Idiosyncratic or Systemic?

Do you believe the current banking 'crisis' is idiosyncratic or systemic? The short answer is it's still far too early to know. Hopefully it's more of the former and less the latter. Because if it's the latter, that's a problem. Last week's issues will become multiplicative (vs additive). 2008 was a global systemic banking crisis.... this is not 2008. At least not yet...

The Fed Must ‘Choose their Poison’

The collapse of SVB and tightening financial conditions has put the Fed in a very difficult spot. For example, prior to the collapse they had a green light to raise at least 25 bps. Not now. Tightening rates could cause further pressure in the banking sector. However, if they choose not to - what signal does that send. There are no easy choices...

Markets Suffer Worst Week for 2023

Markets are in a state of panic. A small regional bank - Silicon Valley Bank - suffered a bank run this week. Over $42B was withdrawn in the space of just two days. What happened? On the surface it looks like very poor risk management - where SVB was effectively forced to sell long-term bonds which were underwater. Call it a margin call. Their interest rate risk was not adequately hedged. More details will come out in the coming days... however this sell off is taking the entire sector down with it. Is it warranted?

First Major Casualty

This week saw the second largest banking collapse in US history and the first since 2008. Silicon Valley Bank - with a market cap of $18B only 4 weeks ago - collapsed Friday after a furious bank run. SVB's collapse was far less to do with the Fed raising rates - it was all to do with poor risk management - forced to sell their holding of treasuries at a loss. But this is nothing we have not seen before....

Powell’s Punch

In what was supposed to be a 'vanilla' testimony to Congress - Jay Powell turned this into a market moving event. Not pleased with how market participants interpreted his previous address - he set the record straight that rates will be higher for longer. His testimony left no room for ambiguity - it was full hawk. Markets quickly revised their forecasts for the peak Fed funds rate - with some now thinking 6.00%. What's more, the 2/10 yield curve is now negative 107 basis points. We have not seen that since 1981. Soft landing? Good luck.

What Do Credit Spreads Tell Us?

There are two types of economic indicators which are often cited in the financial media: (i) those which lag; and (ii) those which are leading. The latter of more useful. One of the best real-time leading indicators are credit spreads. These are excellent indicator of the 'health' of the financial system. So what do they tell us today with interest rates sharply higher?

Soft Landing Hopes

Markets have been largely range trading for 17 consecutive weeks. For example, the S&P 500 appears caught between 3800 and 4200. And I think it's easy to explain: there are valid cases for both the bullish and bearish case. Equally however, there is also no compelling argument to suggest markets are set to explode higher or crash. This market requires patience. What's more, you cannot afford to be too aggressive betting on either outcome.

10-Year Yields Continue to Rise… Why this Matters

The bond market has connected the dots - rates are likely to stay higher for a lot longer. This has seen yields all along the curve surge... with the 10-year now back above 4.0%. The 2-year has moved 100 bps in just 4 weeks. This has implications for stocks and their valuations... none of it great. Look for the 10-year to push higher - perhaps to 4.4% - which represents opportunity for investors.

Fed’s 2% Inflation Goal: A Long, Slow Fight 

Another month, another hotter than expected inflation report. This time it was one which the Fed focus on: "Core PCE". Expectations were for 4.3% YoY - it came at white-hot 4.7%. Where is the problem? Simple... services. And until we see unemployment tick higher... core services inflation will remain sticky. The Fed has a long fight on its hands... and the market is only recently connecting those dots

Equities Often Slow to Connect the Dots

Last week I warned the market was poised for a sharp pullback. This week we got it. In short, both fundamentally and technically the market felt vulnerable. Market multiples pushed 19x forward on little substance. And from there, it did not take much for the bulls to lose their nerve...

Managing Risk During ‘FOMO’

There are three important facets to the game of speculating required to make you consistently profitable: (1) understanding your psychology and emotions; (2) a deep understanding of how to manage your risk profile; and (3) access to a wide array of strategies that suit any range of market conditions. Today I think the first of these could be costing a lot of people money... in this case the "fear of missing out". This is a dangerous mindset which 'infects' a lot of speculators... don't let it be you.

Why a Rising US 10-Yr Yield Presents Opportunity

Bond yields are once again starting to rally. Rates are likely to be higher for longer. The US 10-year is now pressing 3.80% - and likely to exceed 4.0% in the coming weeks. The question is how how far will it go? My view is it will unlikely stay above 4.40% for any sustained period. And if anything - will resume it's downtrend in 2024 as we approach recession. That represents an opportunity for investors - here is how I am trading it.