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Where exactly are we in the woods?
With regard to the banking situation, and based on the Fed’s actions on Wednesday and the comments of Jerome Powell, I think we are a lot closer to being out of the woods than when we were in the middle of the Silicon Valley Bank (SIVB) death spiral early last week. This point of view does not seem to be the consensus.
The authoritative comments from Barron’s Daily on Wednesday morning would easily give one pause about any rate increase: “The Fed’s problem is that while the banking stress seems to have eased in recent days, it’s not over. That makes decisions and forecasts challenging.” On top of this, you had a notable bear, Michael Burry of “The Big Short” fame, out there naming names of two important mid-size banks that had worrisome (in his mind) uninsured deposits. Remember, these are both reputable banks being dinged not because of bad management issues but because they have large uninsured depositors who might panic and pull their money from these banks (a “bank run”).
I have had a change of heart
In my last post, I said: “Out of prudence, the Fed needs to take a step back… As the Fed’s rate moves may be causing problems in other segment of the banking and general economy, it would make sense that they do nothing with rates at the next FOMC meeting.” Of course, then I watched the European Central Bank raise their equivalent of our Fed funds rate by 1/2% the next day in the face of the Credit Suisse (CS) debacle (admittedly, different banking systems… nonetheless, CS was a big player in Europe) and their markets went up. Hmmm, this was obviously viewed as a show of confidence. The fact is, the Fed and Treasury have the tools to deal with more serious problems in the banking industry. We saw that in 2008 and 2009. It is time to amp down fear over the strength of our banking system!
Regardless, today investors, or the computers programmed by certain investors, took umbrage at the Fed’s action and voted with their feet. The Dow, S&P 500 and Nasdaq were all down about 1.6% on the close. Certainly not a horrific result, nonetheless, it seemed pretty unwarranted in my mind when you add in some of the comments from Chairman Powell’s press conference.
The rhetoric has changed
We heard nothing about “higher for longer.”
“If we need to raise rates higher, we will,” Powell said in the press conference. “I think for now, though… we see the likelihood of credit tightening. We know that that can have an effect on the macro economy.”
“It is too soon to determine the extent of these effects, and therefore too soon to tell it how monetary policy should respond,” Powell added. “As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation. Instead, we now anticipate that some additional policy firming may be appropriate.”
“Deposit flows in the banking system have stabilized over the last week,” he said.
(Source: CNBC)
I hesitate to add, but I will: these policy moves will all be data-dependent.
Next Big Thing To Worry About: Credit Tightening
Financial institutions fearful of losing depositors will tighten lending standards, restrict lending, and thus put the brakes on the economy. Who needs to raise rates? Meanwhile, I’m already beginning to see articles using the terminology “credit crunch” purporting to give the lowdown on the impact of “credit tightening” on certain company and industry groups. Here’s one from yesterday: “AerCap And Air Lease Corporation: The Implications Of A Credit Crunch”.
Not to rain on anybody’s parade, but the author of the above concludes a “CC” should not have a meaningful impact on either of these companies. (In the interest of full disclosure, I am a contributor to Seeking Alpha and I own a position in AerCap (AER).)
Bottom Line
The woods may be changing from bank failures to “credit tightening”, soon to be “credit crunch”. There is always something. I am not certain that the latest news from the the Fed merited a 500-point slapdown in the Dow Industrials. The economy continues to chug along even after a 12-month 100% increase in the Fed funds rate. We have experienced significant corrections since. Market timing is hard. Don’t let ’em scare you out of your stocks over transient, ever-changing concerns.
What’s your take?
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