First Major Banking Collapse Since 2009 – What Does it Mean?

March 12, 2023

First Major Banking Collapse Since 2009 – What Does it Mean? March 11, 2023 By Mitchell Anthony     Silicon Valley Bank (SVB) collapsed yesterday as depositors withdrew cash! This is the first major banking collapse since the great financial crisis of 2008.  While the crisis and details of this takeover are still unfolding the early visibility we have reveals that this failure is not part of a systemic problem within the US economy and we are unlikely to see other banks fail in a similar manner.  The problems and circumstances that led to the default seem unique to this highly specialized regional bank that worked almost exclusively with the start-up tech industry in Silicon Valley. At first blush it would appear that the majority of major banks are sound and not subject to the unique circumstances that brought down this highly specialized bank. The problem that we have is the fact that banks are not required to disclose or mark to market their bond portfolios that are being held to maturity or they hope to hold to maturity. There could be significant unrealized losses on these portfolios.  This crisis may force banks to reveal their bond portfolio status and it could certainly require them to start paying higher returns on cash deposits. Investors are obviously bracing for the worst and the stock prices for almost all banks plunged by as much as 20 to 30% over the last few days as the crisis unfolded. We believe the crisis and the plunge in bank stock prices likely represents a value opportunity. We have been underweight banks in our portfolio since the pandemic began for reasons such as this!Read more

Can Markets Move Higher with Inflation Finally Heading Lower?

December 23, 2022

Can Markets Move Higher with Inflation Finally Heading Lower? By Mitchell Anthony December 23, 2022   Financial markets have been extremely volatile throughout most of 2022 as high inflation shocked the economy and central banks around the world reacted with significantly higher interest rates.  The inflation battle has taken significant time to even dent inflation and the path out of the crisis is still unclear. As a result stocks, bonds, and commodities have all been volatile as inflation and the cost of money is critical to the success of an economic cycle. Inflation peaked in October and has begun to tilt lower but the path back to the feds target of 2% inflation is still very uncertain.  Fixed-income securities have declined in value substantially throughout most of the year as the fed pushed rates higher although the decline has paused over the last few months. Equities have followed a similar path but a modest rally has begun several times that is now again struggling.  Yields on treasuries have quadrupled this year reaching as high as 4.5% but falling back to 3.7% today. The equity market has ebbed and flowed since the June bottom and three rebounds have occurred.  While the first two failed, the third has been quite strong narrowing the S&P 500 loss to -18% YTD.Read more

Economy Stays Strong but Risk Assets Move Lower Again in Q3

October 10, 2022

Economy Stays Strong but Risk Assets Move Lower Again in Q3 By Mitchell Anthony October 10, 2022   The US Economy has found a way to avoid recession despite a record rise in interest rates. Consumption in the US economy has remained resilient despite a record rise in interest rates and the highest inflation in 40 years. This is somewhat unexplainable but likely tied to the fiscal stimulus that was poured into the US economy in a plentiful manner by the U.S. Congress as it worried about getting the economy back on its feet after Covid.  Investors and strategists seemed almost certain that the US economy was headed for recession in the first half of 2022 as the FED began to raise rates aggressively, however after two quarters of negative GDP optimism for economy growth has sprung back to life and the 3rd quarter is expected to be positive with over 2.5% GDP.  Actually the US economy was never seemingly in recession despite the negative growth. Unemployment has remained at near record lows and with it came a return to strong consumption.  That’s the positive spin, however as we all know inflation is out of control and central bankers are in the position of busting it even if it means busting the values of all risk assets as well as consumption and employment.  The Fed has been at work raising rates and investors have been doing it right along with the Fed. Mortgage rates have risen from 2.5 to over 7% currently (figure 1).   Surprisingly  housing has not busted and consumer spending has continued to grow.   Strong Employment seems to be the backbone of the economic resilience.  Consumers still have liquidity from Covid stimulus, though it seems to be waning based upon a notable increase in credit usage. Here good news on economic growth is bad news for our inflation problem as inflation needs to cool rapidly to avoid significantly higher rates and the economic slowdown has not arrived as thought and is truly needed!Read more

Risk Assets Fall As Inflation Fails To Resolve Quickly!

September 17, 2022

Risk Assets Fall As Inflation Fails To Resolve Quickly! By Mitchell Anthony September 16, 2022 2022 has been a volatile year for financial assets. Stocks, bonds, and real estate have all slid in price considerably as inflation has remained high contray to the forecast of the Federal Reserve last year. Inflation is the primary driver of liquidity that flows into risk assets.  During periods of low inflation and accommodative monetary policy liquidity drives risk assets higher. However when inflation becomes unfriendly that causes the Fed to move to remove liquidity from the system and risk assets perform poorly.  This is what we are experiencing today. The consumer price index or CPI rose to 9.1% this year and is still holding at 8.3% or more currently. Month over month data looks a bit better with only a modest increase in inflation over the last three months but overall the data is still awful.    As a result interest rates have risen this year and have been volatile with treasury yields now close to 3.8% and mortgage rates over 6%.   Almost all risk assets have seen volatility as optimism and pessimism has played out. The fear is about a terrible economic bust that seems unlikely but can’t be discounted entirely until inflation has been subdued.Read more

Rising Inflation Expectations Drive Investors Out Of Risk Assets!

July 9, 2022

Rising Inflation Expectations Drive Investors Out Of Risk Assets!  By Mitchell Anthony July 8, 2022 While inflation has been running hot for over 1 ½ years, investors and the central bank have not believed that the inflation was entrenched and hence inflation expectations stayed relatively low until recently.  Over the last 3 to 4 months that position has changed significantly and as a result investors hit the sell button in a dramatic manner last quarter. Risk assets of all types had double digit losses in Q2.  Stocks, REITs, Treasuries, Corporate Bonds, Junk Bonds, and Commodities all swooned with the worst losses occurring in high PE stocks and real estate investment trusts. Both of these were down 25 to 30% in Q2.  MACM’s dynamic growth portfolio lost over 16% despite a double digit cash position.  Clearly we have a new hawkish position from the Fed that combined with investors armed with knowledge of how stocks and risk assets perform during periods of high inflation, combined to drive investors out of risk assets and into cash.  Even ultrashort term bond funds lost money in Q2! The Fed’s new resolve to kill inflation all but ensure that a recession will take place this year and maybe into 2023. The uncertainty of what a recession might do to the current themes of consumption in the globe has caused extreme volatility in risk assets.  The US economy has been driven by four strong consumption themes for the last several years.  These themes include: housing and related durable goods, the buildout of cloud computing infrastructure, consumers desire to convert to electric vehicles, and consumers pent up demand for experiences.  The sustainability of these mostly secular growth themes has now been questioned by investors and will continue to be questioned until more visibility is available causing further volatility in risk markets.Read more