Marc Cuniberti NEVER JUST ONE COCKROACH
With the advent of the recent banking crisis involving a handful of banks both foreign and domestic, the stresses on financial markets are ongoing.
Regardless of the seriousness of such an event, the market on Thursday showed some positive yet, in my opinion, irrational performance. Dan Nathan of CNBC seemed to agree with me when he commented the rally seen on Friday in light of the banking problems “just didn’t feel right”.
Although market participants might think the current banking crisis is contained, the credit markets where bank debt is traded is far from calm. Things such as spiking interest rates and increased credit default swaps (hedging strategies) are telling analysts the crisis is not a minor event.
The Fed is hard at work establishing more special programs to try and stem off a repeat of the 2008/09 banking implosion. Three new facilities have been established to fend off the threat of a lack of banking confidence:
The Bank Term Funding Program (BTLF) is brand new and reminiscent of 2008 programs to shuttle more Fed funds to banks needing cash. The FedNow Service Facility is a second program to allow 24-hour access to funds in an attempt to prevent overnight lockouts to depositors. A third crutch specifically addressing the Silicon Valley Bank (SVB) closure is the new National Bank of Santa Clara. This program oddly addresses only SVB customers and many are crying foul as this bailout is limited to this one bank only while leaving other potential bank closures without implied protection.
Not willing to go all in at the moment and guarantee all depositors everywhere, the Fed seems to be using problem-specific band-aids while it decides just how far out on the limb they want to go in guaranteeing all banks.
That the Fed is limiting its programs while it makes up its mind on what to do seems grossly unfair to this analyst who predicted last week the Fed would guarantee all deposits everywhere.
Not so, at least not at the time of this writing.
The question now becomes what banking authorities will do next if another bank goes under.
Would they continue to establish more National Banks for each bank failure that occurs?
Seems a bit hodgepodge if you ask me. Flying by the seat of their pants is the phrase that comes to mind.
Famous investor Warren Buffett’s 2017 quip makes known his view concerning bank failures: “What you find is there’s never just one cockroach in the kitchen when you start looking around,” said the chairman and CEO of Berkshire Hathaway.
For now, the market seems to believe the banking issue is no big deal while the bond market is signaling otherwise.
Since the banks trade with each other, it’s hard to imagine the dominoes won’t continue to fall on other financial institutions.
Additionally, what brought SVB customers to fast-track the massive withdrawals that brought down the bank is likely not limited to the Silicon Valley area. Another U.S. bank based in New York called Signature Bank is hemorrhaging red and needing assistance and the California-based bank, First Republic Bank, also needs a lifeline.
No doubt there are other U.S. banks starting to wobble that have yet to make the evening news.
The European banking system also has its problems as Credit Suisse needed central bank monies last week and contagion over there is a valid concern.
U.S. authorities are voicing concern over recent events. Treasury Secretary Janet Yellen said to the Senate committee: “That (the current banking crisis) could turn this into a source of significant downside economic risk.”
Bank conglomerate Goldman Sachs stated last week that “growing stress in the banking sector has boosted the odds of a US recession within the next 12 months” The bank went on to say that it “believes that the American economy has a 35% chance of entering a recession within a year, up from 25% before the banking sector meltdown started”.
That the stock market rallied last Thursday and Friday as more lifelines were tossed to a handful of banks both here and abroad seems a bit absurd, but no one ever said the market is always logical.
Only time will tell if more banks hit the pavement in the days and weeks to come, but as Warren Buffett indicated, there is never just one cockroach.
“Watching the markets so you don’t have to”
(As mentioned please use the below disclaimer exactly) THANKS (Regulations)
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249. (530)559-1214. He was voted best financial advisor in the county 2021.
