The current economic climate is characterized by uncertainty and inconclusive data. The Federal Reserve is trying to control inflation, but it remains at an intolerably high level, and the stock and bond markets are fluctuating. Although the labor market is tight, growth is slowing, and the housing market is weakening.
Over the last week, the financial world has experienced significant turmoil, with several key indicators pointing towards an impending recession. A $200 billion collapse of Silicon Valley Bank in 24 hours, a $100 billion loss in the crypto market, and a $100 billion loss in bank stocks have sent shockwaves throughout the industry. Additionally, mortgage demand has hit a 30-year low, and the Federal Reserve has predicted that 2 million people will lose their jobs.
The M2 money supply, a measure of the total amount of money in circulation, is also falling, which has led to some calling for increased Fed tightening. However, this may not be the best course of action, as it could exacerbate the current economic downturn.
Uncertainty and Inconclusive Data
The current economic climate is characterized by a lack of clarity regarding the future of inflation, as well as the stock and bond markets. Enormous quantities of inconclusive data make it challenging to develop a definitive interpretation of the current economic situation.
The Federal Reserve’s Attempts to Whip Inflation
The Federal Reserve has been trying to control inflation, which remains at an intolerably high level despite a series of steep interest rate increases. The FOMC has stated that it plans to raise rates further this year, but the data from January indicates that inflationary pressures are running higher than expected.
Inflationary Pressures Remain High
Although inflation has moderated somewhat since the middle of last year, it remains well above the FOMC’s longer-run objective of 2 percent. The 12-month change in total personal consumption expenditures (PCE) prices has slowed from its peak of 7 percent in June to 5.4 percent in January, but core PCE inflation, which excludes volatile food and energy prices, was 4.7 percent over the past 12 months.
Supply Chain Bottlenecks and Housing Services Inflation
Supply chain bottlenecks have eased, and tighter policy has restrained demand, leading to a fall in inflation in the core goods sector. However, housing services inflation remains too high, although the flattening out of rents evident in recently signed leases suggests a deceleration in this component of inflation over the year ahead.
Core Services Excluding Housing
There is little sign of disinflation thus far in the category of core services excluding housing, which accounts for more than half of core consumer expenditures. To restore price stability, lower inflation in this sector is necessary, and there will likely be some softening in labor market conditions.
Growth of the US Economy
The US economy slowed significantly last year, with real gross domestic product rising at a below-trend pace of 0.9 percent. Although consumer spending appears to be expanding at a solid pace this quarter, other recent indicators point to subdued growth of spending and production. Activity in the housing sector continues to weaken, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment.
Tight Labor Market
Despite the slowdown in growth, the labor market remains extremely tight, with the unemployment rate at its lowest level since 1969. Job gains remained very strong in January, while the supply of labor has continued to lag. As of the end of December, there were 1.9 job openings for each unemployed individual, close to the all-time peak recorded last March, while unemployment insurance claims have remained near historical lows.
SIVB Saga
Silicon Valley Bank (SVB) has been in the news lately due to its $200 billion collapse in just 24 hours, leaving investors and clients in shock. As the dust settles, it is becoming clear that many companies had significant deposits with the bank, and the fallout from this collapse may be far-reaching. Here is a list of some of the companies that had deposits with SVB, along with the amounts:
- Circle: $3.3 billion
- Roku: $487 million
- BlockFi: $227 million
- Roblox: $150 million
- Ginkgo Bio: $74 million
- iRhythm: $55 million
- Rocket Lab: $38 million
- Sangamo Therapeutics: $34 million
- Lending Club: $21 million
- Payoneer: $20 million
However, this is not an exhaustive list, and many other companies have not yet disclosed their exposure. This uncertainty has left investors worried about the potential impact on the broader market.
Another concerning aspect is that 97% of SVB’s deposits were above the $250,000 FDIC limit. This means that many companies and individuals may not be fully covered by FDIC insurance in the event of a total collapse. This is especially worrisome for startups and emerging companies that had large deposits with SVB.
The exposure of these companies to SVB highlights the risks associated with the concentration of deposits in a single bank. Companies that rely on one bank for their deposits may be vulnerable to systemic risk, especially if that bank is highly exposed to a particular sector or region.
The collapse of SVB has also raised questions about the stability of other banks and financial institutions. The recent market turbulence, coupled with rising inflation and interest rates, has created a challenging environment for many banks. This has led to concerns about the potential for contagion in the financial system, especially if other banks are similarly exposed to risks.
However, with nearly $200 billion in deposits and 97% of those deposits above the FDIC limit, this poses a significant systemic risk. The collapse of SVB is a management failure that has led to a bank run and highlights the danger of uninsured deposits. In addition to the SVB collapse, the liquidity crisis this week has seen the stock markets lose $2 trillion in 5 days, the crypto markets lose $100 billion in 24 hours, U.S. banks lose $100 billion in 2 days, and bonds post their biggest move since 2008. The situation is concerning, and many are calling for immediate action to address these issues.
In sum, the exposure of companies to SVB highlights the importance of diversifying deposits and mitigating risks associated with concentration in a single institution. It also underscores the need for greater transparency and disclosure to help investors and clients make informed decisions about their financial exposure. As the fallout from the SVB collapse continues, it is clear that the implications may be far-reaching and long-lasting.
Pingback: Banking System in Crisis - Aliff Capital