Finimize - 🎱 Bank shots

What’s going on here?

Bank of America, Goldman Sachs, and Citigroup's third-quarter profits all topped analyst estimates on Tuesday.

What does this mean?

Some of Wall Street’s big fish will be feeling pretty good after reporting better-than-expected earnings. First up was Goldman Sachs, whose profit jumped 45% to $3 billion – from $2.1 billion in the same quarter last year. Next up to the plate was Bank of America, whose profit stumbled 12% rather than the 16% fall expected. The bank lost on some outstanding loans, which it realized probably won’t be repaid – but was buoyed by gains in trading, asset management, and investment banking fees. Finally, Citigroup also came through with a win as profit dipped a less-than-expected 9% to $3.2 billion. The bank struggled with losses in its credit card business, but its four other main ventures – services, banking, wealth, and US personal banking – saw revenue climb.

Why should I care?

For markets: A strong showing.

Investment banks’ shares have been flexing their muscles this year: Goldman Sachs has been leading the pack with gains of 38% – the top US big bank this year. Citigroup followed up with 32%, and Bank of America with 27%. That means they’ve all outperformed the S&P 500. So confidence is high – and, in turn, all three stocks initially jumped after the results. Understandably, the strong economy and strapping stock market have proved good for business and traders at these investment banks. And while Warren Buffett’s Berkshire Hathaway has sold off some of its Bank of America stake throughout the year, the Oracle-led conglomerate still owns around 10% of the company.

What’s going on here?

The International Monetary Fund (IMF) is projecting that by the end of the decade, the world will be weighed down by public debt that’s nearly 100% of the size of the global economy.

What does this mean?

When government spending outruns revenue (think taxes from companies and households), public debt increases. And the IMF’s latest report arrived bearing the bad news. There are plenty of reasons for it, too: major economies are still struggling post-pandemic, the green transition costs money, and aging populations don’t help. What’s more, the IMF has warned that existing plans to stem the tide of borrowing aren’t working. That means a host of countries – including the US, UK, France, Italy, and Brazil – will see their debt levels increase unless some pretty radical policy shifts are made.

Why should I care?

For markets: Running for cover.

With government debt levels rising, investors could become worried about how stable markets will be. And that might have them heading for assets like gold – a reliable old safe haven in the face of geopolitical, financial, and recessionary risks. Mind you, the price of the yellow metal has been closely linked with the growing size of US public debt for the last 50 years. But that’s not the only driver of gold prices these days. Recently, emerging market central banks have become big gold buyers, worried that financial sanctions could make life difficult when it comes to their US dollar holdings.

The bigger picture: A rising tide.

With government debt on the up, investors have been demanding higher returns when they lend. That pushes interest rates north and, in turn, nudges up the amount of interest that governments have to pay – eating into their budgets and making deficits steeper. To bring those shortfalls back to better levels, governments are forced to spend less or start raising taxes. But that can be unpopular with voters and even trigger an economic slowdown, leaving governments between a rock and a hard place.