Peter Boockvar

If the Congressional hearings this week on SVB and SBNY don’t include a deep dive on monetary policy and the Federal Reserve and its contribution to the mess, then fact finding won’t be the true goal of what we’re going to hear. For sure the senior executives of both banks deserve intense scrutiny as do regulators at the SF Fed but the entire web of influences should be investigated. 

As part of this and central bank desires to separate out financial stability from price stability in their approach in containing the latter but not threatening the former, I’ll repeat what I said last year, you can’t. The conjoined triplets of markets, the economy and monetary policy CANNOT be separated. 

While I’ve rarely agreed with the monetary policy decisions of Janet Yellen during her tenure as both Fed governor and chair and I certainly took the other side of her ‘inflation is transitory’ argument, I will say that she was put in an impossible situation over the past few weeks when asked about whether the US government would insure all deposits. She doesn’t have the jurisdiction and authority to make that decision and neither does Jay Powell and how do you answer the question on deposits when you just don’t know the answer. The problem now though is what will be considered ‘systemic’ and what is not when determining who to bail and who to let fail. 

I’m going to quote here my friend Michael Lewitt who in a Substack piece last week said “Increasingly in the West, society is at the mercy of the judgment of government actors who are only human and subject to the flaws of human beings making decisions under intense pressure with incomplete information in times of crisis. They are also influenced by factors that are superfluous to the issues at hand and often irrelevant or antithetical to making optimal judgments.” 

Now on this deposit question, some high profile people on Twitter and others think this is black or white, insure all or disaster awaits, as we’ve heard. I think instead the long term implications of full insurance deposits would be the mistake and what we’ve seen so far with NY Community Bank taking over SBNY and today’s news with First Citizens, can be replicated many times over. I read in today’s WSJ that “Nearly 200 banks would be at risk of failure if half of uninsured deposits pulled their money from the banking system, according to a paper by economists from USC, Northwestern University, Columbia and Stanford.” Considering we have more than 4,000 banks, 200 failures, absorbed by others, is manageable. 

And if handled smartly by regulators from here and in calling out the vulnerable banks and encouraging M&A, we can avoid the bank run panic. Instead though we’ll have a nasty, credit crunch driven recession which cannot be avoided at this point I believe but that is better poison than bank run stories each week that spirals. And many banks, instead of failing, will have to raise a lot more equity but which will be the problem of shareholders rather than depositors. 

Now we know that credit contraction is going to happen with respect to bank loans but the threat is growing for those bigger companies that have access to the capital markets. If you didn’t see in Friday’s WSJ, “Companies big and small lose access to credit amid bank stress.” In the piece it said, “No companies with investment grade credit ratings sold new bonds over the six business days from March 10 through March 17, the first week in March without a new high grade bond sale since 2013, according to PitchBook LCD. The market for new junk bond sales has largely stalled this month, and no companies have gone public on the NYSE in more than two weeks.”

Some more from the article, “Those with the highest ratings have sold $59.9 billion in new bonds this month, compared with March’s five-year average of $179 billion…Companies have raised some $5 billion of junk bonds this month vs the 5 year average of $24 billion.” I continue to be most worried about the leveraged loan market, because of the low quality of the credits and much higher interest rates companies are paying on this floating rate debt for those that didn’t hedge. 

Shifting gears to the uplift that China’s reopening is giving to travel, leisure and hospitality, at the same time Chinese manufacturing is still under pressure because of the economic slowing on the part of their biggest customers and still more time needed to work through their residential real estate market. In an article late last week in Inside Asian Gaming, it said that “the number of visitors to Macau last Saturday March 18th reached 96,000.” For perspective, the 2019 daily average was 108,000 visitor arrivals per day. Now gross gaming revenue is still well below 2019 levels but at least the visitors are coming. We remain bullish and long on Asian travel and leisure plays like Macau casino stocks and online travel agencies. 

Hong Kong exports fell in February by almost 9% y/o/y but that was much better than the expected drop of 28% because exports to China didn’t fall as much as feared. A Hong Kong spokesperson said “The accelerated recovery of the mainland economy, coupled with the removal of cross boundary truck movement restrictions between Hong Kong and the Mainland, should alleviate part of the pressure.”

In Europe, the one data point of note was the March German IFO business confidence index which improved to 93.3 from 91.1 and that was above the estimate of no change. Both the Current Assessment and Expectation components were higher m/o/m. The IFO said succinctly, “Despite turbulence at some international banks, the German economy is stabilizing.” German business is also rejoicing over the sharp drop in energy prices and hopes for their Chinese business.