International Forecaster Weekly

CRISES OF THE MOMENT ..... DON'T WORRY???

I’ve been trying to climb out of crisis mode lately.

Soulful Bob Marley keeps replaying in my head: “Don’t worry ‘bout a ‘ting. Cause every little ‘ting gonna be alright…”

But as we get ready to head into another spring weekend, I’ve been finding it hard to find a meaningful and timely topic to write about that doesn’t entail some impending disaster, tragedy or danger.

There’s the Inflation Crisis…

Fed governor Michelle Bowman traveled all the way to Germany to tell a crowd attending an ECB symposium that the Fed will likely have to continue raising interest rates if price growth and the jobs market don’t further cool down.

She's clearly an outlier right now. Over 83% of Fed Funds Rate futures traders on the CME believe the Fed will (although not necessarily should) pause rate hikes at the Fed's next meeting in mid-June.

I think they should have paused a few months ago -- mainly to avoid the coming recession -- but that's another story for another time.

(FYI...inflation, as measured by the CPI – All Urban Index, increased 4.9% year-over-year in April. Core inflation, which excludes food and energy prices, rose 5.5% annually – despite a 12.6% fall in oil and other energy commodities.)

And the Debt Crisis…

The government is another day closer to X Day when it runs out of extraordinary measures to continuing paying its bills – and when global financial markets start to implode.

But with President Biden and House Speaker McCarthy delaying until next week their next “negotiating” pow wow that had been scheduled for today – while their staffs presumably get closer to a blueprint for compromise, I’m waiting to write about that, too.

So, the Banking Crisis…

Guest Writer | May 12, 2023

By Dave Allen for Discount Gold & Silver

I’ve been trying to climb out of crisis mode lately.

Soulful Bob Marley keeps replaying in my head: “Don’t worry ‘bout a ‘ting. Cause every little ‘ting gonna be alright…”

But as we get ready to head into another spring weekend, I’ve been finding it hard to find a meaningful and timely topic to write about that doesn’t entail some impending disaster, tragedy or danger.

There’s the Inflation Crisis…

Fed governor Michelle Bowman traveled all the way to Germany to tell a crowd attending an ECB symposium that the Fed will likely have to continue raising interest rates if price growth and the jobs market don’t further cool down.

She's clearly an outlier right now. Over 83% of Fed Funds Rate futures traders on the CME believe the Fed will (although not necessarily should) pause rate hikes at the Fed's next meeting in mid-June.

I think they should have paused a few months ago -- mainly to avoid the coming recession -- but that's another story for another time.

(FYI...inflation, as measured by the CPI – All Urban Index, increased 4.9% year-over-year in April. Core inflation, which excludes food and energy prices, rose 5.5% annually – despite a 12.6% fall in oil and other energy commodities.)

And the Debt Crisis…

The government is another day closer to X Day when it runs out of extraordinary measures to continuing paying its bills – and when global financial markets start to implode.

But with President Biden and House Speaker McCarthy delaying until next week their next “negotiating” pow wow that had been scheduled for today – while their staffs presumably get closer to a blueprint for compromise, I’m waiting to write about that, too.

So, the Banking Crisis…

That’s what I’m sticking with today. In this week’s American Survival newsletter, I asked, Is PacWest Bank the next to fail?

We still don’t know the answer to that. But we do know that shares of PacWest were under pressure once again yesterday and today after the struggling regional bank announced that deposit outflows resumed earlier in the month.

The stock was down 23%, further extending its recent declines. Entering the day, PacWest’s shares had already fallen 40% this month and more than 70% for the year.

The bank said in a securities filing that its deposits declined 9.5% during the week of May 5th.

PacWest said the majority of those outflows came after media reports that said the lender was “exploring strategic options” – which many took to mean including a sale.

The bank also said it was able to fund those deposit withdrawals with cash on hand – i.e., $15 billion of available liquidity compared with just $5.2 billion in uninsured deposits.

If true and correct, the update marks a change from May 4th, when PacWest said that it wasn’t experiencing “out-of-the-ordinary deposit flows” and that total deposits had increased since the end of March.

During the 1st quarter, PacWest’s total deposits declined 17%, and the bank said it would use strategic asset sales to reshape its balance sheet.

Several Wall Street analysts speculated that the most recent outflows were coming from PacWest’s venture capital customers.

Jon Afrstrom at RBC Capital Markets said, “While the deposit news is not what the company wants to report, if the outflows are truly from the venture depositors and not the core bank, that is better news, despite the higher total outflow disclosure.

“The financial result is that the company is borrowing more to replace those deposits.”

Following PacWest’s filing yesterday, Western Alliance released its own update, reporting that total deposits have grown by $600 million since May 2nd.

Shares of that bank were up slightly yesterday. Elsewhere, shares of Zions Bancorp dipped 3.5% and the SPDR S&P Regional Banking ETF was down 1.4%.

The regional banking sector has been under pressure since early March, when concern about the impact of higher interest rates led to a run on deposits at Silicon Valley Bank, which was seized by regulators.

            New York’s Signature Bank soon followed, and then San Francisco’s First Republic was seized and sold to five-time felon and too big to fail JPMorganChase – at a steep discount – in the wee hours on May 1st.

The Next Phase

And now, well-known economist Mohamed El-Erian says the U.S. has entered the second stage of the banking mayhem.

He outlined four ways to avoid a "significantly more damaging" third phase of financial unrest.

In an op ed published the other day, the chief economic adviser to Allianz opined that the first phase of the chaos – when depositors took their money from poorly-managed lenders and caused a trio of bank failures – has stabilized.

El-Erian was no doubt referring to the demise of Silicon Valley, Signature and, most recently, First Republic Bank over the past two months.

He added, "The current phase, which focuses on funding cost and balance sheet issues of less problematic banks that happen to operate in a highly unsettled neighborhood, can also be stabilized.

“Indeed, it must (emphasis added by me) if we are to avoid a third phase entailing considerably more financial and economic damage."

The good news, El-Erian believes, is that the U.S. is unlikely to see another "dramatic institutional collapse" similar to Silicon Valley Bank’s.

That's thanks largely to the federal government's handling of SVB’s failure by suggesting unlimited insurance on deposits – above the official $250,000 ceiling – and opening another funding window for lenders.

But, El-Erian added, U.S. regional banks still operate with "mismatches between their short-term liabilities and longer-term assets.

Their balance sheets are further hampered by shaky commercial real estate loans, which Melody Cedarstrom and I talked about on Tuesday’s Financial Survival program.

El-Erian continued, "This second phase can also be contained. First, banks must be careful in what they say and, generally, have very responsive communication with investors.

"Second, the Fed must strengthen its supervision regime. Third, public-private resolutions for banks need to be made to work to a tighter timeline if needed.

"Fourth, he added, the public sector needs to assure markets that it will work to revamp both the deposit insurance system and the regulation of banks erroneously deemed to involve no systemic threat."

"Doing so,” he warns, “is necessary if the U.S. is to avoid a third, and significantly more damaging, phase of the banking turmoil.”

By the way, in the time that I researched and wrote today’s blog this morning, PacWest shares, which opened at $4.78, hit a high of $4.90 before falling to $4.70 about two hours later – down another 1.7%. A year ago, it was trading at $30.50.

Don’t worry about a thing? I wish!