Last week’s stock market rebound is basically something to be careful for.
Stock prices rose on Thursday and again on Friday right after the Fed raised interest rates, and it isn’t because corporate earnings are killing them, inflation has been halted or the economic outlook is so good.
No, stocks have rebounded because we’ve got a banking crisis and the possibility of lowering interest rates in the near term. This implies traders are betting like drug addicts that the Fed may resume giving them the cure – pumping ‘heroin’ in the type of low interest rates into the drug addict that’s the US stock market.
Correct. The fashionable stock market is an addiction – and like addiction, it can’t be trusted. He’ll mislead you with false guarantees. Stealing from you to feed his habit, pretending to be healthy and robust when he has neither. Greater than anything, he needs help – a treatment facility, for those who will, that may break his addiction to free money and permit prices to reflect the real state of the US economy and projected corporate profits.
Healing is painful, as we see. It’s the higher interest rates now imposed by the Fed to stifle food and fuel inflation and bloated financial assets. Things like cryptocurrencies, meme stocks, tech stocks, and more have all fallen recently, exposing a harmful bubble that only free money and better interest rates can create.
Now the treatment for higher rates painfully reveals an identical rottenness inside the banking system. Button-down industrial bankers, unlike meme-pumping retailers, took crazy risks in industrial real estate and VC firms early on. They, too, are being crushed by higher interest rates as asset prices begin to wean themselves from their addiction to risk.
![Traders work on the trading floor of the New York Stock Exchange.](https://nypost.com/wp-content/uploads/sites/2/2023/03/gaspo-10.jpg?w=1024)
More banks can fold
First there was Silicon Valley Bank, or SVB, after which almost concurrently Signature Bank, which succumbed to the cold turkey. There will likely be others, I’m told as many as two dozen. All have balance sheets remarkably similar to SVB and Signature. If things proceed to go flawed, they too are ready to fold, guaranteeing a pointy recession.
Again, you do not see this logic too often in the stock market, where combined wisdom is one in all the dazed giddiness of a junkie who just got his fix every time he hears lower stakes approaching.
Fortunately, there are people on Wall Street who should not high and will be trusted with an easy story – people like Jamie Dimon of JP Morgan and Larry Fink, head of the powerful money management company BlackRock. Combined, they’ve nearly a century of experience in risk management, and while people in Washington are toying with bromides for the strength of the banking system and stock traders are salivating about lower interest rates, they’re ignoring the noise.
They know that stock market investors should not the best barometers of the long-term health of the economy, and even the markets themselves. Also they are conversant in risk taking in SVB et al. it’s more endemic in the banking system than the stock exchanges signal. If we do not play this right, we’re headed for a broader slump, a pointy recession, and a market crash.
![Bank of the First Republic](https://nypost.com/wp-content/uploads/sites/2/2023/03/gaspo-3-4.jpg?w=1024)
Saving the First Republic
A technique they do that is to try, perhaps unsuccessfully, to save First Republic Bank and ultimately sell it. Once a rock star based in San Francisco, this is kind of a treat; has assets value over $200 billion. It caters to wealthy people in tech and other major industries.
Unfortunately, it has made a few of the same terrible portfolio decisions as SVB: loans to firms (technology and industrial real estate) which can be underwater, leading to a jittery deposit base that keeps ripping out of accounts.
Dimon wants to make a “club deal” to save the First Republic. This implies a sale after obtaining commitments to bring real capital to the bank (above the recent inflow of deposits of $30 billion). He and his persons are talking to private equity firms (former treasury secretary Steve Mnuchin, now an EP banker, is alleged to have an interest), other banks and a few extremely wealthy dudes, like perhaps Warren Buffett or a member of the Saudi royal family.
Meanwhile, Fink is pitching ideas to the White House on how to keep the contagion from reaching epic proportions, as he did during the 2008 financial crisis, and alerting his Washington contacts that we face a crisis similar to the one which hit S&L a long time ago. if the government doesn’t act.
Up to now, the White House doesn’t seem to have taken Fink’s words to heart, given his incessant, bland, cheery speech. Dimona’s deal and sale of the club also seems to have stalled. As I first reported, bankers are considering going to the federal government for a handout: capital in exchange for warrants that will likely be paid off at a profit when the thing is sold.
Yes, things can go very badly, so don’t trust stock traders.