Never a Dull Moment

In the wake of a horrendous 2022, stocks and bonds started off the new year with vigor.  The macroeconomic environment has begun flashing green signals.  Covid restrictions are largely over.  Inflation is gradually abating.  The Federal Reserve Board has begun slowing its interest rate increases.  The price of oil is below $75 a barrel.  Corporate profits are steady.  The economic recession that most experts have been predicting for over a year is making like Gadot, leaving the analysts to sit on a log and ponder their existential worth.  Will the recession ever arrive?  Maybe, maybe not.

In mid-March, just when everything seemed to be getting back on track, some venture capitalists in California hit the panic button and started a run on Silicon Valley Bank, an establishment widely used by Bay Area startups.  The bank couldn’t honor its customers' withdrawal requests and was forced to cease operations.  The primary cause of the problem was poor risk management by bank officers and lax supervision by regulators.  The hysteria spread to several other banks around the country but now appears to be contained thanks to intervention by the FDIC and the Federal Reserve.

Some investors thought we were heading for another painful drama similar to the meltdown of 2008/09, but this time things are different.  The banks that failed did so because of liquidity shortfalls rather than losses on loans.  Silicon Valley Bank’s assets (loans) are sound, but the poorly managed bank couldn’t come up with enough cash when many large depositors tried to withdraw their money all at once.  For the bank, that amounted to a default on its obligations which lead to bankruptcy.

An interesting feature of the recent panic is the role smartphones and social media played in intensifying the runs on the banks.  Nowadays it doesn’t take much to get a whole bunch of folks all riled up about something.  That’s mob psychology in the Information Age.  Bank managers and regulators may have to adjust their methods accordingly.

At the end of the first quarter, the equity markets have moved on; the panic is over for now.  The S&P 500 Index was up 7.0% for the quarter led by the Information Technology sector – up 21.5%.  Financial Services was the loser – down 6.1%.

1 April 2023