VIDEO: Here’s Why 2023 Is Not 2008
Welcome to my video presentation for Monday, March 20. Below is a condensed transcript; my video contains additional details and several charts.
There’s a lot of hysterical chatter in the financial media about “black swans” and an imminent global financial meltdown, due to recent banking sector woes.
The failures of Silicon Valley Bank (SVB), Signature Bank, and Silvergate Capital, and liquidity problems with Credit Suisse (NYSE: CS) and First Republic Bank (NYSE: FRC), have spooked investors.
Financial stocks, especially among regional banks, have taken a beating and the broader stock market has gotten caught in the downdraft.
Another shoe dropped Sunday night, when the Swiss government announced that Swiss-based banking giant UBS (NYSE: UBS) would buy smaller rival Credit Suisse for $3.2 billion, in an effort to stem further turbulence in global banking.
Many analysts are invoking memories of the Financial Crisis of 2008 and the Great Recession that ensued.
Do we face another 2008? The answer is no. Or to put it another way, Apocalypse: Not Now.
That said, we experienced a volatile week, with the S&P 500 and NASDAQ posting gains and the Dow Jones Industrial Average slipping.
It’s telling that the tech-heavy NASDAQ jumped 4.4% for the week, a sign that traders expect the Federal Reserve to get less hawkish. Rising interest rates hurt growth stocks, especially high-flying tech shares. Indeed, that’s one of the factors that compelled SVB’s customer base to make a rush of withdrawals. Higher interest rates had been causing a cash crunch among the bank’s tech clientele.
Oil prices fell 13.7% last week, as traders increasingly expect a recession that will dampen energy demand. Bond yields slipped amid recessionary fears as well.
More cash on hand…
We’re not witnessing 2008 redux. For starters, central banks around the world in recent days have moved quickly and decisively to boost liquidity. However, in the period between Bear Stearns collapsing in March 2008 and Lehman Brothers going belly up that September, there was dithering by policymakers.
Also, back in 2008, we were grappling with a gargantuan amount of toxic assets, such as sub-prime mortgage-backed securities. That’s not the case this time around. What’s more, the loan-to-deposit ratios have more balance and the banks in question are much smaller.
Banks are sitting on a lot more money than they did in 2008. Thanks to Dodd-Frank, the big banks must adhere to capital requirements and stress tests. These guidelines were loosened in 2018 for smaller banks, but they have remained in place for the big boys.
According to the key metric of Tier 1 capital, banks are generally in good shape. Tier 1 capital is the core capital held in a bank’s reserves that’s used to fund business activities for clients.
Depositors in small and medium-sized banks are now fleeing to the safety of JPMorgan Chase (NYSE JPM) and other huge banks. Consolidation, not contagion, seems to be in the cards. I expect to see a rise in strategic mergers and acquisitions in the banking sector.
SVB, Signature, Silvergate, Credit Suisse, and First Republic made singular missteps. In the case of SVB, the bank invested in long-term bonds that tumbled in value as interest rates rose. When depositors made a run on the bank, SVB sold those bonds at a loss in an attempt to cover withdrawals but fell short.
A systemic meltdown is highly unlikely. But odds of a recession have increased. Notably, the U.S. 10-year Treasury note yield (TNX) has sunk below 3.4%, which represents a big bet by bond traders that a recession is looming.
This confluence of events, though, will probably prompt the Fed to capitulate and ease up on tightening. The Federal Open Market Committee (FOMC) meets March 21-22 and it’s expected to hike rates by 0.25%, or perhaps stand pat. Goldman Sachs (NYSE: GS) predicted in a recent note that the FOMC would do nothing.
History shows that when the Fed pauses, the equity markets benefit. So the smart move now is to keep your eye on long-term goals and don’t get whipsawed by news headlines.
And as always, be wary of partisan spin. For example, we’re hearing arguments that SVB went bankrupt because of its “wokism” and environmental, social and governance (ESG) guidelines. That’s complete nonsense. There’s zero evidence that SVB’s stated desire to be a diverse workplace had anything to do with its collapse.
The week ahead…
We face a crucial week of scheduled economic reports. The highlights:
Existing home sales (Tuesday); Fed interest rate decision, followed by Fed Chair Jerome Powell’s press conference (Wednesday); initial jobless claims and new home sales (Thursday); durable goods and S&P Global U.S. services and manufacturing PMIs (Friday).
The big news occurs Wednesday, of course. Due to recent instability in the banking sector, the Fed is unlikely to go beyond a hike of 0.25%. Is the sky falling? No. And if Powell’s remarks are reassuring, we could enjoy a relief rally.
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John Persinos is the editorial director of Investing Daily.
This article originally appeared on Investing Daily.