The regional bank problems were just the ignition

Outlook

Most reports of yesterday’s events lay the blame for the stock market, yields and dollar falling squarely on the head of the two regional banks confessing to having been defrauded. Fear is overcoming greed, for the moment. But this is just the catalyst.

The Philly Fed gets some of the blame by contracting -12.8 from 23.2 in September. This runs smack into the argument that not even Trump can wreck the robust economy.

A third factor is the two rate cuts universally expected. 

A fourth factor is tariff fatigue, a fifth, worries over the Fed’s independence, a sixth, Trump’s black and brown shirts abusing citizens’ rights, a seventh Trump’s lies and incompetence—and so on. 

The regional bank problems were just the ignition. The flammables were there all along. Markets were willing to ignore all this as long as the stock market was roaring. But now a new deluge of haven seekers has come out of the woodwork, hence the 10-year under 4% and gold over $4300.

We admit to having been gloomy about most things, and surprised by the occasional upsurge in the dollar. Gloom arises from the dreadful actions Trump is taking but also fiscal recklessness in most of the world and disdain for traditional central bank responses to inflation (Japan) and deflation (China).

This sets up the classic fistfight between the dollar being sought for growth and haven vs. really bad management of just about everything government is doing, including the Fed. We are about to get inflation at 3.5-4.5%, as economists have been saying for months, and there’s no way the Fed can justify two rate cuts given that outlook. This is doubly so when we have a labor shortage, made worse by the immigration mess. One of those smart economists at the Fed must be saying that unemployment can reach 4.5-5% and it’s the equivalent of 3.5-4% when conditions are normal.

Obvious bad management leads to loss of trust in government, so we should not be surprised when yields fall as Treasury prices go up on haven demand. Example (of many)—the IRS is being weaponized to go after Dems.

This time the dollar followed the yield down but as noted before, the correlation is rickety and the outlook messy as the long end is hanging on, meaning there are still some bond vigilantes out there. 

This piles on to the US-China trade war, which is a Very Big Deal. Then we have the addition of “uneasiness caused by the dearth of economic data during the shutdown in Washington,” all leading to demand for havens.

None of the analyses on gold add that Trump is meeting with Putin (before he meets with Chinese Pres Xi) with the idea he is going to end the Ukraine war. Yeah, sure.

Mish widens the perspective. Investors have lost confidence in the Fed, or at least its independence, and Congress, which refuses to compromise on the budget. The message is that deficits are out of control, tariffs are out of control, and Trump is out of control. Mish writes that “US debt now grows by $1 trillion every 150 days.” We assume he has it right. The US is not quite a failed economy (like Turkey or Venezuela) but heading that way.

Forecast: Hysteria is hard to judge. We have a surplus of reasons to buy Treasuries and gold and lighten up on equities, but this doesn’t necessarily mean sell the dollar, since it’s the safe haven, Swiss franc notwithstanding. The yield in Swiss is about zero and possibly going negative again.

The two regional bank story does not suffice to feed long-lasting panic. When Silicon Bank failed, everyone noted that one of the underlying problems was the accounting method of marking-to-market its Treasury holdings. This time a couple of banks got swindled. Nothing new here. For all the markets to blow up on this story is just an excuse to blow off fear-steam.

And while the market is nearly 100% certain the Fed will cut twice before year-end, the longer end of the curve is hanging on.  The yield on 30-year bond rose to 4.60% today, up 0.02%. Trading Economics reports  “Over the past month, the yield has fallen by 0.13 points, though it remains 0.20 points higher than a year ago.”

This is “stability” of a sort. We guess greed will overcome fear and the critical market, the stock market, will recover, probably starting today. The gold frenzy will not go away for all the reasons cited above, but it may moderate for a while.

Where this leaves the dollar is up in the air. We suspect it can come back when Trump caves on the China trade war. Watch the 10-year. It’s already back over 4% this morning at 8:15 am. Don’t bet the ranch on a continuing dip.

Tidbit: Here is the Reuters summary  of the regional bank saga: “The [stock market] decline was triggered by Zions Bancorporation disclosing a $50 million loss tied to two commercial and industrial loans, while Western Alliance said it had initiated a lawsuit alleging fraud by Cantor Group V, LLC.

“The selloff rekindled concerns over lax lending standards in a sector already grappling with two auto bankruptcies, more than two years after the collapse of Silicon Valley Bank.

Zions shares fell 1.8%, while Western Alliance lost 2.8% before the bell.

“Investment bank Jefferies, which has disclosed exposure to bankrupt auto parts supplier First Brands, dropped 2.5%, extending Thursday's 10.6% plunge. Shares of some of the major U.S. banks also dropped. JPMorgan fell 1.1% and Morgan Stanley lost 0.9%. Bank of America and Citigroup declined 1.8% and 1.9%, respectively.

"’All these could be isolated incidents, but there are increasing concerns about souring loans and bad credit,’ said Neil Wilson, strategist at Saxo Markets. ‘Add worries about trade wars and the ever-growing bubble risk from AI and you have a pretty nasty little cocktail of excuses to end the week in risk-off mode.’"

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