This is one of those rare days were I post two columns in one day. The first column sent out earlier this morning was my Saturday morning take on what is happening in the banking sector and this column will be a short one about the response to moves by the Federal government to stem a repeat of 2008.
One quick thing to remember. 2008 was the greatest buying opportunity in the history of investing. You had 80% of the market trading 60% below their average daily price. That average daily price was for the previous six months. How could you not buy everything under the sun then?
Next thing to remember. This banking crisis should not be compared to what happened in 2008. In 2008, banks were less regulated, greedier(if that is even possible) and locked into the idea that they can make tons of money loaning to people who had zero business borrowing money. The brokers created vehicles for investing that were not sustainable. They created vehicles that were so complex, the CEO of those firm couldn’t even explain them. It was Bound to fail. And it did.
That is not what happened here. Sure there were some miscalculations and some bankers never thought that those miscalculations would precipitate a run on their deposits but such is the nature of banking. It can happen.
Now we are in a place were investors don’t want to hold securities from banks that potentially could have some sort of run on deposits. Typically, small to midsize banks would be the first to get affected. Different deposit base, non systemic risk banks that operate with a more relaxed level of risk management can be ripe for failure according to overly cautious investors.
Hence, we see these small regional banks getting it on the chin with no negative news or implications to speak of. I will say it: The sell off is overdone and flat out wrong.
Yup. I said it.
There will not be any systemic collapse of the banking system.
I said that too.
First things first. The Federal Reserve and the Treasury Department will not let that happen. They have pretty much backstopped every bank in this country and will not let banks that are financially sound fail. The banks that have been getting away with survival since 2008 without proper oversight and governance should fail but rest assured, that is a very small number and while some shareholders might be affected by those failures such is the investor life. However, in the bigger picture, you will not see banks fail en masse. You will not see the vultures from New York and Charlotte circling the carcases of broken banks.
What you will see are buying opportunities in the banking sector. In the financial sector as a whole there will be spots where you can pick up a solid asset at Dollar store prices. Trust me. You do not see things like this happen often but it is here now.
Next thing. In my gut, I do not think the Fed will raise rates at the next meeting. It’s simple actually. The banking sector appears very fragile right now and increasing the very thing that brought on that fragility would not be a smart move at this point. Banks miscalculated the impact of rising interest rates on their assets and liabilities. Word got out that losses were coming, boom! Bank run. Raising rates on the 22nd probably would not cause that again but why risk it? Why make it more difficult for banks that are in a similar position?
SVB’s collapse can be attributed to many things but naively I think part of the reason is that it was not considered a systemically important bank based on 2008 reclassifications. They made some fatal errors in accounting for rising Treasury rates and that was that.
The Federal Reserve Open Market Committee will have to take into account what happened last week and what will happen this week along with crunching all the data points.
Speaking of data. Tomorrow’s CPI release becomes even more important because any acceleration in prices will throw a huge monkey wrench into what they do next week. Maybe I am too close to the banking sector and financial services industry to have an unbiased opinion but I think the health and stability of the financial industry is paramount to fighting a two year battle against inflation.
In other words, no matter what the CPI comes in at tomorrow, I don’t think the Fed should raise rates next week. The fight can take a breather so the economy can deal with the risks, known and unknown, of our banking system.