The Fed chairman Powell gave ultra hawkish statements during last week’s congressional testimony sessions two days in a row. The market was speculating that the Fed funds rate has to go up as high as 6%. That didn’t sit well with the CEO at Silicon Valley Bank who was warned of pending bond rating downgrade due to worsened financial conditions. SVB CEO was racing against time to secure funds while the Fed chairman talked higher rates for longer rhetoric. SVB CEO made a fatal decision to raise funds through the public market by selling available shares last Wednesday. The short fund raising notice released after market close last Wednesday caused panic among the tech startup industry. A classic bank run started immediately pre market open last Thursday. SVB was not able to raise funds and it was shut down last Friday.
There is a real sense of panic if the uninsured deposits are not made whole. As the moment of this writing, the Federal Reserve, Treasury Department and the FDIC made a statement that all the SVB customers funds will be available Monday. The government also created a special investment vehicle for future bank failures. It looks like that there won’t be a panic when the market opens on Monday. Business will be as usual, except the failed SVB stock and bond holders. SVB will not be bailed out. The government took care of SVB customers except the failed bank itself.
The recent bank failures (Silvergate, SVB and Signature Bank) probably have given the Fed some serious warnings about its one-sided approach to raise rates. According to the FDIC, US banks were sitting on $620 billion in unrealized losses (assets that have decreased in price but haven’t been sold yet) at the end of 2022. Many institutions — from central banks, commercial banks and pension funds — sit on assets that are worth significantly less than reported in their financial statements. If these institutions are forced to sell their bond folios, the resulting losses will be large and need to be financed somehow. The scale of the problem is starting to cause concern. The Fed is mandated to maintain financial stability. The bank failures and bank runs are not helpful to stabilize the financial systems.
The Fed will hold an emergency closed-door meeting on Monday at 11:30 am. Perhaps the SVB shock to the heart of the financial system will force the Fed to pause in March meeting. Therefore it marks the end of this rate hiking cycle. It is too soon to predict what the Fed might do in the March meeting, but if history is any guide, the Fed only does things when they are forced to. At the onset of the COVID-19 pandemic, the Fed was forced to implement extreme measures to save the market and economy. They failed to recognize the rampant inflation and infamously termed “transitory inflation”. They maintained easy money policy for too long until they were forced by the highest inflation in the last forty years to reverse policy. Now they wrecked a few banks and lots of startups, they are forced to reverse policy. Instead of talking about inflation, the street will talk about financial stability. Without stability, nothing will survive.
The Fed is the direct source of boom and bust cycle. They also go to the extreme on both ends and they definitely have no crystal balls to see anything in advance.
Technically, the month of March has been historically famous for being the bottom making month. Remember the financial crisis bottom was made on March 06. 2009!
Below is the S&P 500 weekly chart.
It is 21 weeks since the 10/14/2022 seasonal low. The events in the next 10-trading days will probably declare the bottom of this weekly cycle. When a bottom occurs in the next 10 trading sessions, the time is right.
First the Fed meets behind the door on Monday, March 13, the CPI data release on Tuesday, March 14. Will they still have the March Fed meeting on March 21-22? Who knows?
