I have always believed that the best way to gauge the market direction was by predicting company profits. A new factor has entered the picture which I believe may cause problems down the road: the Federal government. The optics are not good. The ring fencing of SVB bank and other banks guaranteeing all deposits may have needed to be done, but it is, nevertheless, highly suspect. The fact that Barney Frank sat on the board of the bank (yes, the “Frank” of the Dodd/Frank banking bill enacted after the 08-09 market crash) and the influence on the Fed to bail out the uninsured accounts is a stretch in my mind! Did politically well-connected people influence the Fed on its actions or delay action by banking regulators? I have had more than several clients who sold their businesses, and all were VERY aware of the 250K Federal Deposit Insurance Corporation (FDIC) insurance limit and acted quickly to address this limit. What “moral hazard” is now arising ? Will others say, “Do not worry, they will bail us out as well”. If it sounds like 08-09 before Lehman Brothers went out of business, you may have a point!
Now to the ironic part. The banks were invested in what was and is considered the safest investment in the world, the 10-year Treasury Note. Unlike 08-09 where it was “credit risk” (bad loans) which got out of control, this bank emergency was caused by “interest rate risk”. When interest rates go up, bond prices go down; That is a financial fact. The banks were forced to sell the bonds at a loss to give people back their deposits. Credit and interest risk are well known in the banking industry and to have a bank of this size fail to manage these risks is amazing to me!! This was poor bank management and reflects poorly on management and the Board of Directors. Add to this that the Feds were aware of the risk and were after the banks to correct these months before and you are back to influence and optics. I will not get into the FTX failure and the relationship of Gary Gensler the head of the Securities and Exchange Commission, Bankman-Fried’s mother and Stanford, optics! We will get past the above, but it is interesting the more you read about what caused the banks to collapse.
Another government issue we are watching is the Federal balance sheet. In 2008 it stood at $875 Billion. Today it is $8.6 TRILLION. When you create that much money you could end up with transitory inflation!! Oh, “we should drop the word transitory.” We are in uncharted territory and Powell is doing his best to tame inflation without crashing the economy. He may yet do it, time will tell. We are watching developments and will respond in the best way possible to protect our clients.
As usual, if you have any changes in your situation, please let us know. We have seen an alarming increase in phishing and spoofing attacks. Please be aware that these things are happening and that emails that come to you may have links that are malicious. We are receiving no less than five of these per day in our emails and we want to make you aware of this potential hazard. We thank you for the trust you place with us and if you have any questions, please contact Keith, Nick, Alison, Kathy, or me.
Yours Truly,
Willis Ashby, CFP®
WSJ 1st Trust
TD Economics Morningstar
New York Times Jerome Powell
5105 DTC PKWY Ste 316
Greenwood Village, Colorado 80111 United States
5105 DTC PKWY Ste 316
Greenwood Village, Colorado 80111 United States