Having dispensed with any effort to play this thing straight, I feel I must plunge into deeper sonic depths here. So, this one goes out to long-deceased drummer Cozy Powell, who played with everyone – Beck, Sabbath, Blackmore, Whitesnake (FFS!). Heck, he even, for a time, replaced Carl Palmer in ELP (it probably didn’t hurt his cause that his Sir Name Initial is P, but still..), and, for those in the know, that is saying quite a bit.
Cozy bought it in ’98 – in a car crash on the M4, and, while, by all accounts a sick drummer, he is largely a footnote in the rock cannon. I myself have no strong opinion about him.
But now, fully a generation after his demise, our backbeat has devolved to the control of Jerome (Not So Cozy) Powell – Chairman of the Federal Reserve Board. Who is having a busy month. This past week, he trotted up to Capitol Hill, to deliver, in time-honored fashion, his semi-annual address(es) to each Chamber of Congress. There, while equipped with neither traps nor snares nor high hat, he nonetheless pounded out a tough, rate-raising percussive on the attending masses. So much so that the markets briefly projected, week-after-next, a full 50-point mallet blast on the Fed Funds Rate (more about this below).
To my recollection, as recently as two weeks ago, 25 was in the bag and 50 was unthinkable.
Powell’s two-day, multi-venue engagement offered up little in the way of new material, and investors came away neither entertained nor amused. There was a bit of a selloff, but an unremarkable one. And, overall, I applaud the markets for accepting Powell’s remarks with equanimity and intestinal fortitude.
All the above would make for a respectable week’s worth of activity and no one could complain about a lack of action, but, as fates would have it, we weren’t anywhere near done. While Powell was spitting out his mad, wicked game, and in the immediate aftermath of same, a couple of banks went tits up. One of them was a crypto bank, so who really cares?
The other, of course, was a Silicon Valley concern – so embedded in that lovely region that it called itself – in elegant simplicity – just that – Silicon Valley Bank. Moreover, with a touch of the area’s trademark hubris, it selected for a logo the universal mathematical symbol for “greater than”: >
I cannot resist the temptation to point out that this symbology is now perfectly a propos – insofar as SVB’s liability are now greater than (>) its assets. Bank Regulators, perhaps justifiably, take a dim view of this condition, and have swooped in, creating, somehow, the second largest breakdown in American Banking history.
As the tale unfolds in rapid fashion, several frightening concerns emerge. As mentioned above, it’s the second largest bank failure in history. Number 1 was Washington Mutual (WAMU) in 2008. But while the collapse of WAMU unfolded in slow motion train wreck fashion over many months, SVB was toe tagged within a couple of days. Early last week, it was a fancy, little-known highflier; by Friday, there were chains on its front door and the FDIC had taken over.
Further, and on a related note, while WAMU’s demise was rooted in levered over-investment in the dubious mortgages that were, at the time, all the rage, SVB’s vaporization was catalyzed by losses in the world’s most liquid financial instruments – U.S. Treasury and Agency securities. Notably, this caused an old school bank run, as recommended by their big shot, thought-to-be-intrepid VC chums down the road in the Greater San Jose Metropolitan Area.
What we have here is a through the looking glace financial insolvency. Normally, a bank fails due to problems on the asset side of its Balance Sheet – investment in risky loans and such, rising to the point where its typically diversified lender/depositors achieve a sufficient level of concern to withdraw – en masse – its balances. With SVB, the assets were sound, liquid, virtually default-proof, and have rallied sufficiently in the wake of its collapse to have significantly offset the losses that triggered the event in the first instance. It was their liabilities – their deposits (mostly uninsured due to their size) that lacked diversity and liquidity.
I never knew till now that accepting large cash infusions and investing them in Government Securities was a high-risk enterprise.
It is all, finally, reminiscent of the barely remembered collapse of those two Bear Stearns credit funds back in 2007. We were all at the time was alarmed by and annoyed at these tidings, but hardly anybody expected the torrent that followed. In retrospect, the failure of these two funds arguably started the cascade which, less than a year later, nearly took down the entire financial system.
I don’t know and rather doubt that this here situation mirrors that one in magnitude. My strong sense is that SVB will be quickly snapped up by a larger financial institution, their depositors made speedily whole.
And this ain’t ’07. Banks are much better capitalized. Underwriting standards have tightened to rival that of Cozy Powell’s Standard Tom (if you doubt this, just try to get a loan of any kind).
And my relative serenity appears to be matched by our betters in Washington. Prez Bi released his budget plans a few days ago, which feature a quaint $6.9T in incremental spending and $5.5T in new taxes. We are told that these are remedial measures that will help restore the health of the capital economy and improve the balance sheets of programs such as Social Security Medicaid and Medicare.
It is, at any rate, a lofty sentiment. Because the best estimates I have uncovered as to our unfunded liabilities to these programs rises to at least $200T and perhaps a great deal more – rendering our “on the books” Federal Deficit of just over $30T dainty by comparison.
So, maybe, in some perverse parallel universe, raising taxes is a good idea. But here inside the honest-to-God Milky Way, I’d point out a couple of realities. First, the proposed budged overspends the tax levies by ~$1.5 Trillion. More generally, never in my lifetime have I observed a tax increase that was not accompanied by spending proliferations significantly greater than the additional levies imposed. Moreover, in the prevailing environment, there is no possibility that a dollar of tax increase would not be accompanied by, at minimum, $1.50 in new spending.
And all this is to say nothing of the dampening effect that new taxes would impose upon an already impaired economy.
What passes for good news here is that the proposal is Dead On Arrival. The current administration could not manage to raise taxes (or all that much in the way of spending) when it controlled both houses of Congress and the White House to boot. With meanie Republicans having taken charge of the House of Representatives, the probabilities for passage of such absurdities converge to zero.
Still and all, we must attend to these proposals, as they are, by and large, matters of political positioning. Under certain ’24-based electoral outcomes, these wholesale transfers of economic control from the Private Sector to the Government represent our fate. It will be on us to decide whether or no this is what we want.
And, if that weren’t enough, the February Jobs Report dropped on Friday, with more vigor than that embedded in the consensus estimates. Investors, as could have been prophesied, took a dim view of these tidings, causing our equity indices – under pressure all week – to close near their lows.
But somehow, Treasuries rallied dramatically, reducing Madam X yields an astonishing >30 bp in the week’s last three sessions and rendering even more gruesome our already gruesome yield curve inversion:
In addition, the Fed Watchers released the doves, and the 25/50 bp prospect is now a rough flip of the coin. I can only surmise that these more favorable signals from the Fixed Income market are most catalyzed by the above-mentioned bank failures, as the prospects of raising rates into a banking insolvency environment are in no ways ones for the faint of heart.
And, somehow, the credit markets rallied on all of this. Not much, but with banks failing and whatnot, it is surprising, nonetheless.
My friends, these things are unsustainable. I don’t know where we’re headed, but it ain’t where we at.
For now, the plot is clear. We will watch for newly harvested bank failures and wait with breathless anticipation the contents of the Inflation Reports and the issuances of Not So Cozy Powell and the rest of the FOMC Ensemble.
I don’t reckon that any of it will amount to much. Lots of volatility, little in the way of directionality. Unless, that is, the SVB collapse spreads to other financial institutions. The latter wouldn’t be pleasant, but I foresee no chance of a widespread banking collapse. Further, I’d remind everyone that even in the Great Financial Crisis, not a penny of demand deposits was lost to the unwashed masses.
Come what may, the beat will go on. It always does. From the second of our conception, or, at any rate, when our own arterial functions begin to function.
And until we take our last breaths.
Thump, thump, thump, thump. But through our own resources, we sometimes improve upon this.
Sometimes, for instance, the beat is enhanced by the stylings of John Bonham. Or Keith Moon.
Or Cozy Powell. Now largely forgotten.
Someone or something always comes along. Unfortunately, for now, that someone is Not So Cozy Powell, who no one would choose to man the skins for any band anywhere on the planet. This condition won’t last forever, and, meantime, the best we can do is just adhere to the abovementioned beat – in the markets and in life.
By doing so, we may not achieve >, but, as last week’s events demonstrated, > might not be all it’s cracked up to be.
TIMSHEL