This is the first in what will be a short daily journal of macroeconomic events. Previously, I’ve written weekly economics updates for our investment clients at nVest Advisors, LLC, but this daily journal is more appropriate for Think Like A Rich Guy for several reasons. First, readers here are seeking their own sources of timely, actionable information than my regular investment clients. Also, because becoming aware of the fast-moving changes in the economy truly IS “thinking like a rich guy”. Wealthy people with a lot at stake in the economy are acutely aware of the macroeconomic environment (or they make sure their advisors are – wealthy people are generally not “do it yourself” types when it comes to serious money management issues – they know when it’s best to hire professional tax, legal, and asset management help).
I need to preface these daily macro reports by saying that this is meant to be general education information only. There is absolutely no way for me to offer investment advice to random readers around the world without engaging with you individually and assessing your unique situation (we are also legally restricted from doing so unless you live in a U.S. state in which we are registered to do business). That said, all of us are working, saving, and investing in the same macroeconomic environment, so it makes sense to have “the lay of the land” from which to make personal finance decisions.
This information is also not a solicitation to do business with me as a financial advisor, though for the right readers, that offer is available. It is intended solely to provide timely economic data and analysis from the vantage point of a 15-year industry veteran (but also, always still a student) of personal finance and economics.
I highly recommend you read the past few weekly economic updates I write for my financial advisory firm, nVest Advisors, LLC to get brought current on what’s happening in the broader economy, because this journal will be jumping right in without too much of a primer. I will be writing a primer into this blog as we go, but for now, the best place to catch up on what’s happening (and it’s a lot) is to read the macro blog at nVest.
Monday and Tuesday, March 20 and 21, 2023
Bank Failures
We start our first blog with a look at the current banking crisis (the last recession started with very similar headlines to ones we’re seeing now). Two good-sized regional banks in the U.S. – Silicon Valley Bank in California and Signature Bank in New York, struggled to maintain liquidity requirements and were shut down by the FDIC two weeks ago. Depositors, a vast majority of which had balances far in excess of the FDIC Insurance coverage of $250,000 per account registration, were potentially going to lose billions of dollars of deposits unless the regulators stepped in and created a special program to save them. True to form, the Federal Reserve, FDIC and US Treasury did exactly that (when don’t they rescue the 1%ers?) and guaranteed the deposits of all customers in both banks. The stock and bondholders of both banks, however, were wiped out and the bank customers’ assets were moved to other banks.
This past weekend, Credit Suisse, a large investment bank based in Zurich, Switzerland, also collapsed under similar conditions. UBS bank, under heavy regulatory pressure, is assuming ownership of the assets and holdings of CS.
In all three cases, the causes appear to be poor risk management decisions made by the banks themselves.
At Silicon Valley, there may even be some criminal charges looming due to insider trading and extremely sketchy bonuses given to top executives just before the bank collapsed. Also, SVB had no risk officer (a requirement of US banks) for almost a year prior to the failure. SVB was offering very easy-to-obtain loans for tech company startups and was incentivizing deposits by offering 1% or more interest on even their checking accounts. The rest of the bank’s reserves were being held in long-duration US Treasury bonds, which doesn’t sound like a risky proposition at face value. The problem is, they bought their bonds before the current interest rate hiking cycle began in 2021, to the bonds they owned paid much lower interest rates than newly-issued bonds do, dropping them in value permanently by as much as 40% (this is known as interest rate risk). The bank had few if any stop-loss measures in place to protect against that risk, so their bank reserves had dropped in value by a large amount. That would be risky enough but the bank could survive as long as there was never a significant number of bank customers wanting their money out at the same time (a “bank run”), which, in fact, happened.
We can’t blame a bank run entirely, because depositors have been withdrawing from banks at an increasing rate of speed for the last year at least, as inflation has limited your buying power and borrowing more money has become too expensive. So, companies and families alike are now depleting their savings. Banks depend on deposits in order to make loans, so many banks are at risk of insolvency if this continues:
Also, the revenue for most banks – new loans – appears to be peaking for now, as the interest rates being charged on new debt is just too high. Both looks at loans below show the curve is flattening and may in fact, reverse trend:
In Signature Banks, case, it looks like the bank was managed by clowns, to be honest. A number of odd music videos made by the bank, starring their top executives rapping and doing Broadway dance numbers, have emerged since the bank’s collapse. Although the bank has been around for decades, it decided recently to become a key player in normalizing the cryptocurrency space (a douchebag-infested and con-man casino that I strongly urge my readers to avoid for now). By the time of their collapse, over a quarter of their total deposits were highly volatile cryptocurrencies whose values had plummeted over the past year with all of the failures in the always-corrupt, lawless Wild West of the crypto-bro playground.
SVB and Signature Bank were what are called Regional Banks – banks that have sizeable influence in localized areas, but are not “national players” in terms of size or reach. Because both of the bank failures were regional banks, much confidence was lost in keeping money in these huge, but still relatively small institutions, and we can now see a strong outflow of money from these banks:
This was despite the bailouts the government put in place for depositors in SVB and Signature, and it puts additional liquidity and solvency pressure on other US regional banks. It’s a space to watch closely.
Credit Suisse appears to be a matter of contagion and bad investment decisions, as well. The details are still emerging on this one, and I’m sure we’ll be back to do a post-mortem once we have adults in the room to look over the books and tell us exactly what happened.
These three are, in my opinion, just the start of liquidity problems for the banking sector as a whole. Banks are notoriously interest-rate sensitive. Banks need short-term rates (what they give you) to be low and long-term rates (what you give them) to be high, and we’ve had the exact opposite situation for almost a year now. I am confident that as we head into the recession that – you read it here first – is imminent and unavoidable, banks and mortgage companies will be some of the hardest hit institutions. There is, in my view, much more pain coming to the financial sector before the bottom.
Manufacturing Activity
We got two sets of manufacturing data yesterday, from the Empire State (NY Trade Area) and the Philly (“rust belt” trade area). Both show significant declines in manufacturing activity in recent months that appears to be accelerating.
First, Empire State numbers. Actual output (-24.6) came in WAY below expectations (-7.9). Upcoming orders also fell sharply:
When factories stop getting orders, they have to cut hours and, eventually, employees. We see both now happening at an accelerating rate:
The same is true in Philly manufacturing. Orders are down sharply…
And future orders are faring even worse:
Which is having a marked impact on jobs in this sector:
I believe the U.S. is already in a recession. The frustrating thing is, recessions are always declared retroactively months after they begin because we need the actual data from previous months in order to make the determination. Typically, a recession is described as two (proven) consecutive quarters of declining output, jobs, and a general deterioration of economic conditions. That means we never call a recession until we’re in one for at least six months. So recessions, or at least the declaration of one, are what are called lagging indicators (because we’re essentially looking in the rear-view mirror as we make the assessment).
However, there are also current and leading indicators, which I take strongly into account. The CURRENT financial conditions index also shows we are under water in terms of economic activity:
There will be much discussion in these updates about the Federal Reserve’s current activity, all meant to crush inflation that started after the unnecessary and needlessly costly lockdowns during the Covid-19 pandemic, and the wild spending the governments of the world did to hold things up (stimulus checks, PPP loans, etc.). You can’t drop $6 TRILLION into the economy, out of thin air, and not expect prices to skyrocket. They did, and now the Federal Reserve must enact a series of interest rate hikes and reducing the money supply in order to break it.
Currently, the primary factor keeping inflation stubbornly sticky is the demand for workers. When you have a guy with a resume and two or three companies competing for him, the companies will keep upping the ante to get the available worker on their team. This constant upward pressure on wages and benefits is what is currently forcing inflation up, because if a company’s labor costs climb, the prices they must charge for their products and services must also climb.
So the Fed wants to reverse the situation, by instead, having one available job and two or three guys with resumes competing for the job. Having work less available will mean workers will accept a job at a lower wage, allowing companies to being to ease off on their price increases.
Thankfully, we are seeing wage pressures easing off as the economy begins to slog into recession. The faster this happens, the quicker this can be over. The Atlanta Federal Reserve Bank reported a sharp decline in wage offers for a job switcher versus someone who stays at their current company, so it looks like the financial incentive to move to another company is slowing WAY down.
Also, it looks like the pressure companies felt to try to hang on to their workers also seems to be easing:
We have a long way to go, but we are seeing an impact on the economy as the recession begins. How fast employment can slow down is how long the Fed has to keep raising interest rates. The longer they do that, the deeper and more difficult the recession will go.
See you tomorrow!
