Pervasive Bearishness Looks To Be Unwarranted

Silicon Valley Bank, itself, is starting to emerge as a blip, rather than another Lehman Brothers moment.

AP/Craig Ruttle
Traders at the New York Stock Exchange, March 13, 2023. AP/Craig Ruttle

From CNBC to Twitter to Bloomberg News, the “panic” message has no shortage of amplifiers. “Ackman Concerned About ‘Contagion Risk’ Spiraling Out of Control,” was a Bill Ackman tweet today about a Bloomberg article about an Ackman tweet, an example of the sort of echo chamber that has been dominating the discourse since the run by depositors of Silicon Valley Bank.

Another financial crisis would be good for short sellers and for CNBC ratings. Even narrowly averting another financial crisis would be good for Federal Reserve and Treasury officials, who can depict themselves as heroes who saved the day. Some big banks and other buyers who hope to swallow up regional banks or pieces of them have a potential interest in talking up the problems so as to talk down the purchase prices.

The gold and bitcoin promoters see a chance to depict bank deposits as unsafe. Politicians, too, have an interest in hyping the bank problems. It gives Republicans a chance to take shots at Silicon Valley and to blame Biden for inflation. It gives the Elizabeth Warren Democrats a change to depict the financial industry as reckless profiteers.

The situation gives the Biden-Schumer-Sanders Democrats a chance to force more people, and banks, to finance government spending by putting money in Treasuries rather than in corporate stocks or bonds. 

Look beyond the doomsayers, though, and there are some good and underappreciated reasons to think that the gloom is overdone and that the U.S. stock market is poised for a rebound. Watch out, above.

Inflation is over. An economist at the Cato Institute, Alan Reynolds, reports that if you take out shelter, inflation for everything else “has averaged just 1.1 percent for 8 months.” The shelter problem will be solved as multifamily units under construction — at a 36-year-high or a 50-year-high depending on who is counting — come online and add to supply, and, perhaps, as hybrid work fuels a surge in office-to-apartment conversions.

The real estate company Redfin reported March 10, “The median U.S. asking rent is up just 1.7 percent from a year ago—the smallest gain since May 2021—as landlords grapple with vacancies due to still-high rental costs and rising supply.”

This weekend I saw gasoline selling for below $3 a gallon for the first time in months. As the year anniversary of the start of the Ukraine War passes, the annualized effect of that war on prices starts to become less visible. Russia has figured out how to bypass energy sanctions by selling its oil to India and China, easing the price effects in a global market. 

If and when the Federal Reserve realizes that inflation has been whipped and it can stop raising interest rates and start cutting them, the stock market can be expected to soar on the news.

The banks, meanwhile, are in generally good shape, with stronger loan books and capital ratios than in previous trouble spots.

Goldman Sachs’ former chief executive, Lloyd Blankfein, told CNN that the current situation looks different than 2008. “In 2008, there were asset problems,” said Mr. Blankfein. “In the current market, it’s really people pulling out their deposits but the assets are, probably in the long run, money good.”

Morgan Stanley’s Jim Caron made a similar point: “This situation is distinctly different from the global financial crisis because of one important feature — collateral. The collateral today, generally speaking, is of much higher quality in the form of easy-to-price, transparent and liquid assets held by the banks such as short-dated Treasuries, mortgages, agencies, emergency mortgages and agency securities, that will all likely mature at par or 100 cents on the dollar.”

UBS said March 17: “Overall, we think bank solvency fears are overdone, and most banks retain strong liquidity positions. So, depositors in the vast majority of institutions remain well-protected. This is particularly the case for global systematically important banks, which have been tightly regulated since the 2008 financial crisis to ensure they have a more-than-sufficient surplus of assets over liabilities, even in stressed economic scenarios.”

The UBS note went on: “Recent action by the Federal Deposit Insurance Corporation to guarantee deposits, and by the Fed to lend to banks that require funds, should solve liquidity-related risks for US banks as well as for US branches of foreign banks, in our view.” 

The Silicon Valley Bank situation was sui generis. It looks more like an unprofitable tech stock than an actual bank. Its problem stemmed not so much from defaulted loans but from making bad interest rate bets on government bonds.

Meanwhile, when you get past the inflation and bank issues, some of the fundamental conditions are in place — mainly technological innovation — that led Ed Yardeni, in August 2020, to predict “another roaring Twenties.”

Artificial intelligence, dynamic pricing, big data and analytics, onshoring of manufacturing — they all could contribute to an upside surprise. So could endowments and pension funds reallocating back to common equities from higher-fee, less liquid alternatives such as venture, real estate, and private equity.

I have no crystal ball. The bearish conventional wisdom could prove correct. Anyone making retirement account contributions and allocations before the tax filing deadline next month, though, will want to consider the possibility that the worst “contagion risk” that is “spiraling out of control” has to do not with regional banks but with groupthink and fear. They have a way of creating opportunities for realistic risk-takers.

The New York Sun

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