is, that while leisure traveler may ebb after a revenge travel boom, business travel will pick up later in the year to fill the void. Most hotel markets are either at or above 2019 levels. Here is an interesting chart from STR:











































As you can see, the leisure destinations are well-exceeding 2019 levels (Miami, Tampa, Orange County), while the business-oriented donations are hovering below 2019 levels. But, when you look at the GOPPAR Index, which measures gross profit per room, higher labor costs are taking their tool. For example, Oahu, is nearly doing 2019 levels in revenue, the GOPPAR stands at approximately two-thirds of 2019 levels.

Companies Re-Evaluate Office Needs

As we have argued previously, the spring and summer of this year will be a time in which companies, now that they have brought workers back to the office, re-evaluate their office needs. And, not surprisingly, some are deciding to reduce their office space needs.

Companies including consulting firm Korn Ferry, business-listings provider Yelp Inc. and government contractor Leidos Holdings Inc. are scrutinizing their space needs again as they contend with high inflation, rising interest rates and an uncertain economic outlook. Many businesses also have a better sense now of how many people will come back to the office on a regular basis.

Office space reductions tend to yield long-term savings as less money goes toward rent and other office-related expenses. In the short term however, companies often face one-time penalties when they terminate yearslong leases ahead of time.

Yelp on June 23 said it would shut its offices in New York, Chicago and Washington and trim the size of its location in Phoenix. That equals planned reductions of 420,000 square feet, resulting in nearly 180,000 square feet of remaining space. The San Francisco-based company said it occupied 876,000 square feet at the end of 2019, before the pandemic.

Vacancies have increased across the U.S. over the past year. About 17.5% of office space across the country wasn’t leased or was leased but available for sublease at the end of the second quarter, up from 16.5% a year earlier and 13.2% five years earlier, commercial real-estate firm Cushman & Wakefield PLC said.

Occupancy rates also remain below pre pandemic levels. During the week ended June 29, the average occupancy rate in 10 major U.S. metro areas was 44% down from over 95% before the pandemic began, according to Kastle Systems, which operates security systems in U.S. office buildings. Kastle tracks how many people are entering buildings based on anonymized data from its swipe-entry systems.

“When you’re coming into potential economic headwinds, that puts even more pressure on figuring out where you can cut expenses, so any resource that you’re not fully utilizing is a target for companies,” said Mark Ein, chairman of Kastle.

About 52% of companies expect to shrink their office space over the next three years, up from 44% a year earlier, a recent CBRE survey among 185 businesses with U.S. offices found. That’s compared with 39% that intend to expand, up from 29% a year earlier, and 9% that foresee no change, down from 27% a year earlier.

As the CBRE surveys notes, there are companies who are expanding their office needs as well. But, downtowns in older cities generally have way too many office buildings and not enough housing. The Monday to Friday, 9 to 5 downtown model needs to

evolve and lenders, real estate owners, and cities are going to have to be creative in re-purposing office space.


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The BAN Report: 100 in Play / Housing Shortage Expands / Elon Walks and Twitter Sues / Ode to the Suburban Office Park and Business Lunch

100 In Play

After another higher than expected inflation report at 9.1%, a 100 basis point increase in rates is now in the cards.   

“Everything is in play,” Atlanta Fed President Raphael Bostic told reporters in St. Petersburg, Florida, on Wednesday after US consumer prices rose a faster-than-forecast 9.1% in the year through June. Asked if that included raising rates by a full percentage point, he replied, “it would mean everything.

Investors bet that the Fed is more likely than not to raise interest rates by 100 basis points when it meets July 26-27, which would be the largest increase since the Fed started directly using overnight interest rates to conduct monetary policy in the early 1990s. Americans are furious over high prices, and critics blame the Fed for its initial slow response.

Given the acceleration in monthly inflation, economists at Nomura Securities International now expect a full percentage-point increase in the Fed’s benchmark rate at the upcoming policy meeting.

“Incoming data suggests the Fed’s inflation problem has worsened, and we expect policy makers to react by scaling up the pace of rate hikes to reinforce their credibility,” Nomura’s Aichi Amemiya, Robert Dent and Jacob Meyer, said in a note.

Jim Cramer was optimistic though that this was the last bad inflation report.

CNBC’s Jim Cramer on Wednesday said that while consumer prices rose sharper in June than Wall Street expected, the Federal Reserve is close to beating inflation.

“I think we have a real shot at putting in … a short term bottom here given that the Federal Reserve can probably put through one more big rate hike and then declare victory,” the “Mad Money” host said.

“I know it sounds crazy to say we’re winning the war against inflation when the CPI, consumer price index, was up 9.1% last month, but you know what, I believe it,” he added.

While Cramer can be a raving lunatic, he may be right that these bad inflation reports may be behind us, but we will believe it when we see it.

Housing Shortage Expands

Housing shortages used to be a problem in select areas – now it is increasingly a national issue. This chart in the New York Times is interesting, as it compares 2012 to 2019.





















What once seemed a blue-state coastal problem has increasingly become a national one, with consequences for the quality of life of American families, the health of the national economy and the politics of housing construction.

Today more families in the middle of America who could once count on becoming homeowners can’t be so confident anymore. And communities that long relied on their relatively affordable housing to draw new residents can no longer be so sure of that advantage.

“It’s like the cancer was limited to certain parts of our economic body,” said Sam Khater, the chief economist at Freddie Mac. “And now it’s spreading.”

Freddie Mac has estimated that the nation is short 3.8 million housing units to keep up with household formation. Up For Growth, a Washington-based policy and research group focused on the housing shortage, says that deficit doubled from 2012 to 2019. In that time, supply worsened in 47 states and the District of Columbia, according to an Up For Growth report published Thursday. Among 310 metropolitan areas nationwide, supply was dwindling or shortages were growing worse in three-quarters of them heading into the pandemic.

All of this is good for multi-family. Manhattan rents, after declining early in the pandemic, are soaring again.

Manhattan apartment rents reached another record high in June, with even more pain to come for prospective tenants as the market heads into its most competitive season.

New leases were signed last month at a median of $4,050, according to appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate, which have tracked the data for more than three decades. That topped the previous record, set in May, by $50 and was nearly 25% more than a year earlier, just as the rental market began to emerge from its early-pandemic slump. Average rents, a figure that’s more skewed by the most-expensive deals, topped $5,000 for the first time, the firms said.

The housing shortage is getting worse and worse and approaching a nationwide crisis. There’s only one state in the union that is practically full-developed (New Jersey) so there is plenty of land to build more housing, yet it simply doesn’t happen. Moreover, far too much multi-family housing has been built, at the expense of owner-occupied housing. The banking Agencies should use their regulatory oversight to encourage banks to do more construction loans for both multi-family and residential developments.

Elon Walks and Twitter Sues

Just days after Elon Musk terminated the agreement to purchase Twitter, Twitter filed suit to enforce their agreement.

Musk, who initially framed his desire to take over Twitter in grandiose terms as "important to the future of civilization," has attributed his change of heart to concerns about the number of bots and spam accounts on the platform. He accused Twitter of violating the deal (a binding agreement he signed without negotiating in a bot-related data provision) by not handing over information he says he needs to evaluate the scale of the issue.

In its suit, Twitter attempts to paint a different picture: one of a mercurial billionaire who got buyer's remorse after the tech market, along with Twitter shares, declined amid rising interest rates, inflation and fears of a recession. It also points out that shares of Tesla, which Musk is relying on to finance much of the deal, have fallen sharply in recent weeks. "The structure of Musk's financing meant that the merger could become significantly more expensive for him if Tesla's stock price were to decline," the complaint notes.

The 62-page document, which is sprinkled with memes, tweets, and a certain emoji, effectively highlights the bizarre spectacle of the deal from start to where it currently stands. It also shows the unusual position Twitter now finds itself in. The company paints Musk as a non-serious potential owner — alleging at one point that he has "disdain" for the company, and at another saying, "Musk's strategy is ... a model of bad faith" — while seeking to compel him to become its owner. (Twitter's board has an obligation to its shareholders to try to see the deal through if they believe it is in their best interest. The dispute could also end in a settlement.)

The fact that Musk waived his due diligence contingency makes Twitter’s case strong. The lawsuit is a page-turner to read. It was also filed in the Delaware Court of Chancery, which has a reputation of moving fast. The plaintiffs proposed a 4-day trial starting on September 19. Recovering more than the $1 billion break-up fee though seems like a reach. Most likely, this is headed for a settlement.     

Ode to the Suburban Office Park and Business Lunch

Working in a suburban office (or any office for that matter) and meeting clients for a business lunch isn’t what it once was. The New York Times called it “The Last Days of Suburban Office Parks.”

These places were decidedly suburban in nature and car-dependent in design. In every form — executive park, business park, corporate park, innovation park — the park was an essential part. “Pastoral capitalism,” the landscape architecture scholar Louise Mozingo has called it, naming the very American belief that office workers would do their best work if they could look out at manicured nature instead of the frenetic cityscape.

Today suburban office parks have drawn far less attention than downtown offices that are also threatened by remote work. But their decline reflects in some ways a more sweeping and permanent judgment — of once-dominant ideas about where Americans work, how the office should look, and what the suburbs should be. Many downtown offices, with the benefit of prime location, will need new facades and nicer interiors. Places that have been office parks will need a whole new identity.

Suburban offices built between the 1960s and 1980s were already struggling before the pandemic, with their aging mechanical systems and the changing tastes of millennials (in the Wayne case, Toys “R” Us also went bankrupt). A younger generation wants more urban offices, real estate developers say, or at least suburban offices that feel more urban, with sidewalks and somewhere different to eat lunch every day. But now layer on remote work, “and this might finish it off,” Ms. Mozingo said.

Far from downtowns, there is a different kind of emptiness in suburban settings that were already isolated and lightly populated by design. From the outside, it’s hard to know that the 20th floor of a skyscraper has gone vacant. In a suburban office park, the signs aren’t so inscrutable.

In their prime, suburban office parks offered a modern alternative to cramped office towers, and easy car access when mass transit was faltering. They promised, in the place of seemingly noisy, congested, unpredictable downtowns, a quiet space to sit in a cubicle and concentrate.

Meanwhile, the downtown lunch scene isn’t what it used to be.   

Few people understand the power lunch better than Ashok Bajaj. The restaurateur began his career here in the waning days of Ronald Reagan’s presidency, when he opened the Bombay Club a short walk from the White House.

Eight of the 10 restaurants he operates today are, like his first, located downtown. They’re conveniently clustered near one another, making it easier for Mr. Bajaj to preside over multiple dining rooms, and near customers who work on Capitol Hill, at the State Department and in the Eisenhower Executive Office Building — crucial sources of what Mr. Bajaj calls his “lunch crowd.”

Prominent members of that crowd gravitated to the Oval Room, the power-lunch magnet he ran for 26 years — and closed in November 2020. Longtime regulars have resumed eating lunch at his places that are open for it, like Rasika and the Bombay Club. But “it’s nothing like it was before Covid,” he said. “The energy has been sucked out of downtown.”

Of all the headaches the pandemic has caused the restaurant industry, among the most persistent is the disruption of the business of doing business over lunch. It afflicts a specific, influential cohort of restaurateurs who, like Mr. Bajaj, own prestigious restaurants in the hearts of large cities that office workers have fled, along with their corporate expense accounts.

Continued uncertainty over when or if those workers will return leaves the dining rooms that catered to them without an important revenue stream at a time when the cost of doing business, particularly in dense urban areas, is spiking. At the same time, many of the diners who used to nurture relationships and close deals over midday hamachi crudo and steak frites are now making those connections in front of a computer screen at home while eating salads from takeout boxes.

Ask yourself how many business lunches you have had this year, for example. I haven’t had more than a handful. Have you? I had lunch with a banker with a large portfolio earlier this week and it was his first lunch in a while too.

The BAN Report: Big 4 Bank Earnings / Toys R Us Comeback / EV Sales Soar / NYC Lost 5K Businesses / LGA Rises

Big 4 Bank Earnings

The largest 4 banks have released their second quarter earnings. Overall, earnings were mixed and opinions on the economy varied.

Wells Fargo

Wells Fargo missed on both revenue and net income, due to declines in equity holdings and increased provisioning.

“While our net income declined in the second quarter, our underlying results reflected our improving earnings capacity with expenses declining and rising interest rates driving strong net interest income growth,” CEO Charlie Scharf said in the release.

Wells Fargo said “market conditions” forced it to post a $576 million second-quarter impairment on equity securities tied to its venture capital business. The bank also had a $580 million provision for credit losses in the quarter, which is a sharp reversal from a year earlier, when the bank benefited from the release of reserves as borrowers repaid their debts.

Scharf noted in his statement that he expected “credit losses to increase from these incredibly low levels.”

Notably, the bank’s revenue fell 16% to $17.03 billion in the quarter, roughly half a billion dollars below analysts’ expectation, as fees from mortgage banking plummeted to $287 million from $1.3 billion a year earlier.

A billion dollar drop in mortgage banking fees shows how much the mortgage market has free-fallen with higher rates. Wells is beginning to build up reserves after shedding them in prior quarters and is expecting increased credit losses.


Citigroup had a solid quarter, beating estimates on both profit and revenue.    

Profit declined 27% to $4.55 billion, or $2.19 per share, from $6.19 billion, or $2.85, a year earlier, the New York-based bank said in a statement, as it set aside funds for anticipated loan losses. But earnings handily exceeded expectations for the quarter as analysts have been slashing estimates for the industry in recent weeks.

Revenue rose a bigger-than-expected 11% in the quarter to $19.64 billion, more than $1 billion over estimates, as the bank reaped more interest income and saw strong results in its trading division and institutional services business. Net interest income jumped 14% to $11.96 billion, topping the $11.21 billion estimate of analysts surveyed by Street Account.

Corporate cash management, Wall Street trading and consumer credit cards performed well in the quarter, she noted.

But not all the news was positive. Like JPMorgan Chase on Thursday, Citigroup disclosed that it is also pausing share repurchases. After last month’s Federal Reserve stress test, some banks were caught with less capital than needed ahead of increasingly stringent requirements. By freezing dividends and pausing buybacks, the banks can stockpile capital to help them hit their targets.

We expect many banks to pause their stock buybacks in order to keep capital levels high.

Bank of America

Bank of America had a solid quarter, beating on both revenue and profit. While provisions increased, higher rates seem to be highly beneficial.

“Solid client activity across our businesses, coupled with higher interest rates, drove strong net interest income growth and allowed us to perform well in a weakened capital markets environment,” CEO Brian Moynihan said in the release.

“Our U.S. consumer clients remained resilient with continued strong deposit balances and spending levels. Loan growth continued across our franchise and our markets teams helped clients navigate significant volatility reflecting economic uncertainty.”

Bank of America, led by Moynihan since 2010, has enjoyed tail winds as rising interest rates and a rebound in loan growth have boosted income. But bank stocks have been hammered this year amid concerns that high inflation will spark a recession, which would lead to higher loan defaults.

Noninterest expenses in the quarter rose 2% from a year earlier, as the firm cited about $425 million in costs tied to regulatory matters. Roughly half of that figure was tied to fines announced last week totaling $225 million over how the bank handled unemployment benefits during the Covid pandemic; the rest has to do with an industrywide probe into trading personnel using messaging apps.

Net interest income jumped 22% and the bank was optimistic about the impact of higher rates and strong loan growth.

JP Morgan Chase

JP Morgan Chase missed on revenue and EPS, disappointing Wall Street. They also suspended share buybacks.

JPMorgan Chase said Thursday that second-quarter profit slumped as the bank built reserves for bad loans by $428 million and suspended share buybacks.

The actions reflect Chairman and CEO Jamie Dimon’s increasingly cautious stance. “The U.S. economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy,” he said in the earnings release.

“But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road,” he warned.

With this outlook, JPMorgan has opted to “temporarily” suspend its share repurchases to help it reach regulatory capital requirements, a prospect feared by analysts earlier this year. Last month, the bank was forced to keep its dividend unchanged while rivals boosted their payouts.

JP Morgan Chase seems to be aggressively provisioning in anticipation of a possible recession compared to its peers.   Like its peers, investment banking revenue plummeted (down 54% from the prior year) while trading revenue grew 15%.

Overall, higher rates are mostly good for banks, but they are taking a hit on mortgage revenue and credit quality. And the Fed’s stress tests are forcing banks to hoard capital and be cautious about adding risk-weighted assets. Jamie Dimon was particularly critical of the stress tests.

“We don’t agree with the stress test,” Dimon said. “It’s inconsistent. It’s not transparent. It’s too volatile. It’s basically capricious, arbitrary.”

Under the exam’s hypothetical scenario, JPMorgan was expected to lose around $44 billion as markets crashed and unemployment surged, Dimon said. He essentially called that figure bunk on Thursday, asserting that his bank would continue to earn money during a downturn.

Mr. Dimon raises a good point, as these stress tests may cause harm to the economy if banks need to prepare for a 2008-like recession.

Toys R Us Comeback

How can you know root for a Toys R Us comeback? Starting later this month, Toys R Us will be opening stores within Macy’s department stores in time for the holiday season.

The in-store shops will range from 1,000 square feet to 10,000 square feet in flagship locations. 

The flagship locations will be in Lenox Square in Atlanta; State Street in Chicago; Ala Moana in Honolulu; Memorial City in Houston; South Coast Plaza in Los Angeles; Aventura and Dadeland in Miami; Herald Square and Roosevelt Field in New York City; Union Square in San Francisco and Valley Fair in San Jose.

Macy's officials said that the store footprints will have the ability to expand by another 500 to 3,000 square feet of space during the holidays to offer a wider assortment of products. 

In March 2021, brand management firm WHP Global acquired a controlling stake in Toys R Us. 

The deal came after Toys R Us shuttered its last two remaining stores in New Jersey and Texas in January 2021 due to the coronavirus pandemic. Both locations opened in late 2019 and were the only Toys R Us stores in the country following the company’s chapter 11 bankruptcy filing in 2017 and its U.S. and U.K. store closures in 2018.

In August 2021, WHP Global announced that it would be partnering with Macy's to open more than 400 Toys R Us locations in 2022. Since then, Macy’s customers have been able to shop for Toys R Us products exclusively online at and 

"Macy’s cannot wait to bring the Toys R Us experience to life in our stores," Macy's chief merchandising officer Nata Dvir said in a statement. "We hope Toys R Us kids of all ages discover the joy of exploration and play within our shops and families create special memories together. The customer response to our partnership with Toys R Us has been incredible and our toy business has seen tremendous growth."

The model of creating in-store shops within department stores like Macy’s will likely see more traction, as many of these department stores have excess capacity.   Store within a Store (SWAS) partnerships have been established by Nordstrom and Tonal, Kohl’s and Sephora, Target and Ulta Beauty, and Walmart and Disney.

EV Sales Soar

The share of electrical vehicle car sales in the US remains small, but is growing rapidly, despite supply chain issues and higher prices.

Americans are buying electric vehicles at a record pace, undeterred by rising prices and long waits for delivery, a further indication that the twilight of the internal combustion engine is on the horizon.

Vehicles that run on batteries accounted for 5.6 percent of new-car sales from April through June, still a small slice of the market but twice the share a year ago, according to Cox Automotive, an industry consulting firm. Overall, new-car sales declined 20 percent.

Companies like Tesla, Ford Motor and Volkswagen could have delivered more electric cars if they had been able to build them faster. The carmakers struggled with shortages of semiconductors, which are even more essential to electric cars than to gasoline vehicles, while prices soared for lithium and other raw materials needed for batteries.

“The transformation is real,” said John Lawler, the chief financial officer of Ford, which sold 15,300 electric cars from April through June, a 140 percent increase from a year earlier. “Electric vehicle demand is well beyond what we can supply.”

At the same time, the popularity of electric vehicles has taken the industry by surprise and exposed deficiencies that could slow the transition to battery power, which is considered essential to containing climate change.

Along with the need to fundamentally alter supply chains, other challenges include a lack of public chargers. A trip to Indianapolis from Chicago took an extra two hours, for example, as charging stations are still inconvenient. Moreover, the average price of an electric car is $20K more than the average for all new cars, so growing the share of EVs will hit some speed bumps.

NYC Lost 5K Businesses

Despite no shortage of COVID relief, the pandemic unfortunately wiped out a lot of businesses. In Manhattan, for example, the number of private businesses in Manhattan dropped by 5,200 compared to 2019.

The number of businesses in Manhattan plummeted during the height of the coronavirus pandemic, more than canceling out gains in the other boroughs as New Yorkers worked from home and largely stayed away from the Big Apple’s skyline-defining towers.

The data, released city Comptroller Brad Lander this week, shows the number of private businesses operating in Manhattan was down by 5,200 during the last three months of 2021 when compared to the same period in 2019. The report was first noted by news nonprofit The City.

“The COVID-19 pandemic is the largest shock to the New York City’s private establishment ecosystem in decades, pushing many businesses into closure and reshaping their distribution across the city,” the analysis said. 

That more than offset the gains reported in Brooklyn, The Bronx and Staten Island leaving Gotham with a net loss of more than 4,000 businesses over the time period, a drop of 1.5% against the pre-pandemic totals of roughly 275,000 private storefronts and establishments.

On a trip to Manhattan last week, the vibrancy of NYC has certainly returned in some areas. Bryant Park was packed with people enjoying the good weather, and the restaurants were full.    On the other hand, I visited a trading company operating an entire floor in the heart of midtown and they had two employees in the office, so some challenges remain. Some iconic restaurants that cater to corporate customers like the 21 Club are now closed permanently.

LGA Rises

The transformation of La Guardia, formerly the worst and most depressing airport in the western world, has been remarkable. The Port Authority is spending more than $25 billion to renovate La Guardia, Newark, and JFK.

“I vividly remember the state that La Guardia was in, with tarps hanging down to catch leaks,” said Rick Cotton, the executive director of the Port Authority of New York and New Jersey, which operates La Guardia and John F. Kennedy International Airport in Queens, as well as Newark Liberty International in New Jersey. “Certainly, La Guardia, parts of Newark and parts of J.F.K. were just disgraces.”

Now, after years of neglect and underinvestment, the Port Authority is revamping all three of its major airports at a cost of more than $25 billion. If all goes according to plan, the New York metropolitan area could have three of the most modern airports in the country by 2030.

The onset of the pandemic in early 2020 briefly interrupted construction, but a sharp drop in the number of passengers and flights allowed the work to accelerate, airport officials said. The Delta terminal, which opened in June with some components unfinished, will be completed 18 months ahead of schedule, said Ryan Marzullo, a Delta executive who is overseeing its design and construction.

The airy, art-filled terminals stand closer to the parkway than the dingy, old ones they replaced. They are connected to glass-walled concourses where travelers can sit comfortably and order food while charging their phones.

The old Central Terminal Building has been largely demolished, and soon terminals C and D, with their dark floors and low ceilings, will be torn down too. Then, the old La Guardia will exist mostly in memories — and nightmares.

If you’ve been to LaGuardia, the transformation is incredible. I remember being stranded at LGA a few years ago and watching the NCAA Men’s College Basketball Championship in one tiny dive bar. The airport is beautiful and reminds me of the newer airports in Asia. But that doesn’t stop a 45-minute storm from delaying a flight by 4 hours, as I experienced on Monday! Travel is going to get better after Labor Day when the “revenge travel” boom ends. I recently booked a trip in October and fares and hotel rooms are cheap again.

The BAN Report: GDP Drops Again / Consumers Trade Down / Are Banks Tightening Credit? / JetBlue Wins / Spoiled Employee Annoys Zuck

GDP Drops Again

“Is this the real life?

Is this just fantasy?”

  • Bohemian Rhapsody (Queen)

When I was a boy, two quarters of negative GDP group meant a recession, so a drop of GDP of 0.9% means we are in one. However, that isn’t necessarily the case anymore. Nevertheless, it was another disappointing quarter for the US economy.

Gross domestic product fell 0.9% at an annualized pace for the period, according to the advance estimate. That follows a 1.6% decline in the first quarter and was worse than the Dow Jones estimate for a gain of 0.3%.

Officially, the National Bureau of Economic Research declares recessions and expansions, and likely won’t make a judgment on the period in question for months if not longer.

But a second straight negative GDP reading meets a long-held basic view of recession, despite the unusual circumstances of the decline and regardless of what the NBER decides. GDP is the broadest measure of the economy and encompasses the total level of goods and services produced during the period.

“We’re not in recession, but it’s clear the economy’s growth is slowing,” said Mark Zandi, chief economist at Moody’s Analytics. “The economy is close to stall speed, moving forward but barely.”

The decline came from a broad swath of factors, including decreases in inventories, residential and nonresidential investment, and government spending at the federal, state, and local levels.

Consumer spending, as measured through personal consumption expenditures, increased just 1% for the period as inflation accelerated. Spending on services accelerated during the period by 4.1%, but that was offset by declines in nondurable goods of 5.5% and durable goods of 2.6%.

Inventories, which helped boost GDP in 2021, were a drag on growth in the second quarter, subtracting 2 percentage points from the total.

Private nonfarm inventories subtracted 1.96% from the figure, so growth would be positive otherwise. Whether we are in a recession or not depends on your perspective.   

“We’re in a sentiment recession. I don’t think we’re in an actual recession. The growth slowdown has been driven by inflation and price shocks—as they fade in the near term, that should allow growth to accelerate,” said Aneta Markowska, chief financial economist at Jefferies. She expects the economy to expand 1.7% this year, measured from the fourth quarter of last year.

Fortunately, the National Bureau of Economic Research will let us know in a couple of months. With yesterday’s 75-basis point increase in rates, the Fed stated that interest rates are at a “neutral” level, which means monetary policy is neither contractionary nor expansionary. There seems to be a vested interest in not calling this a recession, because if we were, the Fed would likely be under pressure to loosen.  

Consumers Trade Down

Recent earnings reports from firms like McDonalds, Unilever, Coca-Cola, and Walmart, revealed how consumers are managing inflation. While many consumers are willing to pay higher prices, many are trading down towards more value-oriented options.

Passing higher prices on to shoppers has led some to buy less or trade down to cheaper store brands, Unilever’s results suggested, a trend also seen in Walmart’s recent financial reports. To keep its higher-priced brands in consumers’ minds, Unilever said that it added about $200 million to its marketing budget in the first half of the year, another factor that put a dent in its profits. Investors appeared heartened by Unilever’s ability to balance prices and costs, with its London-listed shares rising almost 3 percent.

Coca-Cola’s stock also traded higher on Tuesday, rising 1.6 percent, after it reported better-than-expected revenue growth in the second quarter, driven by a double-digit percentage rise in prices. Crucially, it also recorded growth in the volume of drinks it sold, suggesting that shoppers are sticking with favored brands despite higher prices. In a similar vein, Unilever noted that it sold more ice cream in the quarter, one of its few product categories to register volume growth.

Consumers’ willingness to pay higher prices has “largely held up better than expected,” James Quincey, Coca-Cola’s chief executive, said on a call with analysts. “We are watching closely for signs of changing consumer behavior as the year goes on and as the average cost of the consumer basket continues to go up.” Like Unilever and its closest rival, PepsiCo, which reported results this month, Coke raised its revenue forecast for the year.

On a call with analysts, executives at McDonald’s said that while consumers have generally accepted higher prices for Big Macs and other items, lower-income customers are beginning to trade down to less expensive menu items, like those in its “value” range, or choosing fewer combination meal deals.

The US consumer is somewhat stubborn and predictable in the long run, but can be difficult to predict in the short run. They stock up on toilet paper and Spam when lockdowns are on the horizon, and revenge travel when the dusk is clear. Retailers like Target and Walmart have struggled with inventory levels as demand has often dried up when supply shortages wane. Inflation seems to be changing behavior, particularly at the low-end of the range.Consumer confidence dropped this week to a 1.5 year low, which usually means consumers spend less.

Are Banks Tightening Credit?

According to the April 2022 Senior Loan Officer Survey on Bank Lending Practices, banks largely kept lending standards unchanged or eased them. Recent earnings reports from banks suggest that banks may be curtailing lending with some preparing for a recession. Regions Financial predicted a slow-down in loan growth as they tighten underwriting standards.

On Friday, Chief Financial Officer David Turner told analysts that the pace at which average loan balances increased during the second quarter is not likely to be repeated during the third quarter. 

Why not? Because the Birmingham, Alabama, company plans to apply more scrutiny to loan requests in light of mounting economic uncertainty and the rising potential for a downturn, Turner said during the bank’s quarterly earnings call. And more scrutiny could lead to fewer new loans.

While Regions should “have a lot of opportunity to grow” loans, “this is a time when you need to be very cautious, very careful, and make sure your client selectivity is robust,” Turner said.

“So we may be a little conservative in terms of our loan balances from here on out,” he said.

To be sure, loan demand at the $160.9 billion-asset bank remains healthy across several industries, including financial services, utilities, wholesale durables, investor real estate and some sectors of transportation, Turner said. Still, “a little bit of cautious tone is all we’re sending, and we will grow as the market gives us permission, with the right metrics,” he said.

Meanwhile, Regions has revised its projections for average loan balances in 2022, which are now expected to increase about 8% from last year, up from the 4%-5% projected in April. The change assumes a slowdown in loan growth and a pickup in capital markets activity, Turner said.

Although recent market volatility has caused capital markets in general to cool, there’s an expectation that the borrowers will want to tap into that segment once again. “So that is part of our projection as well,” Regions CEO John Turner said.


Regions’ loan growth outlook is in keeping with several other large regionals, including PNC Financial Services Group in Pittsburgh, which predicted average loan growth of about 13% for 2022, and KeyCorp in Cleveland, which expects average loans to grow 9%-11% this year.

However, banks’ general economic forecasts have differed this earnings season. PNC CEO William Demchak told analysts last week that he does not expect a severe recession. Meanwhile, his counterpart at Citizens Financial Group, Bruce Van Saun, sounded a more cautious note, saying the Providence, Rhode Island, company is preparing for a recession by locking in floating rates in its commercial loan portfolio and shifting its consumer lending business to less risky strategies.

The good news is banks can afford to be more picky due to very strong loan growth in 2022 so far. The next Fed Loan Officer Survey will be telling, as it may show a tightening of standards. However, higher rates on their own mean credit tightening. Loans renewing this quarter that were at 4% may no longer work at say 6%. Moreover, the Fed stress tests are negatively impacting lending as well for several banks.

JetBlue Wins

With a billion dollars more in consideration, JetBlue was finally able to acquire Spirit Airlines and break-up a merger between Spirit and Frontier Airlines. A day after ending merger talks with Frontier, Spirit agreed to the sale.

A JetBlue acquisition of Spirit would create the country’s fifth-largest carrier, and if approved by regulators, would leave Frontier as the largest discount carrier in the U.S.

JetBlue’s surprise, all-cash bid for Spirit in April had thrown Spirit’s plan to combine with fellow discounter Frontier into question. For months, Frontier and JetBlue competed for Spirit, each sweetening their offers, until the original merger plan fell apart earlier Wednesday, clearing the way for JetBlue.

Spirit said it planned to continue talks to sell itself to JetBlue after ending the Frontier agreement.

JetBlue executives have argued for months that buying Spirit would help it compete with large carriers like American, Delta, United and Southwest, which control most of the U.S. market, and fast-track its growth by giving it access to more Airbus jetliners and pilots, both of which are in short supply.

Spirit previously rebuffed JetBlue’s bids and said such a deal wasn’t likely to be approved by regulators, in part because JetBlue’s alliance with American, which the Justice Department sued to block last year.

The deal faces a high hurdle for regulatory approval.

The press release addressed the regulatory issues, arguing that the combined company would only have a 9% market share.

“We believe we can uniquely be a solution to the lack of competition in the U.S. airline industry and the continued dominance of the Big Four,” Hayes continued. “By enabling JetBlue to grow faster, we can go head-to-head with the legacies in more places to lower fares and improve service for everyone. Even combined with Spirit, JetBlue will still be significantly smaller than the Big Four, but we’ll be much better positioned to bring the proven JetBlue Effect to many more routes and locations.”

  • The four largest carriers control more than 80% of the market. Creating a low-fare, customer-centric challenger with size and scale is the best opportunity to disrupt legacy carrier pricing in the current landscape.

  • Even as the fifth-largest carrier, JetBlue, with Spirit, would have only 9% market share, compared to 13% for the fourth-largest airline and 23% for the largest carrier. After the combination and with its committed upfront divestitures, the largest seat share a combined JetBlue-Spirit will have in any of its largest metro areas is 40%, compared to the 57-91% share legacy carriers have in their largest metro areas.

Many travelers, present company included, will now have to re-think their “I will never fly Spirit Airlines again!” policy. Fortunately, it is not a merger of equals!

Spoiled Employee Annoys Zuck

At a weekly Q&A, Gary from Chicago asked Mark Zuckerberg about vacation time during a call to discuss the tough steps Facebook had to take to right the ship.  

“Hi there,” the first prerecorded employee question started. “I’m Gary, and I’m located in Chicago.” His question: would Meta Days — extra days off introduced during the pandemic — continue in 2023?

Zuckerberg appeared visibly frustrated. “Um… all right,” he stammered. He’d just explained that he thought the economy was headed for one of the “worst downturns that we’ve seen in recent history.” He’d already frozen hiring in many areas. TikTok was eating their lunch, and it would take over a year and a half before they had “line of sight” to overtaking it.

And Gary from Chicago was asking about extra vacation days?

“Given my tone in the rest of the Q&A, you can probably imagine what my reaction to this is,” Zuckerberg said. After this year, Meta Days were canceled.

For Zuckerberg, the company he founded 18 years ago was facing existential threats on multiple fronts. Both Facebook and Instagram were being rearchitected to compete with TikTok. Apple’s iOS privacy settings had disrupted the company’s once-stable ad business, costing it billions in revenue. Meanwhile, Zuckerberg’s bet on the metaverse was a money pit that he didn’t see turning a profit until at least the end of the decade.

But first, Gary from Chicago. As the all-hands escalated, it became clear that Zuckerberg saw that fixing his company’s culture was critical to surviving the tough times ahead. Two years into the pandemic, his company was in a very different, more vulnerable place. It even had a new name.

The days of coddling employees would be over.

“Realistically, there are probably a bunch of people at the company who shouldn’t be here,” Zuckerberg said on the June 30th call, according to a recording obtained by The Verge. “And part of my hope by raising expectations and having more aggressive goals, and just kind of turning up the heat a little bit, is that I think some of you might just say that this place isn’t for you. And that self-selection is okay with me.”

Is this when employers begin pulling in the reins from employees who lost their work ethic during COVID, or never had one at all? Perhaps, the zeitgeist is shifting in corporate America.

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