Spot Markets Live Transcript (13/03/23)

Welcome to Spot Markets Live #siliconvalleyspecial

As you can see we are joined again by Helen Thomas , she runs https://blondemoney.co.uk/

You were also with George Osborne in 2008 when Lehman was imploding?

I remember sitting at my desk the morning Lehman went under

I was reading the newspaper (how old school!) and George looked over and simply said “I bet you’re glad you don’t work in banking any more!”

Look at bank stocks this morning…

Not to mention Credit Suisse which has hit another all time low but that’s another story…

Hard to believe it’s still alive

it’s like a cat

9 lives

So I think that it’s fair that banking stocks are still taking the brunt, people are figuring out exactly what this means

because interest rates will stay higher for longer and higher rates seem to be hurting banks – even though ironically they’re supposed to help them”

what a list!!

yes I hear that people now think there will be a pause BUT this is where the Fed gets tied up in knots. Because they both have to preserve financial stability AND meet their inflation target mandate

The Fed are effectively trying to limit contagion as a bank fails

that’s very different to “cut rates to zero to prop everything up”

they can’t afford to do that this time with inflation where it is

Remember the BOE have already gotten out of their intervention over the LDI debacle – and for a profit too1

It all feels really confusing right now

As many below are mentioning, this doesn’t feel like it should be systemic risk to the system and yet the system is screeching

So I think we have to unpick two things here

one, can the bank (or any other company) deal with 400bps of rate hikes in 12 months

what are their hedges, what is their business model

That’s one part

then the second part relates to systemic risk and that is about liquidity

We have had a series of these now, where over leveraged institutions have been caught up in sudden fire sales

Adani

the LDI managers

FTX

now SVB

but this isn’t a Fed Put like the one we knew for last 40 years

they have got to keep a lid on inflation expectations and ensure they don’t get embedded into the system

So with regard to SVB specifically

1) on the asset side they had deliberately gone into higher yielding assets and not hedged the interest rate risk

2) on the liability side, they had clients all concentrated into one sector (tech) that are uniquely prone to cash burn and high leverage

and 2b) an industry that benefitted from what has happened during the pandemic. What I call the impaired velocity of people where people now live their lives more online (much as we are doing in this discussion now). So that was great for tech in the “recovery” but then not so good when people returned to work. Even though we do still have an impairment in our velocity it is not the same as under lockdowns in 2020 and 2021

you could say that SVB was uniquely highly correlated to interest rates, monetary and fiscal stimulus, and pandemic habits

I think GK has just made a very good point on the chat

They point out that social media and online banking have conspired to make bank runs happen faster

that is a key difference

well that’s a whole can of worms

Before I get to that, let me address Anjuli’s point

So

Yes, that’s a very good point about KYC and the increasing bureaucratic burden of banking

but apparently we are a long way from that

maybe because tech bros prefer to go on a mission to Mars rather than reinvent banking

😀

“all deposits safe”

It’s kind of the Draghi “Whatever it Takes” playbook!

haha yes you’re right Anjuli he does know!

Just going back to @Helmholtz

eg ETFs on real estate funds

there could be plenty of examples these days where people expect to liquidate with a swipe of the phone in the palm of their hand and then confusion when they cannot

ooh thanks for that headline Anjuli

Back to your point from Izzy

I did wonder that

but

it only cost them £1

and

by all accounts there are still some decent assets on their balance sheet

They screwed up their hedging, whether by greed or incompetence, or both

but the real problem came when the bank run started

if you can stop the run dynamic, as regulators seem to have done for now, then getting that balance sheet for £1 doesn’t seem a bad bet to me

First Republic Bank doesn’t look good still

Shares in First Republic Bank have fallen 60pc in pre-market trading as the US lender tried to calm any concerns about its liquidity following the failure of Silicon Valley Bank.

regarding First Republic

I think we need to see whether actual withdrawals take place today

But we have seen the authorities draw a line in the sane

sand

if they have to do more, they’ll do more

but it will be to prevent market dysfunction, not to prop up insolvent entities

that’s the message they’re trying to get across

accepting collateral without haircuts etc

Bruce Packard just asked the key Q

“isn’t accepting collateral without haircuts a form of QE”?

Here is where it gets technical

but the way it is structured would allow the central bank to argue it’s not QE

It’s not asset purchases, it’s a loan

yet another example of “QE that is not QE”

we have seen a lot of this since 2020 and will see more

G K is ON FIRE in the comments!!!

nice link to the terms of the program

could we see something coordinated again

and yes youre also correct, QE isn’t exactly money printing

G K asks a good Q

about the length of time for these loans

1 year maturity

so does that mean 1 year to sort yourself out

1 year is also a “short term” security as far as a bank is concerned

on the one hand people screamed for rate hikes to prop up Sterling

on the other they screamed for cuts to prop up the system

But the truth is that the Fed is constrained with inflation where it is

what they have come up with is a clever little package to operate within their constraints

They actually want the markets to get away from “when anything goes wrong, rates go to zero and we solve everything”

Whatever It Takes is dead

‘@Roger Francis, it’s a loan so the Fed don’t keep the collateral until maturity

JPM, primarily

but i guess now with the backstop this trade could be dead

there’s going to be an interesting and rational debate now

where do you put your money

throw it all into JPM at some low deposit rate

or put it into a money market fund but not have the safety of back stop for systemically important institution

theyr’e now all on standby to ensure their capital ratios are watertight

plus I still think mom and pop businesses will prefer to put cash into JPM than Tsys or money mkt funds

What is so weird about all of this

is that for some reason nobody – not the banks, the customers, the businesses – seem to have realised that short term rates are so much higher

it’s like everyone is only just appreciating that we are almost at 5% rather than at 0

not sure why it’s taken 6 months but this is a tipping point that is overdue

meanwhile the gamma position in the S&P is now negative. Short gamma means more volatility – both up and down

so it will be a wild ride this week#

that is a fair point Anjuli but it’s better than 1% in the bank account

actually I don’t know what you get on US bank account

I am only thinking of my own deposit account!

Hello Izabella

😉

so crypto is in a funny position. It’s bad that risky assets are getting repriced. But good because decentralised and away from authorities getting involved

*involved

So if people are going to rush into Tsys that’s nice and helpful for SVB and similar because they are going to be selling them to raise liquidity !

Izabella makes an interesting point about HSBC

if true then surely that would have to come out !?

why aren’t the assets as good as made out

Tinkering with small measures

a small hamster rather than multiple rabbits out of hats

and it really can’t be now given volatility in the market

Sunak and Hunt want to burnish their credentials for credibility

We have had a lot of bits and bobs leaked already such as more help with childcare, extension to energy price cap and possible freeze on fuel duty

also possible acceleration of deadline for raising retirement age

but I think the area to watch will be on more generous capital allowances to make up for the rise in corporation tax

in other words it’s going to be a techy budget where the implications might take time to sink in

@izabella – very interesting you sniff something in the air over HSBC

but any Prime Minister and Chancellor, let alone a new pair, would simply be delighted to ensure a banking failure passed off without incident. Not just to the UK markets but also to UK jobs

Izzy mentioned a similar idea a few months back

makes sense

I love NS&I

(that’s a very retro comment)

but in any case that does makes sense to utilise NS&I better given the scale of govt debt

I imagine we will get lots of statements from our leaders today

and until things have calmed down a bit

can your investments both withstand and benefit from Higher For Longer interest rates

and

so make sure if you need to get hold of cash, you have a way of doing so

and

bigger picture

this is merely payback for what happened in 2020

we didn’t cancel the recession. It was merely delayed.

and central banks had to oversteer into the hairpin bend – and oversteer on the way out

so too much stimulus for too long and now raising rates (possibly) too quickly

if you step back and think of how we have had a global shutdown, war, health emergency, massive ballooning government balance sheets… it’s kind of amazing nothing worse has happened

It’s been fascinating for us this morning !