Bank Failures: The Issues and Indications
Fear is one of the most powerful human emotions, and for this reason, negativity sells. Successful investing, however, involves a consistent, phlegmatic practice of sound principles over time, and in a broad range of investing environments. While ratings-driven news stories can show us where the emotionally-charged herd is stampeding at the moment, in order to grasp the indications that can help us make wise investing decisions for the mid and long-terms, we need to get past (or avoid) the entertainment, and thoughtfully consider primary forces. Here are a few factors I believe are worthy of our consideration.
Systemically important banks are far better capitalized today than in the 2008 financial crisis. Fed-mandated regulations applicable to banks with consolidated assets exceeding $50billion, including stress tests, resolution planning, stricter liquidity and capital requirements, and enhanced oversight,¹ suggests a crisis similar to The Great Recession is unlikely at this time. While mass fear in a highly indebted society (practicing fractional reserve banking) is alone capable of introducing a systemic crisis, both the Treasury Department and the Fed proved during the 2020 Covid19 lockdown they will go to any length necessary to stabilize the economy and financial markets in a time of crisis, and unless and until the U.S. dollar loses global confidence, they have the power to succeed. That said, the move by federal regulators this week to backstop all Silicon Valley Bank deposits² virtually guarantees a more significant banking crisis will emerge down the road, as it no longer makes sense for banks to consider risk when allocating depositor funds.
While a recession appears imminent (or already here), the U.S. economy is not unraveling in a disorderly manner. Unemployment remains low at 3.6%,³ job openings are robust, and layoffs outside the tech sector are unmentionable. Nothing systemically significant is broken in the U.S. economy at this time, but do not forget inflation remains three times the 2% desired by the Fed!
A Fed policy shift is probably much closer than most investors understand in their present fearful state. For many months the Fed has been aggressively raising interest rates to combat 40 year high inflation, and Jerome Powell has been clear that only a drop in inflation near the desired 2% range, or a crisis, will cause a change in the direction of rates. The Fed’s goal was to raise rates until something big broke, and big things are starting to break.
These are the relevant factors, and I believe they suggest the following:
The Fed will likely pivot to easy money policies near term.
The U.S. dollar will likely weaken against foreign currencies, and gold and other chaos hedges will likely outperform, in this process.
Investors should favor established, capital-efficient businesses, and build a watch list for the Fed pivot.
High inflation continues to place a premium on present streams of income, and discount future streams of income.
The credit market is tightening, which may induce further casualties before regulators take policy action. Look for great businesses to get “thrown out with the bathwater”, and buy them!
Cash is required to capitalize on these dynamic opportunities.
Think about it, Shaun.
“Only when the tide goes out do you find out who has been swimming naked” ~Warren Buffet
“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” ~Ecclesiastes 11:2
1 McKinsey & Company, “A decade after the global financial crisis: What has (and hasn’t) changed?”, August 29, 2018 https://www.mckinsey.com/industries/financial-services/our-insights/a-decade-after-the-global-financial-crisis-what-has-and-hasnt-changed
2 NBC News, “US moves to protect all deposits at Silicon Valley Bank in a bid to stem a wider fallout”, March 12, 2023 https://www.nbcnews.com/business/business-news/treasury-says-will-back-silicon-valley-bank-deposits-rcna74570
3 U.S. Bureau of Labor Statistics, March 10, 2023 https://www.bls.gov/news.release/empsit.nr0.htm
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