UBS rescue of Credit Suisse doesn’t resolve the U.S. banking crisis
The Swiss government gets an “A” for its speed in addressing the Credit Suisse problem, but it doesn’t resolve the U.S. banking crisis. The question of whether the government should (or Congress has the will) to insure every deposit in the U.S. is still very much in the air. The primary focus for U.S. markets is on the Federal Reserve meeting this week. Here in the U.S., the markets can’t seem to agree on what the Fed should be focused on: fighting inflation or avoiding a credit-induced recession. The markets have rarely seen such a wide weekly dispersion in sector performance. Major sectors last week : Technology up 5.7% Energy down 7.0% Materials down 3.5% Industrials down 2.5% Banks down 12% Technology up 5.7% But banks down 12%? That just doesn’t happen, not on a weekly basis. And the decline in cyclical sectors like materials and industrials is also strange. The decline in cyclicals looks like some traders are betting on an economic slowdown. But what about the tech rally? Two things account for why some big tech stocks are up 10% or more last week: 1) the drop in bond yields is a big plus for tech stocks, and 2) tech bulls are expecting a “dovish hike,” from the Fed, that is, it will hike 25 basis points but then signal a pause. Why a pause? The banking crisis has tightened financial conditions because it has dramatically interrupted the flow of capital. Banks, particularly regional banks, will likely be doing much less lending for the rest of the year. Many on Wall Street tech believe that the Fed will acknowledge progress on inflation, and that a pause may be warranted due to what is happening in the banking system. “We expect the FOMC to pause at its March meeting this week because of stress in the banking system,” Jan Hatzius from Goldman Sachs said in a note to clients. “[Silicon Valley Bank] and the rest just may have done the Fed’s job for it,” Frank Gretz at Wellington Shields told clients on Friday. “At the very least, it should help ease the Fed’s foot off the rate hike pedal … this banking problem is doing the Fed’ job for it, but will the Fed see it that way as well?” Bottom line: The odds of a recession go down if the Fed is no longer in tightening mode. Still, the market seems a bit schizophrenic: Some think a more serious recession is coming (the group selling cyclicals) and some believe that the Fed is going to pause and help avert that more serious recession (the group buying tech stocks). So it’s a game of chicken with the Fed: will they blink? There’s good news and bad news here The good news: lower bond yields are going to improve borrowing costs, and corporations are going to go into even higher gear on “cost savings,” which are going to improve earnings. The bad news: this banking crisis has once again revealed an age-old problem with capitalism: much of it is based on faith. Faith, in this case, that depositor money will be safe and depositors don’t have to shop for a bank to put their money in. Indeed the very word “credit” comes from the Latin word creditum , “a loan, thing entrusted to another,” from the word credere , “to trust, to believe.” If the trust is not there, then much of the apparatus of capitalism evaporates. In that context, it makes perfect sense for regulators to shore up trust in the system, which in this case involves debating whether to insure deposits at all banks, no matter how large the deposit. That’s quite a leap from the current limit of $250,000, but it may be what is necessary to restore faith. No surprise that over the weekend a coalition of midsize U.S .banks asked federal regulators to extend FDIC deposit insurance for the next two years. “The prime concern of every bank for the immediate future is preventing deposit flight,” Mike O’Rourke from Jones Trading said in a note to clients last night. “It should be clear that the most expedient and effective solution to this crisis is an expansion and modernization of the FDIC deposit insurance regime.”
