Aside from the vague notion that big banks are too big to fail, it’s increasingly difficult to justify Wells Fargo (NYSE:WFC) based purely on the fundamentals. Note that I said increasingly. I concede that Wells Fargo stock could jump higher once we get over this crisis. But the novel coronavirus pandemic has two components, and only one of which will be directly impacted by a vaccine.
With Congress still deadlocked as to whether it wants to help the American people during this unprecedented calamity, I have now become more skeptical about Wells Fargo stock. Apparently, I’m not alone. According to a Business Insider report, finance professor David Kass stated that Warren Buffett of Berkshire Hathaway (NYSE:BRK.B) fame likely sold all his WFC holdings last quarter.
If so, you can add that to your long list of reasons to avoid Wells Fargo stock. In its second-quarter earnings release, WFC posted its first quarterly loss since the Great Recession. Specifically, according to CNBC.com contributor Hugh Son:
The bank had a net loss of $2.4 billion in the second quarter, or a loss of 66 cents a share, worse than the 20 cents a share loss expected by analysts surveyed by Refinitiv. Revenue of $17.8 billion was also weaker than analysts’ $18.4 billion estimate.
Moreover, the outlook is bleak. For one thing, we’re in a low-interest rate environment because let’s face it – that’s one of the few monetary weapons we have to keep our country afloat. But that also hurts profitability for Wells Fargo stock.
Second, the loss of lending revenue from the business community will probably be staggering. For instance, 85% of independent restaurants may close permanently.
Gold Is the Ultimate Indicator for Wells Fargo Stock
I could go on. Perhaps up to 30 million Americans face eviction, which may translate to a homelessness crisis. It shouldn’t escape anyone that communities of color have disproportionately suffered during this pandemic. I can almost guarantee you that the raging national protests for social justice do not stem exclusively from one incident.
But for me, the biggest concern I have for Wells Fargo stock is extreme bullishness in the gold market. As a precious metals investor, I will freely admit that gold is stupid. Obviously, gold doesn’t generate passive income. Further, it’s not tied to anything but itself. An investment in gold is not a bet on a burgeoning industry or innovative business. Typically, it’s a hedge against the unknown.
So, it should concern stakeholders of Wells Fargo stock that gold is drawing anywhere near the kind of attention it has. This is especially valid considering that we’re in a technological renaissance. Digitalization has changed our lives forever. Yet gold is moving higher?
Historically, gold and economic bellwethers like Wells Fargo stock share a cyclical relationship in terms of average year-over-year returns. But some gold-friendly economists will argue that the exuberant, deficit-spending go-go years of the 1980s and 1990s have never been fully reconciled.
Theoretically, gold should have soared throughout last decade. However, mass government spending saved us from collectively having to adopt an austere lifestyle.
Interestingly, though, gold and WFC returns formed an “infinity loop” over the past two decades: government intervention attempted to push WFC and other benchmarks higher while naturally subduing gold. However, such intervention is probably not indefinitely effective due to the law of diminishing returns.
Therefore, I believe that the end of last decade formed an inflection point between WFC and gold.
It’s Not All About the Metals
Logically, this inflection point suggests that this decade will determine the long-term trajectory of the target assets. So far, gold is winning the battle. Over the next several years, I wouldn’t be surprised that the yellow metal finally and decisively gets its day in the sun.
But the dark cloud hanging over Wells Fargo stock, along with rivals like JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C), doesn’t just revolve around gold. Instead, WFC may have another longer-term headwind: the threat of democratization.
I find it significant that PayPal (NASDAQ:PYPL) poached one of Wells Fargo’s executives. A company like PayPal is better able to service the underbanked and unbanked. Because with so many people facing evictions or losing their jobs, the big banks must lower their standards to acquire democratization’s revenue streams.
But that also involves – if I may be blunt – getting rid of the staid, overpaid white male aristocratic hegemony of the big banking sector, and with it, the associated BS and widening inequities. That’s not an easy pill to swallow for a privileged establishment like Wells Fargo.
But times are changing, as you can see. If Wells can get with the program, perhaps I’ll change my mind. Until then, gold and socially progressive and relevant investments will likely continue moving higher.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he is long gold.