A few quick notes here from what I believed was a pretty interesting discussion between Cathie Wood of ARK and her mentor Art Laffer.
- Leading indicator of issues in the banking system is a rise in Credit Default Swaps CDS. This started happening all the way back in the Spring of 2021.
- SVB’s biggest issue was that its assets were all long-term investments and its liabilities were all short-term. This became a big problem when the yield curve inverted.
- Other banks have the same problem and will similarly capitulate. Most troubled banks made two faulty assumptions: 1) they invested flood of 2020 COVID stimulus funds into long-term, held-to-maturity bonds that yielded just 1.6%; and they 2) believed that deposits would never go down and that borrowers would never shift assets back to cash.
“You never want a liquidity crisis to become a solvency crisis.”
Art joins other economists such as Mohamed El-Erian in thinking Jay Powell is inexperienced and doing a pretty terrible job at the helm of the Fed. The Fed should provide long-term monetary and fiscal policy guidelines. Instead, it has provided short-term shocks that disrupt the stability of our financial system.
