From John Normand -JPM cross asset global strategy:
* Why I’m a #recessionista, but struggle to see Silicon Valley Bank as a watershed event * This week’s death throes (then death) of #SVC has inspired numerous, unfortunate references to #BearStearns and #Lehman. Unfortunate because, during periods of financial (and emotional) stress, it’s unhelpful to draw false analogies to historical events whose features do not resemble the current context. At best, these references distract from the core issues worth debating. At worst, they mislead investors into making portfolio shifts that may work against their short and long-term interests.
Rather than exhume the #Bear and #Lehman bones, here’s how I’d frame #SVB:
1) #SVB’s business model was fragile, with an undiversified #deposit base and #assets vulnerable to rapidly-rising rates. Other regional banks may be similarly vulnerable.
2) Systemically-important banks are strong, with diversified deposits, less-vulnerable #assets (due to #floatingrate loans), and other revenue sources (like Markets businesses). It’s incoherent to analogise SVC with #Bear plus #Lehman, if SVC’s business differed so much from systemically-important banks’ model.
3) There may be considerable #leverage in #crypto and other #innovationassets within the SVC ecosystem, but there isn’t excess systemic leverage in the US private sector. Yesterday, amidst the tumult in #Financials, the Fed released its quarterly stats on sectoral borrowing. It’s a skull-crusher at +200 pages (see
https://lnkd.in/eQXjsFQs), but the attached graph presents the useful data points: #household and #corporate debt as a percentage of GDP. That ratio continues to fall, as it has done throughout this expansion. Household #indebtedness is below its pre-COVID levels, and about 25%-points of GDP below its sub-prime crisis levels. Corporate debt is only 2%-points above its pre-COVID levels. So there's a company-level #canary, but not necessarily a very deep #coalmine.
4) Economies can suffer #recessions without a #leverage build-up, because the #stock of debt must be refinanced, even if the #flow has been constructive in recent years.
5) There will be a #recession, and it will probably start in late 2023/early 2024 given the current strength of the US #labormarket. But the #crytpo - #Tech - #banking nexus isn’t the core problem nor an amplifier. The bedrock issue is that the #labormarket isn’t cooling quickly enough to return #CPI to target. So the Fed will become more #restrictive (5.75-6% funds rate), and trigger a rise in #unemployment of a couple percentage points. The mild GDP contraction (compared to 1970s or GFC) that will accompany that process will deliver peak-to-trough Equities declines in line with the historical norm (-30% from last year’s peak). SVB neither hastens nor contributes to this process. It's also unlikely to impact the the March 22 #FOMC, which rests more on how #CPI prints next Tuesday.
