Banks Dirt Cheap?

Macro Perspectives: Fri 15 Oct 21

So the big four banks have now all reported, kicking off the third quarter earnings season, and all have beaten earnings and revenue expectations.

As we’ve discussed the past few days, business is booming for the banks, and not only are the fundamental tailwinds very, very strong - but the banks will continue to juice earnings by "releasing" the war chest of loan loss reserves.

With the above in mind, if we took a straight average of the trailing twelve month P/E of the biggest four banks in the U.S., we get about 11 times earnings. That's well less than half the P/E of the broader market - as I said yesterday, the bank stocks are cheap (dirt cheap).

Adding to the tailwinds for the banks, will be the rising interest rate environment. The inflation data we've seen continues to point to a scenario where the Fed's hand will be forced - to quickly pivot from emergency mode into inflation fighting mode. That pivot will likely be quicker and more aggressive than the majority of Fed officials have publicly projected.

Just in case anyone thinks the U.S. inflation data might start petering out, let's take a look at what's happening in China, where the products are made that we will be buying in the many months ahead…

China reported (midweek) the hottest prices for producers in 26 years...

And when the producers get those final products on a ship, you can see in the next chart, what has happened to freight container prices coming from China...

So, if you are lucky enough to get your product on a ship, you're paying nearly four times as much to get it here, compared to a year ago.

We looked at these same charts in my June Macro Perspectives notes, when the Fed was successfully convincing Wall Street that inflation would be temporary. The price signals from China were telling a very different story and here we are four months later, and that story continues to be a "hot inflation" story. Not a temporary one.