Once was a bank, run by wokies
Didn’t hedge, now it’s brokies
A biased deposit base, ironic that
Time to pass around the hat
What a week. This time it’s different, but it sure feels like déjà vu all over again. Big moves in markets. Discount windows. I’ve taken to poetry to keep sane. My funds are bloodied. Yours too, I’m guessing.
The temptation “to do something” is overwhelming. Sell. No, buy! Put your cash in a suitcase. UK readers are also digesting a Budget unusually rammed with morsels. More on this next week.
The best approach is to keep an investor view. Relate each event to moves in asset prices. Where are valuations now? What is discounted? Weigh up risk and reward. Stay calm and analyse the numbers.
Let’s start with Silicon Valley Bank. Personally, I wouldn’t have given it a dime — preferring lenders with names such as Morgan or Rothschilds in them, or banks that sound like countries. A west coast bunch of start-up-loving bean bag sitters? No way.
Like many, including European regulators, I’m surprised at the generosity of the US bailout, not to mention the irony of it. These were the disrupters. They boasted of breaking things. One small crack, however, and they ran to mummy. In the UK too.
For investors, though, SVB and subsequent spasms are helpful in my view. I wrote last week that policymakers would eventually “bottle it” when it came to raising rates — too painful. But how to do so without losing face? The European Central bank went 50 basis points on Thursday, but dropped its hawkish stance. Others may follow.
Markets agree. For a brief while on Monday, futures were pricing in two 25 basis point cuts by the Federal Reserve this year. Only weeks ago, another increase was expected this month. No wonder bonds are flapping like geese in a gale. Ten-year Treasury yields have round-tripped by more than 100 basis points this week alone.
Yields are now lower across the board, which when the dust settles will comfort equity owners (wrongly, but there you go). And with inflation still around, real interest rates may have peaked for now. This helps traditional bonds and their inflation-protected cousins.
Meanwhile, bailouts, looser money and lifelines to the likes of Credit Suisse and First Republic will support bank shares in the short run. But lower net interest margins are ultimately bad for bank earnings. The sector is cheap, though, at 1.1 times book value.
And there are quality banks with price-to-earnings ratios barely in double digits. A counter argument is that stronger regulations and capital requirements are surely coming. Maybe. No doubt Wall Street rushed to deposit $30bn with First Republic in order to show it can look after itself.
As an investor I’d welcome a tad more intrusion — if not from regulators. To understand why, join me a dozen years ago sitting…
Read More: Time to cut banker pay once and for all