Like A Hurricane

1430 words – a 4 minute read.

Just when one was getting sick & tired of the never ending inflation saga along comes something straight out of the blue – like a hurricane to paraphrase Neil Young & Crazy Horse. In this case it’s the crypto collapse with a sting in its tail which took down Silvergate Capital Corp & Silicon Valley Bank (SVB) in a matter of days, upending even the top tier jobs #.

Neil & the band came up with that tune back in 1977 (personal confession – Live Rust is one of my go tos for gym workouts) and today one can read about how SVB parallels not quite the 1970s but the S&L crisis of the early 80s. This seems overwrought to me but guys I respect like Larry McDonald of Bear Traps is sounding the 5 alarm fire on this.

I respect Larry a lot but to me this has a good chance of being more like last Fall’s UK LDI crisis than a takedown of the US financial system, even the small bank part of it. It could also be a signal as to what kind of shape the private equity and VC space is in vs the public markets who have already taken significant pain, unlike the private space. Much like the LDI crisis (which I called “a tempest in a tea pot” on BTV IRT) the SVB saga has some specifics which suggest limited extension to other banks, especially the large and systemically important ones.

Both Silvergate & SVB had a very specific focus on the crypto, venture and start up space; the same folks who after the winter of discontent have been burning thru their cash positions, liquidating deposits and becoming super nervous nellies about what might happen to their shrinking cash base. No cash = out of biz so when well respected Silicon Valley VC’s start telling their wanna bes to get their money out, that’s what the wanna bes will do and thus here we are – a basic bank run.

Yesterday’s extension from SVB into the regional banks with KRE, a main ETF for the space, down 8% on 8x its daily volume while big bank ETF XLF fell 4% on 2x av volume suggests some real fear is out there.  Alternatively, when an elephant tries to get thru a key hole it gets cut up – when everyone wants to sell KRE on the same day the price goes down big just like when everyone wants to get their money out of the same bank at the same time banks fail. Note that the ST RSI for KRE is now at 17, deeply oversold, while the same stat for XLF is at 24, also quite oversold.

What happened in the UK might be illustrative of the future here. Last Fall the LDI crisis blew up the UK gilt market and caused the stock market to fall roughly 10% over a matter of weeks. Five months later, the UK is one of the best performing equity markets in the world up well over 20% from those lows. The BOE stepped in and things calmed down quickly; in this case, the FDIC has already stepped in to take over SVB.

Keep in mind that pre SVB, AAII sentiment was already the most bearish in history while Lipper reports US equity funds have had outflows for 9 weeks in a row – the longest streak since 2016. A recent Bloomberg survey found that 2/3 of respondents felt that raising cash would bolster portfolio returns; we disagree and think days like yesterday & today are for putting cash to work, not raising it.

As we wrote last week in our Monthly: Short vs Long Term Investment Thinking one has an opportunity to consider the short term impact of an aggressive selloff, taking the SPY through its important 200d mav just days before many technical analysts are looking for an Ides of March cycle bottom (3/15) versus the long term impact of the jobs number & the impact of the two combined on Fed thinking.

Jobs came in well above expectations (225K) at 311k, very close to the top of the range of estimates (325k) while the UER rose as the job participation rate expanded back to pre Covid levels for prime age workers– very good news in that more job seekers should alleviate wage pressures which could fuel inflation. Weekly hours worked declined while wage pressures eased – coming in below forecast at 0.2% M/M for a 3.2% annualized rate over the past three months. These data points should help reduce some of the hype and fear around the Fed’s next move after Chair Powell’s Congressional testimony.

The result of these two issues – SVB and jobs data - have seen UST rates at both the short and long end come in markedly – more than reversing the backup inspired by Chair Powell’s testimony. The moves have been massive with the 2 yr. UST, which had been breaking north of 5%, suddenly rallying all the way back to 4.6%, almost a 50 bp move in less than 2 trading days. The 10 yr. UST, which had been breaking north of 4% for the first time since last Fall, reversed course and is now around 3.7%. DXY is back to 104.5, down from 105.6 a few days ago.

So, if the short term equity trade is down, the long term trade may well be up given that the jobs data was benign, SVB is unlikely to prove systemic and yet bank fears may well cause the Fed to err on the side of caution and raise rates 25 bps at its upcoming meeting rather than the 50 bps which had just about been priced in. A Fed sticking to 25 bp moves then blunts the USD’s rally as we have again seen over the past few days. February’s CPI print will be released in less than two trading days – possibly setting up for an oversold cycle low to join with a BTE inflation print to send the equity rollercoaster back up.

A more cautious Fed, a capped USD & choppy rather than spiky rates would seem to be a decent outcome for risk assets, especially outside the US. Europe and Japan do not have the same bank – crypto – VC web the US does, nor does Mexico or SE Asia. China which has given back virtually all of its YTD rally does have ties to the VC space but its banks are much more tightly regulated than US small banks are. Thus, one outcome may be to further encourage the flow of capital out of the US to the ROW.

We updated our two models this week – our Global Multi Asset model (GMA) and our TPW 20 thematic model. Beyond the SVB crisis and behind the scenes of the inflation saga we believe there are powerful policy shifts underway across the globe. We continue to believe there are no major imbalances in the US or global economy. As noted in our Monthly, we want to take advantage of short term market dislocations to build long term positions in assets that are the likely beneficiaries of these policy shifts.

To that effect, we made several changes in both models, building on strength in the robotics and semiconductor spaces, expanding our AI bet & leveraging our Tri Polar World construct of regional integration to take advantage of near shoring trends as supply chains return to normal. Technical analysis has proven helpful – last month we made no changes as many ETFs were overbought post January’s surge. This week we have been able to add to positions at much more reasonable levels.

That’s not to say we haven’t taken some pain yesterday & so far this morning but that is short term versus what we continue to expect to be the Middle Path in the medium term and over the longer term a quite positive, high nominal growth world led by a global cap ex boom supported by the return of US Industrial Policy & its expansion in Europe while Asia ignites a new global growth cycle led by China.

“You are like a hurricane, there’s calm in your eye”. Keep calm & carry on!

Enjoy this Your FinanceTV clip – our first with charts included. It’s a good discussion of the Monthly and how we are viewing things. https://www.youtube.com/watch?v=QUc0dpzeIhU

LETS GO DUKE – WIN THE ACC! (have to say payback is quite something – Carolina going to the NIT almost makes up for how they did us last year… almost.)