The Good, The Bad, And The Yellen
By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group
What a couple of weeks it has been! Last week, markets adjusted to the possibility of a banking crisis contagion. This week, markets were whip-sawed on speeches from our fearless financial leaders. It kind of reminds me of the Old West - gunslingers just opening fire whenever it tickles their fancy. There's something to admire about the bravery and fearlessness of some of the real life characters (Billy the Kid, Butch Cassidy, & Wyatt Earp) that pushed Hollywood to explore the Old West genre of movies - in spite of the fact that many of them were thieves and cold-blooded killers. One of the most recognizable stars associated with the genre, John Wayne, once famously said, "Courage is being scared to death...and saddling up anyway." Here are some interesting tidbits about the Old West genre:
- The oldest known movie about the Old West is actually a British movie titled, "Kidnapping by Indians." It was made in 1899.
- The Golden Age of westerns is attributed to the years 1940 to 1960. Out of this period the "stuntman" was born in Hollywood as everyday actors couldn't do some of the riding and gunslinging stunts required for the movies. In fact, John Wayne started as a stuntman before becoming a full-time actor.
- There have been several revivals of the genre since the Golden Age - "The Good, the Bad, and the Ugly" (1966); "Butch Cassidy and the Sundance Kid" (1969); "Jeremiah Johnson" (1972); "Young Guns" (1988); "Unforgiven" (1992); "Tombstone" (1993); and "Wyatt Earp" (1994).
However, when it comes to a $26 trillion dollar economy, federal financial agencies can't afford to be gunslingers. At this point in time, we need measured responses to serious issues - not shooting from the hip.
Here's what we've seen so far this week...
In Her Prime. Janet Yellen doesn't seem to know how to not step into a mess. Like the famous line uttered by Doc Holliday in "Tombstone", "Not me, I'm in my prime" to which Johnny Ringo responds, "Yeah, you look it." The same could be said of Yellen, who after yesterday's performance, seems out of her prime. After Powell calmed markets somewhat about 30 minutes into his speech yesterday, Yellen decided to send the markets into a tailspin. The initial reaction to the FOMC's rate decision at 1:00 yesterday was positive. Powell started his speech about 30 minutes later and markets were a little skittish until he reassured investors that deposits at banks had stabilized. Then came Yellen, who commented at around 2:00 that the FDIC/Treasury was "not considering a broad increase in deposit insurance." Markets, most specifically financials, dropped 1.7% the remainder of the trading session. I'm no word-smith, but I can probably think of at least 2 or 3 things that she could have said that might have protected investors IRAs and 401(k)s a bit better in the latter part of trading yesterday. Perhaps, "Well, we're still discussing the appropriate level of insurance" or "We're monitoring deposits that seem to have stabilized and are still considering the appropriate level of insurance" would have been better responses. But no, we had to get a comment that appeared to be more "from the hip" than carefully thought out. Thanks, Janet!
Dig A Hole. Without a doubt, markets are responding to Chairman Powell's every bated breath. Clint Eastwood famously said in "The Good, the Bad, and the Ugly", "You see, in this world, there's two kinds of people, my friend - those with loaded guns, and those who dig. You dig." Well, Chairman Powell has the gun and we lowly investors have to dig. The failure by the Fed to respond to inflation in 2021 has been hashed out on this blog more than once over the last couple of years. Now, too many interest rate hikes have caused a disparity between what can be earned on T-bills and what can be earned on bank deposits. Well, Powell exacerbated that problem yesterday by raising rates another quarter point. This was what the market expected, however, so the initial damage was minimal. The Fed's official announcement kept the terminal rate the same as outlined at the December meeting. However, the language in the announcement was altered to a more dovish tone. Gone were the words, “ongoing increases” and were replaced with “some additional policy firming may be appropriate.” The market interpreted this to mean a pause in hikes is on the horizon. But what likely caused concern among an already nervous investor base, was the FOMC's statement about the banking crisis and Powell's comments thereafter. The 2nd paragraph of the FOMC's statement added new language to address the crisis: “The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.” Not exactly awe-inspiring words. Then, during his speech, Powell addressed the SVB bank failure specifically by stating, "I quickly realized we were going to need a review, so the question we were all asking ourselves that first weekend was, ‘How did this happen?'" How did this happen?! Well, let's see:
- According to a proxy statement filed by SVB, the bank's former Risk Management Officer, Laura Izurieta, left the bank in October of 2022, but stopped performing her duties in April of last year. Izurieta was replaced by Kim Olsen, but she didn't officially take over until December of last year. It would appear something was missed during the transition.
- SVB had a major mismatch between assets and liabilities. The FDIC is responsible for assessing banks periodically. Did the mismatch and the lack of a risk management officer not raise the eyebrows of anyone at the FDIC?
- In terms of rate hikes, did no one at the Fed (perhaps some lowly risk analyst in a cubicle) think that a disparity between T-bills and deposit yields wouldn't eventually become a problem?
More shooting from the hip, I guess, from the Chairman of the most powerful central bank in the world. Just another day at the office.
The Good. There's always a silver lining, even in the worst of times. Like Emilio Estevez once said in the movie "Young Guns," "I'll make you famous." Even getting killed by Billy the Kid had it's silver lining (I guess). Despite the craziness this week, markets are holding up well. The S&P 500 Index is up about 2% for the week, so far. What's more impressive is the performance of the Nasdaq Composite Index. The Nasdaq, being the riskier of the major indices, is up about 8% since regulators stepped in to resolve the SVB crisis. The market is still holding in a risk-on pattern, but barely. The VIX volatility index has settled down from last week, but after getting close to the 50-day moving average, ultimately moved higher yesterday. On the economic front, housing data has improved. Both Existing Home Sales and Building Permits were higher in February and above expectations. New Home Sales were slightly below expectations, but higher month-over-month. The labor market is providing some credibility to the Fed's comments as Initial Jobless Claims came in lower than expected and have stayed below average for the past 6 months. The labor market is still strong. However, Powell's other interesting comment yesterday about the consequences of the banking crisis and the Fed's goal of addressing inflation: "It’s also possible that this potential tightening will contribute significant tightening in credit conditions over time. And in principle, that means that monetary policy may have less work to do. We simply don’t know.” Could the Fed be using this crisis to help achieve their monetary policy? Perhaps. The reality is we're not out of this current crisis yet, so it will be imperative to watch financial conditions closely.
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