SVB P2
So, the good news.
Depositors will be kept whole, including unsecureds, and that any mini takeovers required for an orderly unwind of assets will involve the emergency stabilisation funds, that effectively insures whoever takes over for downstream adverse effects.
There’s more detail, arguably better detail, but those are the takeaways that matter.
In our view, this is a very good thing. Deposits need to be sacrosanct. Forget the moral hazard.
We tweeted that the Fed should focus on extinguishing the animal spirits driving inflation the old fashioned way, by the relentless grinding pressures of higher interest rates causing weaker labour markets, and lower consumption and investment, not by collapsing risk premia in their entirety.
So, yields have dropped, partly reflecting the idea that if we are at the stage where “unintended stuff breaks badly, or at the least oddly”, let’s (as in the markets’ narrative) “back off” on c50bp hikes from the Fed, and indeed, maybe the Fed just could sit back and leave rates tight, but no higher, and see how things unfold from here.
The Aussie market has whipped around intraday, with most sectors lifting from lows, albeit still slightly negative. The dollar popped.
Not really anything to do, on our end, we think.
We are defensively positioned, underweight equities in aggregate, and defensively positioned within equities (e.g. healthcare, teleco’s etc).
Do we want to suddenly throw 500bps at shares because moral hazard is out the window, however rightly or wrongly?
I am not sure.
Or 500bps at credit?
You could certainly make the argument that the Fed has showed its hand, that banks are now set to be much safer, given that deposit holders will be made whole, in most-likely-and-or-foreseeable circumstances. Equity holders and bond holders might go to the wall, but the actions taken by depositors that can cause those things in the first place (like a bank run) are now less likely, and so equity and credit premia could well plausibly be lower, on a structural basis.
Which would mean higher carrying values for stocks and bonds.
But then, we chase our tail somewhat, as we think “well, those systemic risks are just starting to show, so just because the Fed put, in some form or another, remains, doesn’t mean we want to suddenly be overweight risk”.
So, for now, do nothing, remain diversified, see how things play out.
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