Capital

Bank runs don’t tend to happen in bull markets. Nor large banks clubbing together to prop up small banks. Or Central Banks guaranteeing the whole country’s deposits, or the President going up on television to tell the nation to take a deep breath and calm down. Confidence is a fragile state, and when the muck hit the fan at Silicon Valley Bank at the end of last week, it shattered. Cue all manner of garish headlines, hot rumour and the inevitable back stopping of Europe’s too-big-too-fail and regulatory naughty-naughty lender, Credit Suisse. Some week. Despite the spitting from the pan, the ECB ramped up rates by 50bps, leaving the Federal Reserve a marker on how to stare down the current crisis. Whilst the bank running appears to have abated – for now – the longer term issue is that loan officers are going to be tightening up the straps, paring targets and rejigging the incentives of those out making loans. Less quantity, more quality. This will impact all manner of businesses and is a negative for broader economic growth. US small businesses, after all, create two thirds of all jobs. They will react accordingly. Lower risk appetite all round. The silver lining, perhaps, is that will likely help bring down inflation. So too, it would seem, a more general slowdown in activity. Prints from the Empire Manufacturing Survey spoke of a chill whipping through yards of many businesses. Indeed, the FED’s own recession model is now flashing red, with a side serving of klaxon, sitting at its highest reading since 1980. Worse than in 2001, 2008, etc. With Moody’s downgrading the whole US banking sector to negative it is not the usual environment for hiking rates into. Hence the staggering re-pricing of market expectations which now points to rate cuts before year-end. At least they did at the time of writing. Given the wild swings in share prices it remains a fast and loose environment, and no one really knows where it’ll all end. Manipulate the price of money for as long as Central Banks did, and there are going to be a lot of misallocated skeletons stuffed in the cupboard. Silvergate, FTX, Silicon Valley Bank, Signature Bank, LDI, etc. On and on they roll. Given what has fallen out so far there must be some sleepless nights for those who went big in the private markets or commercial real estate where pricing is a lot less visible, and a lot slower to react. The capital calls are coming. Elsewhere, the UK government was the latest to go big on nuclear energy; committing to more of it, and reclassifying it as green. So there you go.