I have known about financial crises. Financial crises have been my friends. And it’s not a financial crisis. At least not yet.
I’ve tapped into my inner Senator Lloyd Bentsen here because of the big fuss made over the fallout from the Silicon Valley Bank failure in California and the closing of Signature Bank in the East. It’s a weird crisis where megacap tech stocks are rising and cryptocurrency prices are rising. But that’s what happened in the last crazy and worrying week.
The hasty and aggressive responses by the government, regulators and the largest banks stopped the bleeding resulting from the market’s loss of confidence in many medium-sized and smaller banking institutions. That should allow the Federal Reserve to stay on course to raise its key interest rate again at next week’s much-anticipated meeting.
But comparisons with the bailouts during the 2008-09 financial crisis, which culminated in the failure of Lehman Brothers in September 2008, seem misplaced.
The current circumstances also differ significantly from those surrounding the collapse of Bear Stearns, which occurred exactly 15 years ago last week, recall Brean Capital’s John Ryding and Conrad DeQuadros, the investment bank’s economists at the time. Back then, they point out, there was no way for Bear to borrow from the nation’s central bank.
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In contrast, the Fed, the Treasury Department and the Federal Deposit Insurance Corp. rapid depositors at both the Silicon Valley and Signature banks while creating the Bank Term Funding Program. The new facility allows banks to borrow against securities that have lost value due to the sharp rise in interest rates developed by the Fed a year ago.
As of Wednesday, the Fed had lent about $300 billion to banks, including $11.9 billion through the term funding program. But while some experts declared that this was a new form of quantitative easing that offset the tightening from the reduction in the Fed’s securities portfolio, Ryding and DeQuadros disagree. In a client note, they point out that pandemic-driven QE in 2020-21 flowed directly into households via the federal government’s massive stimulus, largely financed through central bank bond purchases. It is unlikely that this latest reserve infusion will be lent to potential borrowers by the banks that are mainly interested in managing their liquidity.
Along with the $30 billion deposited into First Republic Bank (ticker: FRC ) by its bigger sibling banks, the actions of the Fed and other regulators appear to have stabilized the markets, if not First Republic’s stock. They fell 32.8% on Friday, despite the support package announced the day before. On the week they fell by 71.8%. Of course, the protection given to bank depositors does not extend to unsecured bond and stock holders.
Despite the media spotlight on the banks, the stock market failed to show major signs of distress. The Nasdaq Composite rose 4.41%, its best week since mid-January, with megatechs such as Microsoft ( MSFT ) and Alphabet ( GOOGL ) up 12.4% and 12.1%, respectively, and touted as new havens. That
S&P 500 index
rose 1.43% on the week, while
Dow Jones Industrial Average
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fell by only 0.15 per cent. And the most shocking thing is that Bitcoin’s value jumped 33.3%.
Treasuries – one of the traditional safe havens – had a really wild week. The yield on the two-year note, the maturity most sensitive to expectations about future policy, fell 74 basis points (100ths of a percentage point) to 3.846%. That was the most since the week ending Oct. 23, 1987, which included the Black Monday crash, according to Dow Jones.
Given all this, the Fed is expected to go ahead with a 25 basis point increase in its target federal-funds rate, currently 4.50%-4.75%, at the end of its open market committee’s two-day meeting on Wednesday. Fed funds futures put a 65.7% probability of such a move, which would match the increase at the previous meeting in late January. But the futures market is also betting that this increase will be the last, pricing in rate cuts as early as the panel’s confab on 23-24. June.
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Ed Hyman, who heads Evercore ISI’s esteemed finance team, agrees that Jerome Powell & Co. likely to approve a 25 basis point increase. He adds that it would be highly unusual for the Fed to tighten more amid the strong disinflationary force exerted by falling oil prices (US crude fell nearly 13% last week to $66.74, a 52-week low). And, he says, the Fed’s earlier tightening is likely to result in a recession that shrinks gross domestic product by about 2% during the fourth quarter and first quarter of 2024.
A well-known (but publicity-shy) portfolio manager sees a mild recession later this year, but one likely to hit corporate earnings more than consensus expects. The initial decline in the bear market ended last October, the result of the appreciation in stocks from the sharp increase in interest rates by the Fed. After the rally that continued into the early part of this year, he sees the next leg down developing as profit estimates are cut further.
It’s not a crisis, just a typical bear market.
Write to Randall W. Forsyth at randall.forsyth@barrons.com