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The FED, JP Morgan Win. How about the Consumer?

| May 01, 2023

Earnings for the big tech companies were generally ok. Certainly not as bad as feared, with the big winners being Microsoft and Meta (Facebook). We will see what Apple has to say this week, but the big news is in the banking world.

We all remember the collapse of Silicon Valley Bank and Signature bank a bit over a month ago. Those brought up fears of a broader banking collapse. But not to worry, the FED, FDIC and the Treasury are on this one!

So, regulators closed Signature Bank in New York and FDIC took over SVB and guaranteed all deposits, including those over $250,000. You can see that most of these bank’s deposits were unprotected.

So, problem solved. All the wealthy are made whole, whether individually or through their company’s deposits. Nothing to see here. In fact, it gave time for other banks on the brink to find ways to plug their leaks. Which brings us to our next bank.

This is after First Republic received $30 billion in assets from a consortium of banks to shore up their balance sheet. The writing was on the wall and it seemed to be a matter of time. So again, crisis averted, but the ‘Too Big to Fail’ banks just got bigger, as they have through this whole SVB banking issue. Money moved from the small banks to the “systemically important banks” because customers know that their money is safe. But has that made our banking system better? Probably not. Will it make it harder for new banks to open? I would think so. Do customers win when the few “massive” banks get bigger? Doubt it. There is less and less reason for them to compete. You wonder why your checking and savings rates are so low? Because they don’t have to raise them. Except that there are alternatives and consumers are finding them. 

You might consider a CD to be a reasonable option and it is if you don’t mind tying up your money for a period. We talked about FDIC and other insurance when SVB was the main issue. We also discussed what was and wasn’t covered by that insurance. One of the things not covered is Money Market mutual funds. Insurance does not cover investments and Money Markets (MM) are a type of investment. There are many types of MM, some being safer than others. The “safest” MM is government money market. A portfolio of short-term government bonds that pay market rates. That portfolio is yielding around 4.5% at the moment. Good yes, but we will start to see that rate go down when the FED starts to lower rates, potentially as soon as later this year.

Yes, you heard me correctly, LOWER RATES! We will get to that in a future post. For now, take a look at the latest assets in money market funds.

Finally, we look at someone who knows just a little about investing. That would be the spry Charlie Munger – also known as Warren Buffet’s longtime right-hand man. 

I don’t agree with him on everything, but at 99 years old, he’s seen a few things over his days. As we talk about banking issues, Charlie sees a lot of risk in commercial real estate sitting on bank balance sheets. To be fair, he says it’s better than the 2008 financial crisis, but he sees this problem getting worse over time. If you’re interested in reading the Financial Times piece, click here.

This is not to say that everything is bad in the world, but I think we do have some dislocations mainly around interest rates and inflation, which will take time to work through.

On a side note, I was at a birthday party over the weekend. In talking to a person there who was a real estate agent, she mentioned how there are now multiple bids, many over asking prices, for many houses. I was a little surprised by that and I asked about interest rates, which in the 6.5%+ range isn’t deterring buyers from paying up on certain houses. As I later looked at Zillow, sure enough there are a lot of houses that are pending. The question I will leave you with to ponder. If there is still enough money for multiple bidders, and above asking price offers, what does the FED do next? They are almost certain to raise short-term rates another quarter point, but that doesn’t seem to be putting a damper on housing activity. Much of that may be attributed to the 10-year treasury coming down from over 4% to around 3.5% (see chart below).

It leaves me wondering if the markets (and consumers) are whistling by the graveyard. Maybe I’m wrong and there’s nothing to worry about. Let me know what you think.

For now, have a good week.  If something doesn’t make sense or you want clarification, let’s talk.