Bank runs and 54% chance of recession?
Welp, the flowers are blooming, the birds are chirping, but the rain won't stop coming!
This is welcome news for us here in California as most of our reservoirs are close to historical averages according to California Water Resources.
A little good news goes a long way when it seems we are berated with the unpleasant headlines of economic outlooks, bank runs, and war.
If you recall, in last month's market outlook I remarked that I am cautiously optimistic (read here). I likened my cautiousness to the yellow flag that is waived in a formula one race.
Reduce speed, do not overtake, and be prepared to change direction.
And yet, given the recent bank failures, my optimism level has not changed. As this may be a teachable moment for the fed.
It surely must be taken as a stark reminder that the Fed's monetary tightening to squeeze liquidity has consequences.
As of now, much of the contagion is relatively contained in smaller regional banks, and the US government and the Fed coming together to backstop deposits and offer to lend to banks in trouble is helpful.
But, given the current economic environment and despite the government and the Fed's best efforts, the undertones of similarity to past market collapses may seem ominous.
Is this the first sign of something greater on the horizon?
For starters, the market is not reacting in a way that would anticipate a Lehman Brothers' style collapse. In fact, the rally in the bond market today 3/13/2023 is a sign that investors are actually betting that forward rate expectations may be too high.
I venture to say that the Fed's assumed goal of a "soft landing" is becoming more wishful thinking unless recent events give them a change of heart.
This seems to be what bond investors are betting on as more troubling data mounts up.
Probability of recession
The chart below was taken directly off of the New York Fed's website. It is the indicator they use to predict the probability of a recession over the next 12 months.
Currently, the probability of a recession, according to this indicator, is showing a 54% chance of recession by February of 2024.
Conclusion
Unfortunately, for the last 2 years, we have experienced the fallout of more than a decade of loose monetary policy and endless liquidity. That is not to say some good came from it, but many people are now suffering because of it.
It may be counterintuitive to believe that something good can come out of a bank collapse. But, a change of current policy direction may be exactly what is needed for them to try and save what is left.
If the Fed continues to raise rates in the face of collapses from banks like SVB and Signature Bank, it is safe to assume we may see smaller banks collapse and fail.
Thank you fractional reserve banking.
Given recent developments, it should be expected that volatility should be heightened through March but a shift in policy would yield positive results for capital markets. Yet, it is all dependent on the fed.
As we get closer to the end of the quarter, if you are a client, please keep an eye out for a calendar link to schedule a time to connect! I am looking forward to it!
“Banking is a very good business if you don't do anything dumb,” ― Warren Buffett
Thank you for reading,
James Anadon
