Is the SVB bank collapse the canary in the coalmine?

Sometimes I like to post a blog with numerous quotes by smart people with differing expertise than my own. Today, I have a few for you. We’ll start with a CIO on the recent banking situation in the USA, given recent interest by some of you on the subject. Only one chart today, folks. But worthy of the time spent reading:

US Banks: Canaries in the coal mine?

“This system-wide backstop isn’t needed at all.  We have one large bank (not even that large) that was very aggressive on both sides of its balance sheet. We have a group of rich dudes and corporate treasurers that greedily took the extra 60 bps and didn’t do good credit analysis. So a bank failed.  And everyone was reminded what an insured deposit is. In the GFC we bailed out everyone who took the extra 60 bps (like money markets).  But we don’t need to do that here.  There may be a tad of contagion.  But it shouldn’t be significant (some corporate treasurers will be reminded to do their job), despite the whining…from people who are happy to change the rules during the game, if it suits them.  I doubt there is a series of bank failures.  Those saying community banks will lose tons of deposits are wrong.  Show me another where uninsured deposits were anywhere near 90%. The S&P fell a whopping 3% on Thursday/Friday. It’s still up for the year. This is no crisis at all. 

Rate Hikes

“The hiking cycle is unlikely to be over. SIVB is not a systemic crisis.  It also doesn’t end inflation.  We shall see what cpi says, but the economy is unambiguously strong (excluding the money-losing tech sector, which is the loser in SIVB).  Biden proposed a 5.2% pay increase for federal workers. We just added another 300K jobs.  We are not in a recession or even a slowdown. Fed funds priced in 41 bps in March this week, so the market was debating 50 vs. 25.  My guess is 25 is now more likely… but still data dependent. Powell will tighten much more than anyone thinks. My guess is we see 7% fed funds before this is over.” — (Un-named CIO Large Hedge US Hedge Fund, from Beartraps)

“If we want to get back down to 2%, that’s not going to happen magically. It’s going to take either much more economic weakness than we’ve already seen or significantly more tightening in order to bring it down.” — Karen Karniol-Tambour, co-CIO Bridgewater

“On Thursday, Christopher Waller, a member of the Fed’s influential Board of Governors, said that if the economy continued to show strength and inflation remained elevated, the central bank would have to lift its key rate above 5.4%. That would be higher than Fed officials had signaled in December, when they projected it would peak at roughly 5.1% this year. “Recent data suggest that consumer spending isn’t slowing that much, that the labor market continues to run unsustainably hot and that inflation is not coming down as fast as I had thought,” Waller said in prepared remarks for a business conference in Los Angeles. His suggestion was in contrast to a speech he gave in January, titled “A Case for Cautious Optimism,” that captured a prevailing sentiment at the time that inflation had peaked and was steadily declining.” — ABC

MarketDesk Research: Low beta stocks

Note: couldn’t get this quote to re-print properly so you will have to excuse the broken text-keith

“With the end of the tightening cycle approaching and uncertainty around Fed policy decreasing, we expect fundamentals to become the
next focus point. Our base case continues to be that macro conditions and corporate fundamentals will weaken in 1H 2023. In the equity
sleeve of portfolios, we continue to favor a low beta approach to protect against drawdown risk. In the credit sleeve, we favor extending
duration via U.S. Treasuries after the jump higher in yields during February. Overall, our approach remains defensive and cautious.
Long-term Outlook (12 months) – Macro conditions continue to deteriorate, and our proprietary Quant Pack indicators signal now is the time to
start reining in risk and transitioning to a lower beta portfolio. The tightening cycle is nearing an end, but the economy has not yet felt the
impact of higher interest rates and tighter monetary policy. Rather than trying to time macro catalysts and events, which is difficult, our focus
remains on long-term indicators and positioning a portfolio to run a lower beta during the first half of 2023. To justify an increase in portfolio
beta, we would need to see an inflection higher across multiple indicators, such as earnings growth, manufacturing PMI, and
GDP growth. Until the outlook improves, our focus will continue to be on protecting against sell-offs”

EquityClock: Liquidity drainage

“Through the month of January, $1 Trillion were added to central bank reserves as a result of interventions undertaken by the Bank of Japan and the Peoples Bank of China. This caused global central bank liquidity to pull up from its declining path that had been apparent in recent
quarters, allowing stocks to realize their strong start to the year as those funds flowed into the market and
squeezed those that were positioned for further declines. According to one analyst, the $1 trillion boost in
reserves equates to a 10% rise in stocks and a compression of credit spreads that wouldn’t have been realized
without this central bank intervention. The analyst at Citigroup notes that while this influence was a tremendous
tailwind for stocks early in the year, the path of “liquidity drainage and risk weakness” is set to resume now that
these one-off liquidity injections are largely complete”– EquityClock

BearTraps: Look for a final flush, and a bottom soon

When equities are – for two years – try and rally – OVER and OVER again into a HIGHER and HIGHER risk-free rate and a WALL of overhead supply — over time — the bulls get more and more tired. Weak hands start to get flushed out of the game. From “despair” in Q1 2020, to “hope” in Q2 2020, on to “excitement” in Q4 2020, the investor psychology shift was powerful. This dynamic worked its way up to “euphoria” — ALL juiced with central bank love in 2021. The year 2022 was a pure “denial” stage, as the last decade´s darlings fell on hard times without QE and inflation eating away at long-duration equities. It was the classic DCF (Discounted Cash Flow) model adjustment zone. In 2023, as “fatigue” starts to overpower the bulls, capitulation draws near. As we did AGGRESSIVELY in Q1 and Q2 2020 — we must be prepared to put capital to work into “despair.” 

Goldman Sachs concerned about retail commercial debt due in 2023

“This week, Goldman announced it´s looking for “strategic alternatives” for its consumer arm, raising prospects for a potential sale after the business lost billions of dollars. Goldman Sachs goes “all in” US consumer finance, then pukes 🤮 it out 18 months later? Really??? Flashback to 2006-2007, Goldman was the FIRST to exit subprime lending in the housing market — it was a classic, hall of fame stop 🛑 loss. Today, as colossal interest rate risk hits the $4.8T consumer finance market – they cut bait again while most are asleep. History rhymes, indeed. For GS to make this sharp reversal, they see something, and they do NOT like what they see. With $4800 BILLION of consumer debt across credit cards, home equity lines of credit, auto finance etc”- BearTraps

“I wouldn’t be surprised over the next six months if you just saw a wave of defaults and keys getting handed back because the offices are not getting filled up,”  Nitin Chexal, Chief Executive Palladius