Börjesson

3/3 What prompts the Fed to stop hiking? In each of the cases shown above, the Fed went too far and something in the markets/economy broke: The Fed ended a hiking campaign on May 16, 2000, at 6.50%. This was two months after the NASDAQ bubble burst and tech stocks were imploding. The Fed ended a hiking campaign on June 29, 2006, at 5.25%. The Case-Shiller housing index peaked two months later, leading to a massive collapse and the Great Recession. The Fed ended a hiking campaign on December 19, 2018, at 2.375%. Initially, the stock market broke following this meeting, leading to the “Powell Pivot” in January 2019. That September, the repo market broke. If today marks the last hike, a strong case can be made that it was influenced by the problems in small and regional banks, as they are potentially breaking. Implications for the S&P 500 The table below shows the S&P 500’s performance during these previous peaks, pauses, and pivots. Buying the end of the rate hike campaign and holding until the rate cutting campaign was over (red part of the line above) would have been a disastrous time to own stocks. Equity bulls have been praying for a Fed pivot for a year. They might want to be careful what they wish for.

Today the 2-year note yield declined 61 bps. This was the biggest one-day decline since Oct 1, 1982 (the first discount rate cut following the Sept 1981 all-time peak in yields). To emphasize, today's decline in the 2-year was larger than any one day seen during the 2007 - 2009 financial crisis, following 9/11 ,and the 1987 stock market crash. If markets signal ... what is the 2-year telling us???

Lots of really bad takes about SVB. Let’s try and correct This is not a solvency crisis like 2008. Bad loans or poor investments were not made. Money was not lost. So, everyone is going to get their money back. (And please no takes about no interest rate hedging. Asset/liability mismatches are how banking works.) Instead this is an old fashion 1930s liquidity crisis. Too many depositors demanded cash at once (as in right now) and SVB (and SI) could not convert loans and securities (and crypto) to cash that quickly. So, everyone is getting their money back from SVB (and SI), just not at 8AM Monday. And, yes this is a big problem as this is working capital for a lot of companies. They have payrolls to meet and vendors to pay next week. And if they don’t pay bills and employees, they in turn don’t pay their bills and this can quickly cascade into a major economic problem. The important question is why so many demanded their money back at once. And I’m not referring to the last two days. I’m asking about the days/weeks leading up to this last two days forcing SVB to sell securities and realize a $1.8B loss, necessitating a capital raise. Why were depositors withdrawing in big enough amounts before Thursday/Friday? First, welcome to the world of mobile banking. Gone are the frictions of standing in line with tellers instructed to count money slowly. (Media images of lines Friday were largely gawkers) How did $42 billion get withdrawn Friday alone without thousands in line? Answer, your phone! This is not the Bailey Savings and Loan anymore. This should scare the hell of bankers and regulators worldwide. The entire $17 trillion deposit base is now on a hair trigger expecting instant liquidity. Add in social media and millions get a message, like Peter Thiel telling Founders companies to pull out, or Senator Warren gloating that SI went under, and pick up their phone open a Chase account and Venmo-ed their life savings into it in 10 minutes. Instant liquidity (not solvency) crisis with everyone still in bed. Banking will never be the same. The second, and I did a long thread on this on Friday … banks are over-reserved, after 14 years of QE, and are still paying 0.50% on accounts when T-bills are yielding 5.00%. They don’t need to compete for deposits. Initially as rates passed 2%, 3% and 4%, the public did not notice. So bankers thought deposits were well anchored at their bank and not moving regardless of the interest rate paid. But at 5% the public finally noticed, and millions reached for the phone at once and transferred to a money market account or Treasury direct to buy T-bills. Banks were squeezed to convert loans and securities to cash instantly so depositors could leave for better rates. Add in the bleed out from tech firms struggling, and Senator Warrens tweeting with glee about SI going out of business, and depositors at SVB got the message and picked up their phones and acted. This is why I have been tweeting that this has to stop now. The Fed is meeting Monday at 11:30. Too late! They need to meet today (Sunday) at 11:30. What needs to be done? Two things. The FDIC needs to raise the deposit insurance ceiling to unlimited as they did this in 2008. Besides $250k is a made up number anyway. So make up a bigger number. Banks need to get their deposit base to stop figuring out how to buy a 4.5% money market fund. They need to raise the interest rates they pay 3.00% - 3.50%, from 0.50%, immediately. Yes, this will kill bank profitability so expect Bank Execs to balk at doing this. This way the public gets the message that you money is safe, no matter the bank, or the amount, and the rate paid on your money is at least competitive with other alternatives. So, do nothing. Otherwise, if we are all waiting for the Fed to START a meeting at 11:30 Monday, hundreds of billions of deposits will have moved by phone and it will be far worse.

1/5 Uh oh, Powell' new (invented) metric of "Core PCE services less Housing Services" soared in January to 0.58%. As this chart shows, this is one of the highest readings ever. Powell says this metric is 55% of core inflation. And it is highly sensitive to wage and labor.