We are entering a period of extreme flux, and you would be right to think, what's going on.
We will over the next few weeks try to unpack the various inputs and best ways to navigate this period from an investment and saving(s) point of view.
- Banking crisis - what crisis.
In the last week we have seen the demise of Credit Suisse the venerable Swiss institution that only 14 years ago was feted as the safe haven of 2008. During that moment every hedge fund on the planet was rushing to sign prime brokerage agreements with CS at whatever terms and switch their clients assets from the sinking ships of Bear Stearns, Lehman Brothers, Morgan Stanley and Goldman Sachs. In 9 short months they moved from small players to THE player in institutional asset servicing.
Fast forward to 2023, they have been forced by the regulator into the arms of their bitter rival, UBS. The outcome for UBS is not clear, and while the SNB has backstopped almost all risks of the transaction, it seems reasonable that the 'beneficiaries' in this period will be the Morgan Stanley's and Goldman Sachs wealth management arms, as they accept with glee the SHNW customers rushing to diversify.
At the same moment, we have a rumbling and unresolved issue in the US. Regional banks and uninsured deposits.
Banks are (generally) very highly levered businesses, with tiny slivers of true equity supporting massive asset and liability bases. This model has stood for all time, but comes under huge stress when asset prices move quickly. Such is the case today, as bond prices whip around in response to inflation and interest rate expectations, putting poorly managed treasury and risk teams at some banks in the spotlight, as it becomes clear that depositors cash is worth less today that it was yesterday due to the performance of the 10 year or 30 year Debt markets.
At its root however, in both Switzerland and the US, is confidence. Banking more than a trick of leverage is a trick of confidence. We've seen it before and we will see it again. A run, on any bank, if unchecked will put the bank out of businesses. The key is to keeping most of the deposits unmoving.
So what does this mean, and are we through the woods.
Well, no, we are not out of the woods, and probably not by a longshot. The underlying ructions of tighter financial conditions will expose more banks and asset managers to pain. The gravy train of easy money is slowing and those most exposed will be hurt. Large hedge funds employing carry trades will hit the skids, and banks from whom they've been recieving cheap financing will scramble to make good the collateral vs claims ratios. As we have seen many times before, there will be casulties in this process,on both sides.
The Fed, the ECB, the BOE, the PBOC all have the tools (currently) to handle any bank specific issues that might continue to arise. Be that through the deposit insurance, fiancing windows etc, they have the weapons to disarm any runs they see coming. That however doesnt protect from the issues they dont see coming and as we've seen many times, going bust happens very slowly and then all at once.
So, how to invest. Investing in any bank stocks now is a gamble. Most will survive and on various historic metrics they might even look cheap (P/B etc). BUT....the asymmetry here is not attractive unless you are able to day trade and run sophisticated risk management models.
Instead it would be prudent to invest in stable, cash generative business with a defensive element. Unexposed to the possible slow down in consumer spending, unexposed to the possible correction in housing, but exposed to staple behaviours and flight to quality.
We continue to like energy as while oil prices have fallen, this appears very seasonal and the long term production and capex does not fit the picture, so oil prices in excess of $100 by year end feels more possible than sub $50.
Precious metals and miners look sensibly priced. They will be volatile due to rampent speculation, but safe cyclically.
Tech names will likely bifurcate into cash generative and ad exposed, while companies like Apple have fortress balance sheets they also have staggering valuations so while they remain 'safe' they will also provide liquiditiy when needed to investors.
Good luck, and we will be back soon with more discussion.
Upside.
