The Ides of March Loom Large Over the Financial Markets Once Again – Top 3 Takeaways – March 13th, 2023
- It’s a lot of debt/FTX. It was March 16th, 2008. The day Bear Sterns collapsed and the day that the economy forever changed. Sure, there were plenty of signs of looming issues in the economy leading up to that moment. Unaffordable and unsustainable housing prices driven by people obtaining mortgages who had no business having them. Rising inflation due to a housing bubble that the Federal Reserve was aggressively combating by significantly raising interest rates. Banks overleveraged on their own balance sheets due to assets bubbles. Sound familiar? It’s been 20 months since incomes rose faster than inflation. How long is that truly sustainable? Related...total consumer debt is 3.7% higher today than a year ago today, which nearly mirrors the divide between incomes and inflation. And where is most of it being accumulated? In the worst possible place. Credit cards. Most recently credit card balances are 15% higher than a year ago. 15%! And with every interest rate increase the cost of servicing that debt, which is being used to account for the rising cost of everyday life in excess of their income, is rising. And the last time we had consumer debt levels jump by such a large percentage year over year? You guessed it, two decades ago, just preceding the financial crisis. Managing debt isn’t complicated. It works until it doesn’t. One can accumulate as much of it as they want until they can no longer meet the minimum monthly obligations. And aside from inflation continuing to rise faster than incomes, which will continue to naturally narrow the free cash flow gap for most Americans, the time it typically stops working is when they do. So about that...
- It’s a lot of jobs on the line/Silverbank Capitol. Friday’s jobs report with 311,000 jobs was generally seen as continuation of a strong labor market, which is generally still true. But looking under the hood a little, shows a bit more than the headlines suggest. Wage growth is at 4.6% while inflation remains at 6.4%. Negative revisions from December and January, meaning fewer jobs were previously added than originally reported by the federal government – a trend in which the ADP Private Sector jobs report has consistently picked up on with their reports regularly showing fewer job gains than the government’s. But still more people continuing to go to work is a good thing. And at the time of the FTX collapse in November they had only 319 employees and were worth a total of $18 billion. Not insignificant, but in the grand scheme of a $25 trillion dollar economy, not a big deal. Ditto. The second shoe to drop on March 1st, Silverbank Capitol, the pure play digital currency bank, was significant within the realm of digital currency but not in the overall context of the US economy. They retained assets of just $12 billion and 300 full-time employees as the bottom fell out from under them. But like the personal debt story example for today’s top takeaway, there comes a point when there’s systemic risk where there are a lot jobs on the line. And one failure leads to an ever bigger one. On that note.
- It’s a lot of exposure/Silicon Valley Bank. Stuff got real Friday...unlike much of what brought us to this point. Record artificial debt spending by President Biden and congressional Democrats, providing a one-two-three punch of 1) watering down the US dollar by artificially creating more of them in record numbers as part of the American Rescue Plan, Infrastructure and Jobs Act and Omnibus spending plan, among others. 2) Driving artificial demand by throwing all of this newly minted money into the economy. 3) Enacting crippling regulations, starting with Biden’s week one executive orders reining in domestic energy production and distribution which immediately resulted in the US losing the energy independence it obtained under the Trump administration. That’s how you have 41-year high inflation. All of that artificial money supply built on debt is also how you create asset bubbles. It’s what led to the Great Depression, as investors borrowed seemingly endless sums to invest in the stock market. It’s what caused the Great Recession as we did essentially the same thing but this time with real-estate. Silicon Valley Bank wasn’t like FTX or Silverbank Capitol. They’re a real bank. Or should I say “were”. An actual FDIC-insured bank. And many of the cool kids playing in the digital currency space were their clients. SVB was a 40-year-old bank specificizing in technology companies and startups with real money and real investments. And with $250 billion in assets, they had 8,553 full-time employed people managing them. As the 16th largest bank in the United States, that’s a lot of exposure and a lot of risk. But not nearly as much as this next statistic. 95% of deposits at Silicon Valley Bank weren’t FDIC insured. Meaning the potential for 95% of everything held by everyone and every company at that bank was at risk until the federal government announced late Sunday that they would be backstopping those deposits too. That’s a huge amount of exposure and a huge amount of risk and we’re effectively back to government bailouts of banks. So that takes me to what’s next. Good question. I can’t quantify it. The last time I couldn’t quantify what I was analyzing? March 16th, 2008. Nearly fifteen years ago to the day. What did I say back then? Right here, on WJNO, I said that I didn’t know where this would go, so if you need money for the next few years that you have invested, you should consider moving to the sidelines. Here’s my question for all of us today. 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. I also know that if hundreds, perhaps thousands of companies (2,500 companies had accounts with SVB at the time of the collapse), hadn’t made payroll this week...? You’d have had a lot of exposure for companies which would have otherwise been profitable this week. This situation escalated quickly, and the question is what’s next? I wish I didn’t see what I currently see in the economy. But I do. Something I don’t see...elasticity in the economy to handle much more of this.