Pro Perspectives 3/16/23

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March 16, 2023
The European Central Bank met this morning and stuck with another rate hike.  This, in the face of a confidence shock in U.S. banks that had already spilled over into a major European bank (Credit Suisse).
Given that a liquidity problem has been exposed in the banking sector over the past week, driven by the level of interest rates, why would a major central bank add fuel to that fire?
Because they know the Fed (in the case of American banks) and the Swiss central bank (in the case of Credit Suisse) will do "whatever it takes" to restore stability, and quickly – no hesitation. 
And they have. 
In fact, Lagarde (ECB President) said today that they, too, will "always stand ready to act" to preserve stability.  And, moreover, she said they "can also exercise creativity in very short order."
As we discussed last week, this is the "no rules" era of central banking: Fix and manipulate.
With that, the liquidity holes appear to be plugged, for now.  And, importantly, those holes, at this point, are found only in a very specific niche of U.S. banking:  those that banked venture capital firms and startups (the tech ecosystem).
And in the case of Credit Suisse, it has been a very troubled bank (but important bank), that perhaps gets the excuse of another lifeline because of the U.S. banking confidence shock.
Given this context, markets are bouncing back.
Have they done enough?  Maybe.  Let's revisit my note from Friday on the significance of these "intervention" moments …
March 10, 2023
As we discussed in my note yesterday, once again the 4% level on the 10-year yield seems to be the economy's Kryptonite.
We looked at this chart yesterday, of the 10-year yield…

Each of the events on this chart were driven by the level of interest rates.
The latest victim is Silicon Valley Bank, the specialty bank to venture capital and technology companies. 
It was taken over today by the FDIC.
As Warren Buffett has said, "only when the tide goes out, do you discover who's been swimming naked."  The "tide" in this case, is the easy money, low inflation era. 
The tide has gone out, and the malinvestment has being exposed.  That includes high valuation, no earnings tech companies, and now the biggest banker to those companies … SPACs … crypto currencies (to name a few).  Of course, what else makes that list?  Sovereign debt.
It's because of sovereign debt vulnerabilities (domestic and global), that a 70s and 80s-style inflation fight was never in the cards.  Double-digit interest rates were never an option.  Instead, the Fed used the bully pulpit, attacking inflation by verbally attacking jobs, wages and the stock market.
Now, will this bank failure in Silicon Valley turn into something more? 
Remember, it was just five months ago that rumors were going around that Credit Suisse, a major global bank, was on the verge of failing.  The market started placing bets on another "Lehman moment" for the world — where the failure of a major global trading bank could quickly result in a freeze of global credit.
But as we discussed back in my October 3rd note (when this Credit Suisse news was hitting) there is a big difference between now (into perpetuity) and 2008
huge difference. 
The difference:  There is NO UNCERTAINTY about what central banks can and will do.
There are no longer rules of engagement for central banks.  The rule book was ripped up during the Global Financial Crisis.  We now know (no uncertainty), that they will do "whatever it takes" to maintain financial stability, and to manufacture their desired outcome. 
This comes with one very important condition:  The "no rules" era of central banking requires cooperation and coordination of the major global central banks. 
Indeed, they do continue to cooperate and coordinate very closely.
Now, with all of the above in mind, notice that each of the events of the past nine months have led to lower yields (today included).  And lower yields, have led to higher stocks (as you can see in the chart below).

Again, this chart above is from Friday.  Stocks closed today back above the big trendline (yellow line), and back above the 200-day moving average (purple line).
What's different today, relative to last Friday?
The Fed is back in the business of expanding its balance sheet
AND, the interest rate outlook has swung about 125 basis points LOWER by the end of the year.  That formula tends to be good for stocks.   
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