I’ve been doing this for over 25 years now, these are the things we talk about in our investment committee meetings while we’re managing portfolios for our clients. And although the specific set of things happening in today’s markets are unique to today… there does tend to be some common threads that occur over time. One of those that we talk about in our investment meetings is what we’ve been seeing now with the dramatic rising rates. In short, any time you see a substantial move in a very short period of time, that is an outlier or an anomaly, compared to how that particular data point moves during normal times, it almost always has a ripple effect. Knowing that rates have been climbing in an unprecedented way, it makes sense that certain industries will need to adapt; and the one that’s in the headlines right now is the banking industry.
John: There are many layers to the banking issue, and it is likely to be some uncovered in the future until things fully stabilize. The largest banks here in the US, those like JP Morgan, Wells Fargo and Bank of America, have been undergoing stress tests post 2008 to make sure they can handle upsets in the economy. Those smaller and regional banks like SVB did not have the same regulation. But there has been some discussion that even if SVB was stress tested, they would have passed. That’s because the stress tests don’t include bond duration; something I’m guessing we’ll see changed. In addition, lending standards and bank health are not the same globally as Credit Suisse had been rumored to have had issues for many years until they finally were bought by UBS. The Swiss government basically mandated the buyout to bring ease to their sovereign banking system. One of the side effects of this current crisis is that it’s likely to tighten financial conditions further – which is what the Fed is trying to do to lower inflation. So, while the Fed may pause rate hikes soon, it’s possible that banks, especially regional banks, with less lending could help the Fed with a lower inflation rate. In general, less lending is less inflation due to taking money out of circulation. If we take a look at the chart below, we see that credit standards generally tighten and peak just before or during a recession. We’ve seen quite a rise in this measure lately leading to those wondering if that recession is around the corner.