FAU in the NCAA’s & Freaky Friday’s in the Financial Markets – Top 3 Takeaways – March 16th, 2023
- Freaky Friday. Yeah, it’s Friday. Yeah, it’s St. Patrick’s Day. Yeah, the NCAA tournament is in full swing. Yeah, FAU will be participating in it for the first time in 21 years tonight. That’s fun. What’s not are Fridays when we’re on the precipice of a potential financial crisis. All week I’ve carefully crafted stories and messaging designed to inform, occasionally entertain, but mostly to make sure you’re minding your own financial store as whatever will be, plays out. On Monday I said this: What are the odds with 40+ year high inflation, spiking consumer debt levels, barely affordable (or unaffordable) housing prices and rent rates, still rising interest rates which are now the highest since, you guessed it, 2008, and now the 16th largest bank in the country collapsing...that somehow or another this just all works out? I don’t know, which for me is the problem. But I do know history. Notably, the FDIC stepped in late Sunday to backstop even the uninsured deposits (at SVB & Signature). This is a real red herring and what happens next is a pivotal moment in this country. Contagion risk is real. If invested in stocks I think it’s wise to be fully prepared for a 23% or so selloff from here in case we do see systemic impacts in the economy and potential panic selling in the financial markets. On Tuesday I had this to say: While the philosophical debate over whether the federal government should risk taxpayer money to attempt to stabilize the financial system was the debate of 15 years ago. The philosophical debate should currently be whether the FDIC can justify backstopping all deposits, 95% of which aren’t eligible for their protection, at these institutions, while potentially raising costs on all remaining banks – which of course are passed on to consumers – and at worst could put them at risk of falling short in meeting obligations at other banks. On Wednesday my message was this: If all of the looming affordability issues, banking issues, etc. get better from here, the economy just might be alright. But the problem for me is that it all must work out from here. What happens if... There’s another shoe to drop? And I’m not throwing that out there as some theoretical question. Yesterday (Tuesday), one of the big three credit rating agencies, Moody’s, not only suggested its possible. They named seven potential shoes which could drop. Quoting Moody’s, We have changed to negative from stable our outlook on the US banking system to reflect the rapid deterioration in the operating environment following deposit runs at Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (SNY) and the failures of SVB and SNY. And yesterday it was this... No sooner had I communicated my top takeaways yesterday, explaining that Tuesday’s reaction in the financial markets was a head fake (and frankly a good opportunity for those who needed to make adjustments to do so), than came news Credit Suisse was in serious trouble and at risk of failing. And...that takes us to...
- What happened yesterday. The morning started with the news the Swiss government was bailing out Credit Suisse to the tune of $54 billion. The morning continued with news First Republic Bank, which had just had its credit cut to junk by the rating agencies Fitch and Moody’s, was set to get its own version of a corporate bailout. 11 financial institutions led by Goldman Sachs, Morgan Stanley, JPMorgan Chase and Citigroup are set to pony up $30 billion in deposits to attempt to stabilize the bank. So, we had a government bailout of a major Swiss bank and a corporate bailout of an American bank. And that was Thursday. And what was the stock market reaction? A rally. And likely another deceptive one. The point is that the problem in our financial markets weren’t solved when the FDIC stepped in and shuttered SVB and Signature Bank last Friday. The problem was just beginning as we’ve continued to see playout this week. The weak links have just begun show themselves. Throughout this week we’ve had the entire US banking system downgraded to negative. A government bailout of a major foreign bank which would have collapsed without it and a corporate bailout of a major American bank on the brink of collapse. Show of hands, how many think it’s really over now? The collapse of Bear Stearns happened March 16th, 2008. The real impact of that failure wasn’t felt until the summer. It would be naïve to say at this point that this is over, and we’d be beyond lucky if it was. The fact of the matter is the banking sector is worse off today than a week ago and...
- It’s Friday. Financial markets and Fridays during times of significant adversity are fickle things. Nervous investors and traders tend to be reluctant to hold full positions through the weekend out of fear of what might happen during it. Regulators tend to like to use it as a time to do their business – if they perceive there are other banks at risk of failing. That’s what makes today a freaky Friday. And there are likely to be many more to come. Hopefully FAU wins and hopefully a budding financial crisis has already been contained. If so, it’ll just be a fun Friday. But truth be told. I didn’t bet on the Owls in my bracket (it’s nothing personal) and I wouldn’t be betting on the worst of whatever will be in banking sector and the economy being over at this point either.