Will The Fed Actually Abandon The Fight Against Inflation?
Before we dive in, I would like to address some questions I have been getting from clients lately:
Question #1: I saw Charles Schwab was in the news. Should I be worried?
Answer: In short, you have nothing to worry about if your accounts are at Charles Schwab or TD Ameritrade.
The cash in your account is protected by FDIC up to $250,000
Schwab also has SIPC protection that goes up to another $500,000 for cash and securities.
Schwab also has excess SIPC coverage through Lloyd's of London up to $149,500,000 per account.
If you would like to see Schwab's asset safety and security protection practices, send me an email and I would be happy to share it with you.
Question #2: Should I be worried about my primary bank?
Answer: I think it is always important to know what your current bank provides you. If you have deposits over the FDIC coverage limits, your bank might be able to extend your coverage for you. If they can't do that for you, then let me know and I will put you in front of a bank that can offer extended FDIC coverage up to $125 million within one account. Or if you are interested in getting a little better return on your cash than what a bank is willing to give you, we can get you extended FDIC insurance through our fixed income strategy.
The Ivory Hill RiskSIGNAL® is still green on the long-term but the signal is teetering on the edge of flipping red at any moment so caution is advised. Our short-term and intermediate-term signals are red. We trimmed some equity exposure this week by selling into rallies. We are currently sitting on roughly 65% cash and 6% fixed income.
We're finally starting to see some real effects of the Fed's "late to the party" and very aggressive rate-hiking campaign over the past 15 months. During the ZIRP period, banks started buying Treasuries and looking further out on the curve for yield. Now that interest rates are close to 5% instead of 0%, those bond portfolios are taking a beating, and banks like Silicon Valley Bank that didn't hedge their interest rate risk exposure are paying the price.
The big question is whether this is a sign that there are growing systemic risks in the banking sector. Here's why I think the answer is no (at least until we find out something that says otherwise). First, Silicon Valley Bank and Signature Bank are both regional banks with specialized services. SVB was one of the biggest lenders to tech startups and venture capital companies. Also, it looks like SVB did a terrible job of managing risks. Signature was very involved in the crypto space, just like the now-defunct Silvergate bank. These aren't your typical banks that mostly write mortgages and business loans. And they are not the biggest banks by any measure.
If you hear that big banks like Bank of America or Wells Fargo are having trouble, or that big regional banks like PNC or Fifth Third are having trouble, then we can talk about systemic risk. Until then, this seems more like a one-time scare than anything else. Also, all deposits at these places are already backstopped by the government. It looks scary at first, but I don't think it's a threat to the whole industry. In fact, if you are a contrarian investor, you have probably been buying bank stocks.
So, let's talk about what the Fed will do about all of this. The markets seem to think that after SVB, there won't be many more rate hikes, but I'm not sure that will be the case. Even if you ignore the SVB situation and treat it like a one-time thing where depositors will get their money back no matter what, there is still a clear case for more rate hikes. The February inflation report shows that the trend toward less inflation is not yet solid, and more work needs to be done. Some things, like rents, will go down in the long run, which is a big part of the core inflation problem right now, but the Fed has been very clear up to this point that we're not at a "sufficiently restrictive" policy level yet. I think the rate will go up by a quarter point and I am sure the market will be surprised by this even though the Fed has been saying the same thing for over a year now. Think about it, if the Fed pauses rates or cuts rates at this point, then they will be completely abandoning their inflation mission and I think that is highly unlikely.
This is not the big credit event I have been writing about. With lower yields and higher credit spreads, the bond market has done what you would expect it to do in these uncertain conditions, but not to blowout levels. Spreads on high-yield bonds have widened, but they are still not even close to being above average when compared to the past.
For now, the flight to safety trade is back, but what Powell says next week could determine if it stays or goes away. For early information on the Fed's rate hike decision, you can wait and see what Nick Timiraos "Nicky Leaks" publishes in the WSJ - the Fed has been leaking their rate hike decisions to him before almost every meeting.
The yield curve has been reverting back up. Remember, you should expect a major sell off following the reversion of the yield curve.
The $VIX is firmly in the chop zone so one should expect increased volatility and potentially big rallies, followed by big drawdowns.
Remember, we still need to see the VIX spike to 45+ as no bear market has ever bottomed in history with out a VIX spike to 45 or higher.
And remember—the one fact pertaining to all conditions is that they will change.
Feel free to reach out to me and use me as a sounding board.
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President