Now That We have Solved This Mess
Hardly, but it sounds good anyway.
With First Citizens Bank buying a large chunk of the assets of Silicon Valley Bank this weekend it would seem we are working our way out of the woods as far as this 2023 Banking Crisis is concerned.
Maybe.
First Citizens is a fairly large banking institution in North Carolina that has grown to be one of the 30 largest banks in the country by buying distressed banking assets on the cheap and cleaning up the books while continuing to build in other ways as well. Very strong management that has not been afraid to go down that banking black hole from time to time. CIT financial is a perfect example of taking on toxic and working out of it.
If you watch any of the major business channels or subscribe to any of the major online business sites you will see the blaring headlines about this deal and the first impression you will get is that everyone loves this deal. The stock of First Citizens is up anywhere from 35-48% depending on when you look at the stock. That is amazing! Unreal! Stockholders love it! UGH. Stop already with this aspect of this deal. Put the pricing of First Citizen’s stock in context and you will see that the headlines might be fun but the facts bring everything back into focus.
First Citizens’ stock is extremely illiquid. There are 14 million shares outstanding and it trades around 300,000 shares a day. Regions Financial, for example, is a bank of a similar size and it has over 900 million shares outstanding and trades around 25 million shares a day. The movement in First Citizen’s stock is primarily due to it’s liquidity as opposed to being the next big banking thing.
First Citizens has taken the route less traveled by financial firms, they have limited their shareholder access and created a banking powerhouse by other means. Most banks initially finance their growth by dipping into the equity markets and creating more shares. As the company grows, the shares eventually will be more valuable and then they can dip back in and list more shares. This can go on for years but at some point banks will reach a point where growth won’t counteract the listing of new shares and they will have to grow organically. First Citizens never went that route.
That part of the story is now complete, but what about other banks that may be on the cusp of insolvency? I am sure there are a few more banks that will breach certain covenants in their charters and have to ask the Fed for help and it does seem that the Fed is ready, willing and able to deal with whatever comes next.
I never thought this would be a repeat of 2008. 2008 was created by levels of greed and stupidity unseen in modern times over such a broad cross section of the banking landscape that it still is beyond comprehension. This is not that. This is poor risk management even though the cards were exposed well in advance. You knew rates were rising, maybe faster than you thought they would but you still knew rates were going up. Prepare for it. Hedge it. They didn’t and this is what happened. The dumb suffer. The lazy get bailed out. Crisis averted.
On a more important note and I have no problem admitting I was wrong here. The Fed raised rates last week by 25 basis points. Really no surprise there and Fed Chair Powell made it pretty clear this will continue until they get to a set point and then that will be it. 5 1/2% was it?
Powell and his posse were in a no win situation. Continue raising rates, people like me will complain because of the potential damage it could do to some regional banks that might look like SVB. Don’t do anything and the other side will complain equally as hard.
Two things become obvious here: One, The Fed is pretty sure a quarter point rise will not cause any collapse or bank run. They know more than we do and have seen the books and know something we don’t know, just yet. To be confident that another rate rise won’t cause another failure or two is the reason they did it.
Two, I will stand by this for as long as I can. The Fed will never get inflation back to the desired 2% range. You can bring on a recession if you want to and yes, inflation will get there or lower but it will not stabilize there in any sort of growing economy.
We lived through it for years and it was great but the world has changed and the model that once existed, no longer exists. That model where producers eek out 1-2% rises in produced products no longer exists. Producers know now that they can raise prices at will and still meet sales goals. They can raise prices and reduce production costs and still maintain healthy profit margins. That is what they have done since 2020 and will continue to do it. I am not saying that inflation is all on the backs of producers but they have a very large role in this. It’s not unions, it’s not the supply chain anymore. It’s about producing less and earning more.
In other words, inflation is here to stay for a lot longer than any of us ever expected. The Fed will get it back to 3-3 1/2% perhaps. We may see some form of recessionary period but it won’t be long enough or deep enough to end inflation for good.
What this will produce is another Bull market however. Producers that can control costs will have the upper hand for the foreseeable future. They can and will keep prices high enough to get around the slowing of unit sales. Lower unit sales at higher prices means higher profits. Your labor and material costs are down but the price of the goods you sell is up, you will be more profitable. hence, higher stock prices.
I remain in the camp that sees a 15-20% rise in the S&P this year and next year may see similar gains.