Chris Burrell's Market View Blog

Chris Burrell's Market View Blog




Part I 2023 Banking Crisis

The 2023 US regional banking crisis was steadied over the last six weeks by the Federal Reserve and US Government effectively guaranteeing all deposits of the troubled regional banks. This means not only insured deposits up to $US250,000 were guaranteed, but uninsured deposits above that amount. The small number of banks affected has not grown, although others have seen significant falls in their market prices. Some of this activity appears to be from short sellers, which may suffer losses if, as expected, the US regulators continue to keep ahead of any adverse situations. This includes on sale of any further at risk regionals eg the sale to JP Morgan.

The second shoe to drop was Credit Suisse. Years of poor risk management & poor corporate deals saw Credit Suisse suffer large deposit withdrawals in a short period, resulting in Swiss banking regulators arranging a shotgun marriage with UBS. Credit Suisse European style hybrids were wiped out & shareholders lost almost all their equity. In Australia, the Tier 1 hybrids would have been converted to equity, while all other debt holders will not suffer losses. (Australian banks are now well capitalized, so economists and regulators see no real probability of contagion in Australia).

So Part I of the 2023 banking crisis is over. The question is what is Part II?

Part II 2023 Banking Crisis

There are a number of risks, but we lack the public data to quantify the following:

  • Whether one blames the Fed for its too loose monetary policy or the failure of banks to see the risks investing in long dated Bonds in rising interest rate markets, the unrealised losses on long dated bonds remain. The Fed has allowed these to be pledged at face value for 12 months to provide liquidity, but are charging 4-5% for the privilege, which is higher than the interest rates being earned on mortgages for a number of regionals. The ability of depositors to electronically withdraw large amounts of deposits almost instantly is a new feature, so any exposed US regional banks may see further runs.
  • The effect on credit is being debated in the US. If regional banks have concerns about their Balance Sheets and further bank runs, they are likely to reduce new loans & so credit becomes tighter. This behaviour comes at the same time as central banks around the world are on a crusade to raise interest rates at a record pace, whilst simultaneously moving from quantitative easing to quantitative tightening. This means selling bonds bought during covid, so tightening the money supply and credit. The impact of this tightening on liquidity could have ramifications across investment markets around the globe. A great time to hold some cash and wait for opportunities.
  • The effect on the US real estate markets is seen by some as a key element of Part II. A senior credit company CEO recently back from New York issued a warning in our offices last week on the fragile state of the New York office market with reduced occupancies as many in NY continue to work from home & family offices have high debt levels on properties.
  • Warren Buffett: “Credit is like oxygen. You don’t notice it most of the time, but when it’s not there, it’s the only thing you notice”.
  • The cause of the above crisis continues in that the crusade by central banks globally continues. Reducing inflation from 8% to 2% is likely to take 5 years on analysis of previous cycles, yet central banks continue to talk as if they are dealing with a transitory problem. They also continue to get the lagged indicators wrong. Central banks particularly Australia kept pumping liquidity until unemployment hit 3.5%. Unemployment is a lagged indicator - it moves last. Historically 4-4.5% was viewed as full employment. This misstep globally by central banks is causing them now to over correct because they keep looking at unemployment which is stuck at 3.5%, then frustrated raise rates again. Inflation is also a lagged indicator. The concern is their lack of understanding and patience will result in a scorched earth policy.
  • Central banks have as their core outcome slowing the economies. They have talked about a soft landing i.e. avoiding recessions. The high employment with most having a job is the key to whether the outcomes are soft landings or recessions. Your diarist’s central probability is for a soft landing in Australia, but a recession in the US in 2024.

Other Risks

  • The US debt ceiling requires US lawmakers to pass legislation, perhaps as early as 1 Jun. US President Biden appears to have poor economic understanding with continual high spending as if there is no tomorrow clashing with the Republican core belief to reign in this expenditure. Congress has used its bare Republican minority to pass a Bill raising the debt ceiling for 12 months, contingent on spending restraints.

Market Moves

There is a real risk that the US market is too optimistic about a soft landing & interest rates moving from rising to falling. Given the inflation bogie, this seems unlikely. Rather stagflation is a more likely outcome. The outlook for the high growth stocks including the tech sector in the US is therefore clouded.

So far most companies have continued to report some small softening in economic conditions impacting on sales and inflation on costs, but for most those impacts are not dramatic to date. But consumers are nervous and the interest rate rises have many quite fearful both in the US and Australia. This impact on consumers should continue to result in a further softening of consumer expenditures. Stagnant GDP growth with too high inflation creates a difficult investment climate for employers and investors. Many have no experience of the stagflation of the 1980’s.

Some pointers on Investing.

  • Stick to fundamentals as the sentiment and momentum investing period has largely given way to value and growth at reasonable price (GARP) companies.
  • Avoid the overvalued sectors: nouveau technology, private equity and venture capital; high P/E companies and those with no earnings
  • A number of value and GARP stocks should come back to Burrell FVEs (Fair value Estimates) over the balance of calendar 2023. Keep engaged.
  • Resources have benefitted from the terrible events in Ukraine. These geopolitical factors are compounding demand in several key commodities including the so called battery minerals being not only lithium, but copper, nickel, cobalt, manganese etc. Australian miners and resource stocks should continue to do well, notwithstanding increasing political risks from Canberra in the LNG sector.
  • Differences between the US and Australia are providing opportunities for Australian investors e.g. in banking stocks, listed property
  • Be astute on fixed interest. A diversified fixed interest portfolio with varying duration and selected securities from differing types of fixed interest securities in the credit stack. Talk to Burrell Fixed interest desk.
  • Listed Property is trading at discounts to nta, but those net assets will reduce as cap rates increase in response to rising long-term interest rates. The discounts are likely overdone when compared to actual sale prices of properties. Industrial property continues to be preferred.

Happy investing


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