Harrison: Banks Tell the Tale of the K-Shaped Recovery

Your Real Vision Daily Briefing for October 13th, 2020

Ash Bennington welcomes Tony Greer of TG Macro back to the Daily Briefing to make sense of big moves today in equities, bonds, and the dollar.

  • Banks that are leveraged to the consumer and the real economy are faring worse than those that are more trading oriented.
  • The forward-looking part of economy looks good because of this K, but a reversion toward generalized distress could be on the horizon.
  • We’re already seeing a reversion of the K-shape as 90% of credit downgrades are in the CCC space; that will eventually move up the chain.

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Banks tell the tale of the K-shaped recovery, Ed Harrison told Real Vision during today’s Daily Briefing.

Harrison said that the banks that are dependent on the consumer aren’t faring as well as those that are more trading oriented and that the K-shaped bifurcation between winners and losers falls along the lines of investment versus commercial banks.

“You see the K shape all over the place, in the credit cycle, on the consumer side, and in investment banks,” Harrison said. “It’s a sign of the financialization of the economy and the Fed supporting asset prices while the real economy is weak.”

The real question according to Harrison is whether this is priced in and what happens to the economy going forward. He thinks it is priced in, and if we eventually see a reversion from the K, we’ll see Goldman underperform relative to the likes of JP Morgan.

Harrison said that he thinks we are already seeing the reversion of the K shape. With 90% of credit downgrades in CCC space, there’s a massive amount of distress at lower end of credit spectrum and Harrison thinks we are seeing that pull through and eventually it will move up the chain.

He believes the forward-looking part of economy looks good because of the current K shape, but he anticipates a reversion toward generalized distress.

Looking at the credit cycle, Harrison noted that 70% of the 2020 defaults by industry have been in four areas: consumer products, oil and gas, retail and restaurants, and media and entertainment. That’s where the distress is, he said, and if that number shrinks, it means that the gap is closing and the top performers are moving down in that direction.

He believes the presidential election less important than how the economy is doing and what the credit cycle is saying. And because the credit cycle generally leads as opposed to follows, Harrison said he’s looking to see how steep the curve is in terms of the downgrade prospects going forward in the wake of the consolidation phase we’re in right now.

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