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Small Cap Stocks Lose Favor To Techs
Alongside the financial and REIT sectors, small cap stocks are falling victim to the banking crisis. The logic is that many small companies tend to rely heavily on debt financing. As financial lending standards tighten and credit spreads widen, small cap companies must pay higher interest rates on their debt. Further, those may be the […]
Mar 28, 2023
Is Deutsche Bank The Next Domino?
Deutsche Bank shares fell more than 10% on Friday and over 30% since March 1 as investors grew anxious about the banking sector’s health. The impetus behind Friday’s decline was a surge in its credit-default swaps (CDS). Credit default swaps are derivatives allowing investors to hedge a company’s credit risk. If the associated company defaults, […]
Mar 27, 2023
Credit Risks Trump Inflation Concerns
Courtesy of BofA, the survey results below show that professional money managers are now more concerned with credit risk than lingering high inflation. This survey also inadvertently points out the Fed’s delicate dance between financial stability and inflation. If rates stay high, money will continue to leak from banks to money market funds. Conversely, if […]
Mar 24, 2023
Pause and Pivot or Full Steam Ahead?
Yesterday’s FOMC meeting was likely one of the toughest for the Fed in a long time. As we have written numerous times, the Fed must carefully balance fighting inflation with rising financial instability. Before the meeting, Fed Funds Futures were implying a 40% chance of one more 25bps rate increase at the May or June […]
Mar 23, 2023
The Silent Bank Run
Long before Silicon Valley Bank failed, the banking sector was experiencing a silent bank run. Unlike the Great Depression, where lines of people clamoring for their money were blocks long, this silent bank run, as its name portends, has been out of sight until recently. There are a couple of reasons for this. First, online […]
Mar 22, 2023
UBS Bank Bailout of Credit Suisse May Open Pandora’s Box
The Silicon Valley Bank failure, originally considered a one-off event, is escalating and spreading. On Sunday afternoon, UBS, with significant liquidity and financial backstops from the Switzerland National Bank (SNB), bought Credit Suisse (CS) for about a third of its most recent market cap. The purchase may settle markets, but it potentially opens pandora’s box […]
Mar 21, 2023
Expect the Fed to Follow ECB’s Lead This Week
The FOMC will announce its Fed Fund’s rate policy decision this Wednesday. Given the recent events in the banking sector, we return to the question posed Friday in Fed Mandates or Financial Stability: Will the Fed aggravate inflation by ignoring its Fed mandate and focusing on financial instability? The ECB’s rate decision last Thursday provides […]
Mar 20, 2023
Fed Mandates or Financial Stability
Heading into next week’s FOMC meeting, the Fed’s big dilemna is whether to address recent financial instability or adhere to their Fed mandates. Per the San Francisco Fed: “Congress has given the Fed two coequal goals for monetary policy: first, maximum employment; and, second, stable prices, meaning low, stable inflation.” The Fed’s mandates argue the […]
Mar 17, 2023
Credit Suisse Bank is Next on the Docket
Shares of Credit Suisse and other large European banks traded sharply lower yesterday. This occurs only a few days after European leaders expressed little concern that U.S. banking problems would spread across the Atlantic. Credit Suisse Bank, down nearly 25% yesterday, appears to be the culprit. Credit Suisse, a foreign bank domiciled in Switzerland, has […]
Mar 16, 2023
Rate Pivot or Higher For Longer
Less than a week after Jerome Powell was pounding the table on Capitol Hill, arguing the Fed must stay aggressive in its inflation fight, the market thinks the Fed is about to make an abrupt pivot and drop the Fed Funds rate rapidly. The graph below compares expectations for Fed Funds on March 7 (light […]
Mar 15, 2023
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