Caution Is The Better Part Of Valor… Again

Authored by Peter Tchir via Academy Securities,

I did not like what happened on Wednesday and reiterated that view as stocks were popping yesterday morning. Today, a relatively calm overnight session got spooked as European bank CDS (particularly contracts linked to sub debt) spiked. That continued into the U.S. session until headlines that Treasury Secretary Yellen had convened a FSOC meeting. Maybe something comes out of that meeting, but here are issues that I think resurface once that meeting is done, unless something surprisingly aggressive is done (I don’t expect that).

What Good are the Numbers?

This is probably something that a lot of people are thinking about.

As of Dec. 31, CS had a common equity ratio well above many prior periods. It had been much lower in 2020 and 2021. It was lower in September when bond yields in many countries peaked. Presumably it had moved down again, but I am left scratching my head how this chart leads to AT1 being wiped out and additional loss provisions from the SNB were needed?  I know CS had a lot of issues, but how many were new or got materially worse in Q1? I don’t know, but this chart concerns me, because it speaks of susceptibility to me.

It is About Yields

While deposit insurance and safety are issues (one I think that was overstated), the reality is that we live in a world where it is easy to move money to higher yielding, but still safe assets. Yes, you get a lot of benefits and features and utility out of a bank account, but for some yield matters and that really wasn’t an issue throughout ZIRP!

The “Unrealized” Mark to Market Losses

I remain dumbfounded by some of the duration risk that was obviously taken at, at least, one bank. The sense that I get, from talking to people is more time is being spent on what other issues could be out there?

On the bright side, housing as a whole seems strong enough, the job market is solid and corporate credit is doing well, so maybe there won’t be other risks that the market decides some subset of banks is facing (though CRE, in some regions, comes up as yet another issue where if assets needed to be sold, they wouldn’t receive par bids).

The risk, is that these risks get identified, dragging a new set of banks into the limelight (I suspect, if we see that, it will be small, relatively unknown banks), but does it end there?

Skewed Towards Risk-Off

The big bull case seems to depend on the Fed being done hiking. That may or may not be the case, and even if it is, I’m not sure what is left to price in?

So for now stay cautious on risk. So far, sadly, thing are not playing out as well as I’d hoped on the central bank/policy maker front, and I think we’ve seen those in charge being Too Clever By Half.