CAMS Weekly View from the Corner – Week ending 5/5/2023
May 8, 2023
In today’s edition we ask unanswerable questions. They are unanswerable because we cannot speak for the entity and various key players within it relative to what they were thinking and are thinking present day. If you are even an occasional reader of these editions you will recognize the sharing of various angles relative to the Federal Reserve in the previous couple of years especially in the previous several months. The Fed, as the nation’s interest rate setting policy body, financial regulator and money printer plays a significant role in every citizen’s life. This holds true regardless if you are a market(s) participant or are far removed from such activities. In our previous edition we focused on the upcoming interest rate meeting which has since passed. As most are aware the Fed raised interest rates by ¼% point. That was only a piece of the puzzle as the puzzle has gotten considerably more complicated in the previous couple of years with price inflation being let out of the box coupled with a follow-on banking system issue in recent months. All point toward the Fed in light of their central role within the financial and economic system of the nation. Did He Really Say That? Post-Fed meeting Chairman Powell addressed the citizenry in the traditional press conference. He opened with prepared commentary and then took questions. There were several aspects of the commentary and Q&A that we could speak to here and may circle back on in near-term editions. Today we will focus on an aspect of the Q&A session that seemed surreal. First though, we offer a very brief context. Chairman Powell has consistently emphasized in recent appearances including within his prepared remarks of this press conference that the Fed is “…..committed to learning the right lessons from this (banking) episode and will work to prevent events like these from happening again…” to quote him directly from Wednesday’s presser. We continue to ask why do lessons need to be learned in light of their expected intellectual understanding of the financial system coupled with the power they have to proactively fix an expected downstream issue in light of their deep intellectual understanding of said system. Below we share excerpts from an interaction of a reporter and Powell: https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230503.pdf
STEVE LIESMAN. Can you tell us what the Federal Reserve Board did in the wake of that February presentation where you informed that Silicon Valley Bank and other banks were experiencing interest rate risks? CHAIR POWELL. So, the February 14 presentation, I didn’t remember it very well. But now, of course, I’ve gone back and looked at it very carefully. I did remember it. And what it was, was a general presentation. It was an informational briefing of the whole board, the entire board. I think all members were there. And it was about interest rate risk in the banks and lots of data. And there was one page on Silicon Valley Bank, which talked about, you know, the amount of losses they — mark to market losses they had in their portfolio. There was nothing in it about — that I recall, anyway, about the risk of a bank run. It wasn’t — it wasn’t presented as an urgent or alarming situation. It was presented as an informational non-decisional kind of a thing.
The Entire Board We note how the Chairman offered the entire Board was in this meeting. We share this to emphasize this is not a specific focus on the Chairman as much as it is questioning the Fed at large. How can you have a front row seat to the entire systemic financial landscape while simultaneously being the body that has been increasing interest rates aggressively in the previous year-plus and not simultaneously have in the back of your own, “regulator’s mind,” that the banks your entity oversees must have significant losses on their books in light of the impact on bond prices that your own interest rate setting policies bring onto bond prices? How is this possible? Furthermore, how is it possible, as a simple logical follow-on that you do not instantly set up in your chair and offer “We have a real potential problem here folks!” This “oh oh” moment expectedly brought on by realizing that as depositors flee for higher interest yielding vehicles outside of the bank(s) and through this turning those banking system losses on the books into real experiential losses. This in-turn inviting more potential fleeing deposits which then logically raises the risk of a bank run with not only the specific bank mentioned in the presentation but with the banking system at large. How does such an informed entity with all its power not experience such an “oh oh” moment in advance by thinking downstream through logical conclusion thinking? Information Non-Decisional Kind of a Thing Powell sums up to the reporter in a lackadaisical manner that this entire topic (think the risk to the banking system at large via the above shared interest rate risk/bank losses risk/deposit flight risk = bank run risk) relative to the presentation was an information non-decisional kind of thing. The reporter retorts and Powell changes his tune:
STEVE LIESMAN. Mr. Chairman, I’m sorry. I don’t mean to be argumentative, but the staff report said SVB has significant interest rate risk. It said, interest rate risk measurements failed at SVB. And it said, Banks with large unrealized losses face significant safety and soundness risks. Why was that not alarming? CHAIR POWELL. Well, I mean, I didn’t say it wasn’t alarming. It was — they’re pointing out something that they’re working on and that they’re on the case, that — that, you know, that I’m not sure whether they mentioned — I think they did, actually. They mentioned that they had taken regulatory action matter or supervisory action in the form of matters requiring attention. So I think that was also in the presentation. I think it was to say, yes. This is a bank and there are many other banks that are experiencing this — these things, and we’re on the case.
Information Non-Decisional Kind of a Thing – Becomes – We’re on the Case Powell ended this particular Q&A interaction offering the Fed was and (implying) remains, “on the case.” The Q&A interaction above was surreal to listen to when realizing Powell is the leader and voice of the entity that is at the epicenter of the financial system and is charged with playing numerous crucial roles in keeping it healthy. With this comes an inherent expectation they will always be looking downstream to get in front of potential issues that can surface – in particular within the banking system being that is their bailiwick. They missed it by a mile on price inflation circa two plus years ago – think “transitory” and current day have been missing the banking issue as represented by the fact that we even have a banking issue. Underlining this, according to the Federal Deposit Insurance Corporation (FDIC) the total assets of federally insured banks that have collapsed in 2023, in inflation adjusted terms, is more than the total of the 25 banks that failed in the Great Recession of 2008. Yes, take a moment to digest this fact. Importantly, unlike then we have not even had a recession (yet?) which places tremendous additional stress on bank balance sheets as their loan portfolio’s become stressed by borrower’s inability to service said loans all-the-while the assets within bank loan portfolios reduce in market value. Collective Market Participants Vote with Their Feet Below we leave you with a percentage return chart over the previous twelve months for Regional Banks. Their collective stock prices have collapsed to nearly 45% negative at their low point mid-last week. Market participants are not impressed with what they have been seeing. In light of their obsession with looking downstream and assessing logical conclusions of all socioeconomic and policymaking inputs clearly they are not enthusiastic about the near-future banking outlook. The Federal Reserve’s inability to take sound forward looking policy and regulatory actions certainly has played a role in their pricing of bank stocks.
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I wish you well…
Director, Market Research & Portfolio Analysis
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.