Peter Boockvar

I mentioned last week that small and medium sized banks made up 38% of all corporate and household loans. If you didn’t see the WSJ yesterday, using info from the Federal Reserve, they broke down the distribution to highlight the importance of these banks in creating loans and the setup for what a credit contraction brings. They made up 28% of C&I loans, 37% of residential real estate loans, a large 67% of commercial real estate loans where many office properties are now in trouble, 27% of credit card loans, 15% of auto loans and 48% of other loans. //www.wsj.com/articles/smaller-banks-critical-role-in-economy-means-distress-raises-recession-risks-ba31e6a8?mod=itp_wsj&ru=yahoo

I wanted to include here some charts on lending standards as of the end of January and we can only imagine what the next survey is going to look like. As seen for C&I loans, they were the tightest since 2009 not including Covid.

Net % of Tightening Standards for C&I Loans for Large Firms

Net % of Tightening Standards for C&I for Small Firms

Bloomberg is reporting that “US officials are studying ways they might temporarily expand FDIC coverage of to all deposits, a move sought by a coalition of banks arguing that it’s needed to head off a potential financial crisis. Treasury Department staff are reviewing whether federal regulators have enough emergency authority to temporarily insure deposits greater than the current $250k cap on most accounts without formal consent from a deeply divided Congress, according to people with knowledge of the talks.” 

To solve this, I’m sure there are plenty of US insurance companies that would write policies for businesses that want to insure deposits above $250k without the banks and the FDIC getting involved. And maybe for individuals we can raise the insured deposit cap.

As for autos, this could be the next interest rate sensitive part of the economy that cracks as we’re already seeing a rise in subprime delinquencies and repossessions. From the NY Fed, “The rejection rate for auto loans increased to 9.1% from 5.8% in October, its highest reading since February 2017.”  //www.newyorkfed.org/microeconomics/sce/credit-access#/

Since mid April 2022 to now, the S&P 500 has traded in a closing range of about 4300 on the upside and just under 3600 on the downside. The exact mid-point is 3950 and yesterday it closed at 3951. Call it technical no man’s land. 

With respect to the US dollar, I want to highlight how tightly it has traded over the past few years based on Fed tightening, which implies that there is further weakness ahead assuming the relationship remains, as it should and for other reasons like what will be a further rise in the US budget deficit as a % of GDP. It was at the June 2021 FOMC press conference when Jay Powell said they are finally talking about tapering QE, which began that November but the playing field had been set. As seen in the chart of the DXY, that is when the dollar started to rally. The 27% rise in the dollar that followed peaked in late September 2022 and a 2nd retest failed on November 3rd, one day after the final 75 bps rate hike that was then slowed to 50 bps and then 25 bps as we know. 

If this weakness continues as I expect it to, the gold and silver bounce of late is only getting started. Emerging market local currency bonds look very attractive as do international stocks relative to US ones. 

DXY

South Korea said its exports in the first 20 days of March fell 17.4% y/o/y and imports were lower by 5.7% y/o/y. The drop in exports was led by a 45% plunge in semi shipments and a drop in exports to China of 36%. The China reopening at least right now as mostly helped leisure, hospitality and travel and not much else. 

The March German ZEW investor confidence index in the German economy fell to 13 from 28 and that was 2 pts below expectations. The current situation remained deeply negative, down by 1 pt m/o/m to 46.5. ZEW highlighted the recent financial turmoil. “The international financial markets are under strong pressure. The high level of uncertainty is also reflected in the ZEW Indicator of Economic Sentiment. The assessment of the earnings development of banks has deteriorated considerably, although it still remains slightly positive. The estimates for the insurance industry have also declined significantly.” 

ZEW

The very hawkish ECB member Robert Holzmann who just a few weeks ago said he wanted four more 50 bps rate hikes, one of which we got last week, today said, maybe not. “I wouldn’t rule them out, but I also wouldn’t say that they’ll necessarily come either.” The monetary knees are buckling.