Macro issues on the horizon

Pierre Aury warns that a financial crisis is looming that could make 2008 look like ‘a picnic by the sea on a beautiful spring day’

In our previous column we wrote that shipping is not an adiabatic system: it is a derivative of the global economy/geopolitical situation that is influenced by decisions of insane politicians that cannot be predicted with any AIS signal.

In this column we look at what the macroeconomic situation has in store for us in the short to medium term, especially on the financial front.

Remember the end of 2008? The world’s international financial system stopped functioning for a short period of time. As a direct result, the freight market went to zero as trade finance dried up overnight.

There are more and more articles about a potentially bigger financial crisis looming. Some of these articles cite unrealized losses in the accounts of US banks to prove this by citing the FDIC. FDIC stands for Federal Deposit Insurance Corporation. It is the US agency charged with insuring deposits at approximately 5,000 banks and savings associations in the US (basically all banks and savings associations except the 12 state reserve banks that are part of the Federal Reserve System).

The chart above (made with data from the FDIC) shows the level of unrealized profits or losses of US banks, in billions of dollars. It shows a huge increase in unrealized losses compared to 2008: 550 versus 50 or 11 times more. Now let’s compare this to the profits of US banks: over the same period and excluding 2008, US banks reported quarterly profits ranging from $16 billion to $82 billion. In 2023, US banks reported profits of $256 billion. In short, if the unrealized losses of US banks over a 10-year period were realized, it would represent “only” 25% of their average annual profits. Still the comparison of the half trillion reported by the FDIC, but this time with the bonuses that US banks paid in 2009, yes, you read that right in 2009: US banks paid $140 billion in bonuses that year! Another comparison can be made with the $204 billion in fines and damages paid by US banks after the 2008 crisis!

The FDIC figure must also be compared to the Fed’s unrealized losses: $1 trillion ($100 billion of which will be realized in 2023) or the nearly trillion (one thousand trillion!) notional value of the global derivatives market, which is ten times global GDP.

Have the lunatics taken over the asylum? That half-trillion FDIC number is a sum, but not one that by itself will cause a crisis like the one in 2008. Banks, for some obscure reason, have the ability to legally manipulate their books, so much so that the balance sheet of the average bank is usually something with nothing on the right in the left column and nothing on the left in the right column, while regulators turn a blind eye. This ability to manipulate accounts is a powerful tool for delaying a looming crisis. But if something were to cause another crisis, the effects would make the 2008 crisis look like a seaside picnic on a beautiful spring day.

In 2008, the trigger was the decline in the real estate market. What could it be in 2024, 2025 or 2026? Our bet is that the level of debt in the system, which has reached unsustainable levels, will be the catalyst for the next financial disaster. Simply put, the world is buried under $300 trillion in debt and counting.

Stay tuned: next month we’ll explain why this is a problem. In the meantime, enjoy your vacation.