Finance

Two new laws, one on espionage and the other on foreign relations, took effect July 1.
In strictly legal terms, the legislative changes don’t increase the risk for foreign businesses in China, said Jeremy Daum, senior fellow at Yale Law School’s Paul Tsai China Center.
“The current environment lends itself to more occasions where a regulator or someone in the government in China may choose to take action that is non-transparent. That creates a risk for U.S. business,” said Michael House, partner at Perkins Coie.

New Chinese laws on espionage and foreign relations took effect on July 1.
Vcg | Visual China Group | Getty Images

BEIJING — For foreign businesses in China, geopolitics hold more sway than new Chinese laws, according to analysts.
National security is a growing priority for the country. Two new laws, one on espionage and the other on foreign relations, took effect July 1. They contain catch-all phrases such as “state secrets” that are open to interpretation by local and central authorities.

Adding to the worries of those considering doing business in China is news earlier this year of three raids on international consulting firms with little public explanation.
In strictly legal terms, however, the legislative changes themselves don’t increase the risk for foreign businesses in China, said Jeremy Daum, senior fellow at Yale Law School’s Paul Tsai China Center.
Rather, he said, “the current international relations climate and competing political pressures may be making some businesses re-evaluate their cost-benefit analysis in accepting the risks of doing business in China.”

U.S.-China relations have deteriorated over the last several years, after decades of increased engagement.
High-level dialogue beyond the presidential level has only resumed partially this year with U.S. Secretary of State Antony Blinken’s visit to Beijing, among others.

“The current environment lends itself to more occasions where a regulator or someone in the government in China may choose to take action that is non-transparent. That creates a risk for U.S. business,” said Michael House, partner at Perkins Coie and based out of offices in Beijing and Washington, D.C.
“And when there is no real opportunity for the two governments to talk about the reason for that action or at the government level try to get some better read on what’s motivated those kinds of actions, that becomes then detrimental for U.S. business when that kind of opportunity doesn’t exist,” House said.
When it comes to industries, he pointed out, advanced technology and its links to the military are a concern to the U.S. and China, while other sectors bear less risk.

The new laws

The new Espionage Law expands the “acts of espionage” definition to include “seeking to align with an espionage organization” and attempts to illegally obtain data related to national security, according to an English-language translation on China Law Translate, a website Daum founded.
The law also calls on “all levels” of government in China to educate and manage related security precautions, according to the translation.
The website’s translation of the Foreign Relations Law notes that foreign organizations in China “must not endanger China’s national security, harm the societal public interest, or undermine societal public order.”

Corporate disconnect

The Chinese approach [to national security] is more defensive and domestic while the U.S. understandings are very global.

Alex Liang
Anjie & Broad, partner

Michael Hart, president of the American Chamber of Commerce in China, said he’s brought up the corporate raids in his meetings with Chinese officials.
“This is one of the disconnects where we usually hear, is as long as you’re not doing anything illegal you have nothing to worry about,” Hart said. “But it’s unclear to us what these companies did that was considered illegal. We continue to call for more transparency.”
Blinken and U.S. Treasury Secretary Janet Yellen have both met with U.S. businesses in China during their visits this year.
Companies also face increased scrutiny on the U.S. side. A House committee delegation discussed China business in their meeting with executives of high-profile U.S. tech and media companies in California in April.

National security

The term national security has been increasingly cited by the U.S. and Chinese government in new restrictions for businesses over the last few years.
For businesses in China, the biggest concern is that everything from food to energy is given a security angle, Jens Eskelund, president of the EU Chamber of Commerce in China, said at a briefing in mid-June.
“That I think creates uncertainty about what are the exact borders between what falls under a security purview and something we can operate as normal businesses.”
Cultural and language differences also play a role.
“The Chinese approach [to national security] is more defensive and domestic while the U.S. understandings are very global,” said Alex Liang, partner at Anjie & Broad in Beijing.
“For example, China generally focuses on whether sensitive information is leaked across the border, while U.S. normally focuses whether its allies provide technology to its rivalries and certain target nations,” he said.

Read more about China from CNBC Pro

The role of law and the court system also have fundamentally different statuses in the U.S. and China. Beijing has been trying to build up its legal system in recent years, but the government is ruled by one party.
Perkins Coie’s House pointed out that since the U.S. courts are able to rein in what the enforcement part of the government is doing, a Chinese company could make a legal dispute about national security-driven actions — something difficult for a foreign company to do in China.
He said foreign businesses in China could also consider having more dialogue with their local regulators, so they have a better understanding of what a company is doing and how it’s contributing to the economy.
China’s Ministry of Commerce on Wednesday met with foreign pharmaceutical companies, and said it would hold regular roundtables with foreign businesses to support their operations. More

A Carvana used-car vending machine displays vehicles in Miami, Dec. 9, 2022.
Joe Raedle | Getty Images

Check out the companies making headlines in midday trading.
Carvana — Shares soared 10% in midday trading. The company said on Monday it expected exponential growth within its used electric vehicle segment as consumer demand for EVs skyrocket.

Lucid — The luxury electric-vehicle company added 3.4%. Lucid has gained more than 15% since January and has added roughly 34% since hitting its 52-week low on June 23.
Shockwave Medical — Shares of the medical device maker jumped 5.8% following an upgrade to overweight by Morgan Stanley. The Wall Street firm said consensus expectations are misjudging potential catalysts that could improve the sales outlook for its key product.
DraftKings — The sports betting stock climbed 6.6%. Jefferies included DraftKings on its list of stocks set to benefit as it approaches profitability and highlighted the company’s effort to penetrate “a critical mass of states.”
Cava — Shares of the Mediterranean restaurant chain rose more than 9% Monday after JPMorgan initiated coverage of Cava with an overweight rating. The investment firm said the newly public Cava has the business model and market opportunity to expand rapidly over the next decade and a half.
Icahn Enterprises — Shares jumped 17.6% after the company said in a filing it has amended the terms of Carl Icahn’s personal loans to separate them from the trading price of his company’s shares. The issue was highlighted by short seller Hindenburg in a research note, which had triggered a dramatic sell-off in the stock.

Fisker — Fisker rose 2% after the electric-vehicle maker said it’s issuing a $340 million convertible note offering. Fisker said it plans to use the capital for general corporate purposes, including an additional battery pack line and other products.
Novavax — The biotech stock gained 25%. On Friday, the company disclosed in a securities filing that it would receive $350 million from Canada for unused Covid-19 vaccines.
— CNBC’s Jesse Pound, Sarah Min, Yun Li and Samantha Subin contributed reporting. More

An individual in Toronto reportedly found a one-of-a-kind playing card as part of a special “Magic: The Gathering” edition in June.
Collectors have offered public bids of millions of dollars for the “The One Ring” serialized card.
If sold, the “ring bearer” would likely pay a top tax rate of 53.53% on half of the profits from the transaction, experts said.
Based on reported bids, the total tax bill could amount to up to roughly 780,000 Canadian dollars (about $588,000), in one likely scenario.

Elijah Wood as Frodo in “The Lord of the Rings” film trilogy.
Courtesy: New Line Cinema

The One Ring that collectors were coveting this summer wasn’t found in Hobbiton or deep in the tunnels of the Misty Mountains; nor was it discovered in the Elf stronghold of Rivendell, the realm of Gondor or even beyond the Black Gates of Mordor.
It was found in Toronto last month.

And the ring bearer — if they choose to sell the “precious” — may owe a hefty tax bill on the profits. Their tax rate could be as high as 53.53%.
In this case, the One Ring isn’t the physical ring forged by the Dark Lord Sauron in the fires of Mount Doom and coveted by all manner of creatures in Middle Earth, as outlined in the author J.R.R. Tolkien’s “The Lord of the Rings” trilogy.
Instead, it’s an ultra-rare playing card in “Magic: The Gathering.”

Seven-figure bids in the quest for ‘The One Ring’

Wizards of the Coast — the company that created the Magic playing card game in 1993 — issued a “Lord of the Rings”-themed set in June, and featured a “One of One Ring” promotion. One pack contained “The One Ring,” a serialized card of which there’s only one in existence.
Public bids for the one-of-a-kind card — printed in traditional foil and in the Black Speech of Sauron using Tengwar letterforms, according to Wizards of the Coast — have extended into the millions of dollars.

Arrows pointing outwards

The “One Ring” serialized card is a one-of-a-kind Magic: The Gathering card issued in June. Bids for the collectible, which is part of a special “Lord of the Rings” themed Magic edition, have extended into the millions of dollars.
Wizards of the Coast LLC

One would-be buyer — Gremio de Dragones, a game store based in Valencia, Spain — offered 2 million euros, about $2.2 million or 2.9 million Canadian dollars. (Its bid also included travel and lodging expenses and a free paella dinner.)
Another interested party — Dave & Adam’s, a collectibles shop near Buffalo, New York — offered $1 million.
Wizards of the Coast, which is owned by Hasbro, confirmed the card had been found as of June 30. The finder — who remains anonymous — reportedly lives in Toronto, the biggest city in Canada and the capital of the province of Ontario.
The odds of finding the card were roughly 1 in 3 million. (By comparison, the odds of winning the Powerball jackpot are about 1 in 292 million.)
“To me, it’s almost the equivalent of a lottery ticket,” said Scott Plaskett, a Toronto-based certified financial planner and managing partner and CEO at Ironshield Financial Planning.
More from Personal Finance:How to avoid this tax on high earnersHere’s what a new Supreme Court case could mean for federal wealth tax proposalsThe IRS plans to tax some NFTs as collectibles — and the rich would pay up to 28% on profits

How Canada taxes capital gains

However, unlike lottery winnings — which are tax-free in Canada — The One Ring’s finder would generally owe tax on profits incurred from a sale.
The U.S. also imposes a tax on profits, known as a “capital gains” tax. It applies to stocks, bonds, real estate, collectibles and other assets.
In both countries, the tax is judged on “cost basis,” a term that refers to the original purchase price. The net profit is the leftover sum after subtracting the cost basis and other potential line items like costs incurred by the seller (like a broker’s fee, for example).
But the Canadian and U.S. tax systems differ in how they levy a capital gains tax.

Roger Perzan dressed as Sauron from “The Lord of the Rings” poses for a photo at the Fan Expo in Toronto on Sept. 4, 2015.
Marta Iwanek | Toronto Star | Getty Images

The Canadian who acquired The One Ring card would most likely pay tax on half their profits. The rest would be tax-free, experts said.
This is due to Canada’s use of an “inclusion rate.” Depending on the scenario, only a portion of profits are typically counted (i.e., included) as taxable income.
The share depends on how the card was acquired, Plaskett said. The inclusion rate is generally 50% — and that would likely apply in this scenario, he said.
If The One Ring card were sold for 2 million euros — which appears to be the current top bid — then 1 million euros (about CA$1.46 million) would be taxable.
“We used to do it that way in the U.S. but changed it a number of years ago,” Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center, said of omitting a share of profits from tax.  

Total Canadian tax bill is ‘subjective’

But what’s Canada’s tax rate on the profits?
Due to the large sum of money involved, the seller would likely be taxed at Canada’s top income tax rate, experts said.
In Ontario, the top tax rate is 53.53%. This includes both federal and provincial taxes.
Because just half of the seller’s profit would be taxed in this example, the individual’s back-of-the-envelope effective tax rate on the transaction would be about 26.8% (or, half of 53.53%). The total tax bill could therefore be up to roughly CA$780,000 in this example (which translates to about $588,000.)
(In reality, the effective tax rate would be slightly lower since Canada’s income tax system is progressive, as in the U.S., experts said. That means most, but not all, of the profits here would taxed at the top rate.)

To me, it’s almost the equivalent of a lottery ticket.

Scott Plaskett
Toronto-based certified financial planner

There are alternate taxation scenarios, however, experts said.
For example, if The One Ring card were accidentally dropped by its owner and then subsequently picked up on the street by someone else, the method of acquisition would change, Plaskett said.
The inclusion rate would likely jump to 100% in this case — meaning all the profits would be taxed at 53.53%, doubling the total tax bill, he said.
In some cases, Canadian law also taxes 100% of the profits (instead of 50%) depending on a seller’s intent, said John Oakey, vice president of taxation at Chartered Professional Accountants Canada.
For example, if the person who found The One Ring card were the owner of a collectible store — and buying and selling cards was their business — a sale may be intended as a business transaction, in which case all the profits would be taxed.

There’s some ambiguity here, though, Oakey said. For example, what if the card’s owner — even if it was a hobbyist collector — put considerable effort into maximizing their profit by, among other things, proactively soliciting bids from numerous potential buyers?
The Canada Revenue Agency (Canada’s equivalent to the IRS) might also treat the sale as a business transaction in this case — in which case the full CA$2.9 million would be taxed at 53.53%.
“It’s a subjective area,” Oakey said. “It’s not black and white.”

How the U.S. taxes capital gains

In some ways, the U.S. system is more concrete, he said.
That’s because preferential capital gains tax treatment in the U.S. is based on duration.
If an asset like a stock is bought and held for a year or less, profits don’t get preferential treatment. They’re treated as a “short term” capital gain, taxed at ordinary income tax rates, which are as high as 37% at the federal level.
A “long term” capital gain applies to assets held for more than a year. They get preferential treatment.

Sir Ian McKellen as Gandalf and Elijah Wood as Frodo in “The Lord of the Rings: The Fellowship of the Ring.”
New Line | WireImage | Getty Images

Here, there’s a distinction between collectibles and assets like stocks, however. Stocks are taxed at a top long-term federal capital gains tax rate of 20%; but collectibles have a top rate of 28%. (In both cases, there’s also a 3.8% net investment income tax for high earners, in addition to any state and local taxes on capital gains.)
The One Ring card would “almost definitely be deemed a collectible,” said Joe Hughes, federal policy analyst at the Institute on Taxation and Economic Policy.
For example, a seller in Michigan would pay a top long-term capital gains rate of about 36% on a collectible item, Hughes said. The rough total tax bill on the $2.2 million top bid would be about $792,000 in this example.
In a state like Tennessee, which doesn’t levy a state income tax, the top long-term capital gains rate would be 31.8%.
In other words: The ring bearer would appear to fare better in Canada over the U.S. — from the perspective of tax rates, anyway.
Of course, whether Ringwraiths descend upon the ring bearer from the lair of Minas Morgul, or whether men ensnared by the evil, corrupting grip of the ring try to snatch it from the ring bearer’s grasp, this publication cannot say. More

Life Changes

Choosing between pretax versus Roth 401(k) plan contributions can be more complicated than you expect, experts say.
Pretax 401(k) deposits provide an upfront tax break, but you’ll owe levies when you withdraw the funds.
By comparison, Roth 401(k) contributions happen after taxes, but your money can grow tax-free.
However, the best choice depends on more than just your current and future tax brackets.

Prostock-Studio | Istock | Getty Images

If you have a 401(k), one of the big questions is whether to make pretax or Roth contributions — and the answer may be complicated, experts say.
While pretax 401(k) contributions reduce your adjusted gross income, you’ll owe levies on growth upon withdrawal. By comparison, Roth 401(k) deposits won’t provide an upfront tax break, but the money can grow tax-free.

Some 80% of employer retirement plans offered Roth contributions in 2022, compared with 71% in 2018, according to a recent Vanguard report based on roughly 1,700 retirement plans.  

More from Life Changes:

Here’s a look at other stories offering a financial angle on important lifetime milestones.

While your current and future tax brackets are part of the puzzle, experts say there are other factors to consider.
“It’s hard speaking in broad terms, because there are so many things that go into making that decision,” said certified financial planner Ashton Lawrence at Mariner Wealth Advisors in Greenville, South Carolina.
Here’s how to decide what’s right for your 401(k) plan.

Current vs. future tax brackets

One of the big questions to consider is whether you expect to be in a higher or lower tax bracket in retirement, experts say.

Generally speaking, pretax contributions are better for higher earners because of the upfront tax break, Lawrence said. But if your tax bracket is lower, paying levies now with Roth deposits may make sense.

If you’re in the 22% or 24% bracket or lower, I think the Roth contribution makes sense, assuming you’ll be in a higher bracket upon retirement.

Lawrence Pon
CPA at Pon & Associates

Roth 401(k) contributions are typically good for younger workers who expect to earn more later in their careers, explained Lawrence Pon, a CFP and certified public accountant at Pon & Associates in Redwood City, California.
“If you’re in the 22% or 24% bracket or lower, I think the Roth contribution makes sense, assuming you’ll be in a higher bracket upon retirement,” he said. 

There’s a ‘low-tax sweet spot’ through 2025

Although it’s unclear how Congress may change tax policy, several provisions from the Tax Cuts and Jobs Act of 2017 are scheduled to sunset in 2026, including lower tax brackets and a higher standard deduction.
Experts say these expected changes may also factor into the pretax versus Roth contributions analysis.
“We’re in this low-tax sweet spot,” said Catherine Valega, a CFP and founder of Green Bee Advisory in Boston, referring to the period before tax brackets may get higher. “I say taxes are on sale.” 

We’re in this low-tax sweet spot.

Catherine Valega
Founder of Green Bee Advisory

While Roth contributions are a “no-brainer” for young, lower earners, she said the current tax environment has made these deposits more attractive for higher-income clients, as well. 
“I have clients who can get in $22,500 for three years,” Valega said. “That’s a pretty nice chunk of change that will grow tax-free.”
Plus, recent changes from Secure 2.0 have made Roth 401(k) contributions more appealing for some investors, she said. Plans may now offer Roth employer matches and Roth 401(k)s no longer have required minimum distributions. Of course, plans may vary based on which features employers choose to adopt.

Consider your ‘legacy goals’

“Legacy goals” are also a factor when deciding between pretax and Roth contributions, said Lawrence from Mariner Wealth Advisors.
“Estate planning is becoming a larger piece of what people are actually thinking about,” he said.
Since the Secure Act of 2019, tax planning has become trickier for inherited individual retirement accounts. Previously, nonspouse beneficiaries could “stretch” withdrawals across their lifetime. But now, they must deplete inherited IRAs within 10 years, known as the “10-year rule.”

The withdrawal timeline is now “much more compact, which can impact the beneficiary, especially if they’re in their peak earning years,” Lawrence said.
However, Roth IRAs can be a “better estate planning tool” than traditional pretax accounts because nonspouse beneficiaries won’t owe taxes on withdrawals, he said.
“Everyone has their own preferences,” Lawrence added. “We just try to provide the best options for what they’re trying to achieve.”  More

Rising interest rates, losses on commercial real estate and heightened regulatory scrutiny will pressure regional and midsized banks, leading to a wave of mergers, sources told CNBC.
Some of those pressures will be visible as regional banks disclose second-quarter results this month. Firms including Zions and KeyCorp already have warned of sinking revenues.
Half the country’s banks will likely be swallowed by competitors in the next decade, according to Fitch analyst Chris Wolfe.
“Some of these banks will survive by being the buyer rather than the target,” said incoming Lazard CEO Peter Orszag. “We could see over time fewer, larger regionals.”

The whirlwind weekend in late April that saw the country’s biggest bank take over its most troubled regional lender marked the end of one wave of problems — and the start of another.
After emerging with the winning bid for First Republic, a lender to rich coastal families that had $229 billion in assets, JPMorgan Chase CEO Jamie Dimon delivered the soothing words craved by investors after weeks of stomach-churning volatility: “This part of the crisis is over.”

But even as the dust settles from a string of government seizures of failed midsized banks, the forces that sparked the regional banking crisis in March are still at play.
Rising interest rates will deepen losses on securities held by banks and motivate savers to pull cash from accounts, squeezing the main way these companies make money. Losses on commercial real estate and other loans have just begun to register for banks, further shrinking their bottom lines. Regulators will turn their sights on midsized institutions after the collapse of Silicon Valley Bank exposed supervisory lapses.  
What is coming will likely be the most significant shift in the American banking landscape since the 2008 financial crisis. Many of the country’s 4,672 lenders will be forced into the arms of stronger banks over the next few years, either by market forces or regulators, according to a dozen executives, advisors and investment bankers who spoke with CNBC.
“You’re going to have a massive wave of M&A among smaller banks because they need to get bigger,” said the co-president of a top six U.S. bank who declined to be identified speaking candidly about industry consolidation. “We’re the only country in the world that has this many banks.”

How’d we get here?

To understand the roots of the regional bank crisis, it helps to look back to the turmoil of 2008, caused by irresponsible lending that fueled a housing bubble whose collapse nearly toppled the global economy.

The aftermath of that earlier crisis brought scrutiny on the world’s biggest banks, which needed bailouts to avert disaster. As a result, it was ultimately institutions with $250 billion or more in assets that saw the most changes, including annual stress tests and stiffer rules governing how much loss-absorbing capital they had to keep on their balance sheets.
Non-giant banks, meanwhile, were viewed as safer and skirted by with less federal oversight. In the years after 2008, regional and small banks often traded for a premium to their bigger peers, and banks that showed steady growth by catering to wealthy homeowners or startup investors, like First Republic and SVB, were rewarded with rising stock prices. But while they were less complex than the giant banks, they were not necessarily less risky.

The sudden collapse of SVB in March showed how quickly a bank could unravel, dispelling one of the core assumptions of the industry: the so-called stickiness of deposits. Low interest rates and bond-purchasing programs that defined the post-2008 years flooded banks with a cheap source of funding and lulled depositors into leaving cash parked at accounts that paid negligible rates.
“For at least 15 years, banks have been awash in deposits and with low rates, it cost them nothing,” said Brian Graham, a banking veteran and co-founder of advisory firm Klaros Group. “That’s clearly changed.”

‘Under stress’

After 10 straight rate hikes and with banks making headline news again this year, depositors have moved funds in search of higher yields or greater perceived safety. Now it’s the too-big to-fail-banks, with their implicit government backstop, that are seen as the safest places to park money. Big bank stocks have outperformed regionals. JPMorgan shares are up 7.6% this year, while the KBW Regional Banking Index is down more than 20%.
That illustrates one of the lessons of March’s tumult. Online tools have made moving money easier, and social media platforms have led to coordinated fears over lenders. Deposits that in the past were considered “sticky,” or unlikely to move, have suddenly become slippery. The industry’s funding is more expensive as a result, especially for smaller banks with a higher percentage of uninsured deposits. But even the megabanks have been forced to pay higher rates to retain deposits.

Some of those pressures will be visible as regional banks disclose second-quarter results this month. Banks including Zions and KeyCorp told investors last month that interest revenue was coming in lower than expected, and Deutsche Bank analyst Matt O’Connor warned that regional banks may begin slashing dividend payouts.
JPMorgan kicks off bank earnings Friday.
“The fundamental issue with the regional banking system is the underlying business model is under stress,” said incoming Lazard CEO Peter Orszag. “Some of these banks will survive by being the buyer rather than the target. We could see over time fewer, larger regionals.”

Walking wounded

Compounding the industry’s dilemma is the expectation that regulators will tighten oversight of banks, particularly those in the $100 billion to $250 billion asset range, which is where First Republic and SVB slotted.
“There’s going to be a lot more costs coming down the pipe that’s going to depress returns and pressure earnings,” said Chris Wolfe, a Fitch banking analyst who previously worked at the Federal Reserve Bank of New York.
“Higher fixed costs require greater scale, whether you’re in steel manufacturing or banking,” he said. “The incentives for banks to get bigger have just gone up materially.”
Half of the country’s banks will likely be swallowed by competitors in the next decade, said Wolfe.

While SVB and First Republic saw the greatest exodus of deposits in March, other banks were wounded in that chaotic period, according to a top investment banker who advises financial institutions. Most banks saw a drop in first-quarter deposits below about 10%, but those that lost more than that may be troubled, the banker said.
“If you happen to be one of the banks that lost 10% to 20% of deposits, you’ve got problems,” said the banker, who declined to be identified speaking about potential clients. “You’ve got to either go raise capital and bleed your balance sheet or you’ve got to sell yourself” to alleviate the pressure.
A third option is to simply wait until the bonds that are underwater eventually mature and roll off banks’ balance sheets – or until falling interest rates ease the losses.
But that could take years to play out, and it exposes banks to the risk that something else goes wrong, such as rising defaults on office loans. That could put some banks into a precarious position of not having enough capital.

‘False calm’

In the meantime, banks are already seeking to unload assets and businesses to boost capital, according to another veteran financials banker and former Goldman Sachs partner. They are weighing sales of payments, asset management and fintech operations, this banker said.
“A fair number of them are looking at their balance sheet and trying to figure out, `What do I have that I can sell and get an attractive price for’?” the banker said.
Banks are in a bind, however, because the market isn’t open for fresh sales of lenders’ stock, despite their depressed valuations, according to Lazard’s Orszag. Institutional investors are staying away because further rate increases could cause another leg down for the sector, he said.

Orszag referred to the last few weeks as a “false calm” that could be shattered when banks post second-quarter results. The industry still faces the risk that the negative feedback loop of falling stock prices and deposit runs could return, he said.
“All you need is one or two banks to say, ‘Deposits are down another 20%’ and all of a sudden, you will be back to similar scenarios,” Orszag said. “Pounding on equity prices, which then feeds into deposit flight, which then feeds back on the equity prices.”

Deals on the horizon

It will take perhaps a year or longer for mergers to ramp up, multiple bankers said. That’s because acquirers would absorb hits to their own capital when taking over competitors with underwater bonds. Executives are also looking for the “all clear” signal from regulators on consolidation after several deals have been scuttled in recent years.
While Treasury Secretary Janet Yellen has signaled an openness to bank mergers, recent remarks from the Justice Department indicate greater deal scrutiny on antitrust concerns, and influential lawmakers including Sen. Elizabeth Warren oppose more banking consolidation.
When the logjam does break, deals will likely cluster in several brackets as banks seek to optimize their size in the new regime.
Banks that once benefited from being below $250 billion in assets may find those advantages gone, leading to more deals among midsized lenders. Other deals will create bulked-up entities below the $100 billion and $10 billion asset levels, which are likely regulatory thresholds, according to Klaros co-founder Graham.

Bigger banks have more resources to adhere to coming regulations and consumers’ technology demands, advantages that have helped financial giants including JPMorgan steadily grow earnings despite higher capital requirements. Still, the process isn’t likely to be a comfortable one for sellers.
But distress for one bank means opportunity for another. Amalgamated Bank, a New York-based institution with $7.8 billion in assets that caters to unions and nonprofits, will consider acquisitions after its stock price recovers, according to CFO Jason Darby.
“Once our currency returns to a place where we feel it’s more appropriate, we’ll take a look at our ability to roll up,” Darby said. “I do think you’ll see more and more banks raising their hands and saying, `We’re looking for strategic partners’ as the future unfolds.” More

An exterior view of the Advance Auto Parts store at the Sunbury Plaza.
Sopa Images | Lightrocket | Getty Images

Check out the companies making the biggest moves before the bell:
Advance Auto Parts — Advance Auto Parts declined 2.4% in the premarket after Atlantic Equities on Monday downgraded the stock to underweight, and cut its price target to $50. That represents about 28% downside. Analyst Sam Hudson said the firm’s “ongoing weak performance as indicative of structural challenges and significant share losses.”

Icahn Enterprises — Shares popped 10% following a Wall Street Journal report that Carl Icahn untied his personal loans from the stock price, in response to recent attacks by a short seller that alleged “inflated” asset valuations.
Meta Platforms — Shares of the social media company rose about 1% in premarket trading. Meta’s new online platform Threads has attracted over 100 million users since its launch last Wednesday, according to the tracking site, Quiver Quantitative. CEO Mark Zuckerberg said last week the rapid growth was “way beyond our expectations.”
Cava — The restaurant chain gained 3% after JPMorgan initiated coverage of the stock with an overweight rating and $45 price target, suggesting nearly 14% upside from Friday’s close. The firm cited Cava’s well-capitalized business model and total addressable market opportunity for the call.
Fisker — The electric vehicle maker’s stock rose less than 1% after the company announced a $340 million convertible note offering, with the potential to increase it to $680 million. Fisker said it intends to use the net process for general corporate purposes, including working capital, an additional battery pack line and the development of future products.
Charles Schwab — Shares of the brokerage firm rose 1.9% in premarket trading after JMP upgraded Schwab to market outperform from market perform. The firm said in a note to clients that Schwab should benefit from stabilizing cash-sorting trends and low expectations heading into earnings season.

Shockwave Medical — The stock added 2.8% after being upgraded by Morgan Stanley to overweight from in-line. The firm said it expects a solid improvement in outpatient reimbursement.
— CNBC’s Yun Li, Sarah Min and Jesse Pound contributed reporting. More

U.S. inflation cooled in May to an annual 4%, its lowest annual rate in more than two years, but core inflation rose by 0.4% month-on-month and 5.3% year-on-year.
“The central banks need to trigger a recession to force unemployment to pick up and create enough demand destruction, but we’re not there yet,” top Societe Generale economist Kokou Agbo-Bloua said.
Nathan Thooft, co-head of global asset allocation at Manulife Asset Management, said that a recession had been “postponed rather than canceled.”

U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee (FOMC) at the headquarters of the Federal Reserve on June 14, 2023 in Washington, DC.
Drew Angerer | Getty Images News | Getty Images

Central banks are at “the end of the beginning” in their battle against inflation, as several factors keep core prices persistently high, according to top Societe Generale economist Kokou Agbo-Bloua.
Markets are eagerly awaiting key inflation prints from the U.S. later this week, with the core annual consumer price index (CPI) — which excludes volatile food and energy prices — remaining persistently high to date, despite the headline figure gradually edging closer to the Federal Reserve’s 2% target.

The persistence of labor market tightness and the apparent resilience of the economy means the market is pricing around a more-than 90% chance that the Fed will hike interest rates to a range of between 5.25% and 5.5% at its meeting later this month, according to CME Group’s FedWatch tool.
U.S. inflation cooled in May to an annual 4%, its lowest annual rate in more than two years, but core inflation rose by 0.4% month-on-month and 5.3% year-on-year.
In assessing the current state of global policymakers’ efforts to tame inflation, Agbo-Bloua quoted former British Prime Minister Winston Churchill’s remarks in a 1942 speech: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

“The number one ‘original sin,’ so to speak, is that governments have spent a huge amount of money to maintain the economy that was put in hibernation to save human lives, so we’re talking roughly 10-15% of GDP,” Agbo-Bloua, global head of economics, cross-asset and quant research at Societe Generale, told CNBC.
“The second point — obviously you had the war in Ukraine, you had the supply chain disruptions — but then you also had this massive buildup in excess savings plus ‘greedflation,’ so companies’ ability to raise prices by more than is warranted, and this is why we see profit margins at record levels over the past 10 years.”

Companies have developed a “natural immunity” against interest rates, Agbo-Bloua argued, since they have been able to refinance their balance sheets and pass higher input prices on to consumers, who are now expecting higher prices for goods and services.
“Last but not least, the labor market is super tight and you have lower labor productivity growth which now is pushing unit labor costs and you get this negative spiral of wage prices,” he said.
“The central banks need to trigger a recession to force unemployment to pick up and create enough demand destruction, but we’re not there yet.”
The impact of monetary policy tightening often lags the real economy by around three to five quarters, Agbo-Bloua said. But he highlighted that the excess savings built up during the pandemic created an additional buffer for consumers and households, while companies were able to repair balance sheets. He suggested that this has helped to keep the labor market resilient, which will likely extend this lag time.

Inducing a recession

In order to maintain credibility, Agbo-Bloua therefore said central banks — and in particular the Fed — will need to keep raising interest rates until they induce a recession.
“We think that the recession or slowdown should occur in the U.S. in Q1 of next year because we think the cumulative tightening is ultimately going to have its effects, it’s not disappearing,” he said.
“Then in Europe, we don’t see a recession in the euro area, because we see demand 2 to 3 percentage points above supply, and therefore we see more of a slowdown but not recession.”
In terms of where the recession in the U.S. will begin to take hold, he suggested it will most likely “creep into corporate profit margins” that are still lingering near record levels, through the “wage growth phenomenon that is essentially going to eat into earnings.”
“The second point is that consumer spending patterns will also slow down, so we think it is a combination of all of these factors that should eventually drive a slowdown,” he added.
“Then again, if you look at the current path of interest rates, it seems like we might see more tightening before this is likely to occur.”
‘Recession postponed, but not canceled’
This sentiment was echoed by Nathan Thooft, co-head of global asset allocation at Manulife Asset Management, who said while economies had a better start to 2023 than expected and have so far mostly avoided a technical recession, this is more a case of the recession being “postponed rather than canceled.”
“The tightening of credit conditions and the slowdown in lending suggest that we’ve so far managed to delay the impending recession as opposed to averting it altogether,” Thooft said in the asset manager’s mid-year outlook on Friday.
“However, whether a recession actually takes [place] is far less relevant than how long we could be stuck in a period of below-trend GDP growth.”
He suggested that with global growth expected to settle at around 2.5% this year and next, below the 3% threshold that would herald a global recession if breached.
“If forecasts are correct, it means that global GDP growth would come in 15.2% below trend, a scenario last seen during the pandemic in 2020 and, before that, in the 1940s.” More

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