The markets and the economy are starting to pay the price for a long run of overly easy monetary policy and massive congressional largess. All of which was triggered as the result of the Covid lockdowns, which should go down in history as the greatest policy failure in the developed economies since World War II.
The shutdown of a good part of the global economy directly caused the supply chain issues we are still dealing with. Combined with the Fed keeping rates at/near zero until a year ago and trillions of dollars of largely unnecessary legislative spending, directly resulted in the highest inflation levels in two generations.
As the central bank has embarked on the most aggressive monetary policy since the days of Paul Volcker, cracks across the financial system are starting to appear and many 'naked swimmers' are starting to bubble to the surface. First, we had the implosion of hundreds of companies that came public in the great IPO and SPAC craze of 2020 and 2021. So many of which now trade at 10 to 30 cents on the dollar and a myriad of these concerns have also gone bankrupt.
Then late last year FTX collapsed taking a lot of the crypto space with it. This looks like it was the largest case of fraud since Bernie Madoff, whose deeds not coincidentally came to light during the great financial crisis 15 years ago. Then came the bank failures of this month, which counted many crypto firms among their customers. The shotgun marriage of UBS Group (UBS) and Credit Suisse (CS) immediately followed.
The implosion of Silicon Valley Bank (SIVB) was the indirect result of easy money policies from the Federal Reserve. The bank's deposits nearly quadrupled over four years, many of which came from companies that were taken public during IPO/SPAC bubble of 2020/2021. With companies flush, there was no prudent way to grow the bank's loan portfolio to near the extent of its deposit growth. Stretching for yield, SVB put a good portion of portfolio in 'risk free' long dated Treasuries.
This exposed the company to duration risk when interest rates rose. Eventually the bank had to take massive losses on that portion of the portfolio to meet withdrawals. This triggered a classic bank run and SVB was quickly shuttered by the FDIC and Signature Bank (SBNY) met the same fate two days later.
The question for investors is what is the next shoe to drop? Just as Bear Stearns was followed months later by Lehman Brothers, it doesn't seem close to the time to be sounding 'all clear'. Fellow contributor James "RevShark" DePorre had a solid observation via a tweet yesterday, "The fact that Yellen felt she had to 'correct' yesterday's comments makes it sound like she is really worried about something" about the Treasury Secretary's conflicting statements this week which have sparked market selloffs.
I think the recent troubles in the regional banking system is yet another major headwind for commercial real estate, given how responsible they are for the credit to this part of the economy. An investor can't like the recent charts of SL Green Realty Corp. (SLG) or Vornado Realty Trust (VNO) , two REITs with major exposure to the New York City office market. Both stocks have had huge declines in the past month.
My view is it not whether the next shoe will drop, but where and when. A few months of anxiety likely lies ahead of us, and caution remains the watchword of the day.
