Skinny dipping is a joy, but swimming naked is another story. As they say, when the tide goes out, you can see who’s been swimming naked.
With the Fed (and other central banks) having fallen behind on inflation and then scurrying to crank rates higher to try to control things, everybody was getting nervous, although pretending all was OK—maybe the US will skirt a recession, maybe rates will not have to rise so far; indeed, maybe rates may even start coming down by the end of the year. Rising bond market volatility, however, was telling another story, and last week, suddenly, the tide sure as hell went out.
A handful of people—Silicon Valley Bank, Signature Bank, Credit Suisse—were caught swimming naked on the first few days, desperately clutching at their absent Speedos or whatever. SVB and Signature have already disappeared, though not shame-facedly, whilst Credit Suisse is thrashing around like a grounded porpoise. UBS, through the Swiss National Bank, has bought it an expensive Eres Nuit swimsuit, but it remains to be seen how well it fits.
It is significant that, unlike in 2008, when everybody and their sister were in the same game—loaded chock-full of mortgage-backed securities—this time, the business model of Credit Suisse was completely different from SVB’s or Signature Bank’s. Fumbling as it had been from crisis to crisis over the past few years, it succumbed to a generalised sense of nervousness in the market. People suddenly started remembering a word called RISK.
It may also be (privately) significant that, since January last year, I have been tracking a chart called FEAR. Between January and early October last year, the movement of the Dow tracked the way it had moved during the 2008 crisis with a terrifying correlation—it was 20% down at the time but, as we all know and I could see, in 2008 it fell even more dramatically over the succeeding 18 months, bringing the total decline to over 50%.
Of course, the circumstances were different—then, the financial crisis had destroyed a large number of banks and nobody really knew how bad anyone’s balance sheet was, since the mad mortgage boom had spread really far and wide; thus, no one was lending to anyone and the economy was seizing up. True to form, the Fed poured in money and pushed rates to zero. This time (in September 2022), it seems more fundamental—inflation was high and rising and the Fed was thought to be behind the curve, despite its hurried 75 basis point hikes in June and July. The September hike (again 75 basis points) appeared to calm the equity markets who felt the Fed had finally got things under control and things would settle down soon enough. Equities jumped and the Dow recovered half its losses in a few weeks.
But, as I said, the problem today seems more fundamental—everybody had been loading up on cheap debt for YEARS. Inflation has not yet (March 2023) come down sustainably and nobody has a clue about when that will happen. In other words, what people are calling high interest rates could be around for a long while.
The shoes started to drop—SVB, Signature Bank, Credit Suisse (for God’s sake)—and nobody knows how many more are to come. It would seem there must be non-financial companies (other than Adani) who loaded up on free debt to grow—look for companies that have put on stellar growth in capital-hungry industries to short or, at least, stay away from. And, while the Fed is making noises about holding back on rate-cuts, that would be a double-edged sword, since even if it calms markets, it will kindle the fundamental fire of continued high inflation.
Everybody’s talking about there being (yet another) paradigm shift needed in banking regulation, but this must include a definitive refocus on taxation and a definitive claw-back of egregious payments to CEO’s who destroy companies—Greg Becker, who headed SVB, was paid a compensation of $9.9 million, including a cash bonus of $1.5 million for 2022. Indeed, unless politicians focus singularly on the screaming inequality globally and, in particular, the US economy [Businesses in Phoenix Struggle As Homelessness Crisis Continues, says The New York Times (nytimes.com)], which was the first—and completely unheeded—symptom of this crisis, we will return to business as usual of stumbling from financial crisis to financial crisis. In the immediate term, it is hard to see how a further—and possibly substantive—equity collapse can be avoided.
We need real punishment for white-collar crime to ensure that swimming naked never again feels as joyous as skinny dipping.
Disclaimer: Author is CEO, Mecklai Financial www.mecklai.com. Views are personal.