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Debt Ceiling Talks Bring Opportunity to Buy Stocks

Published May 24, 2023

The following is aggregated discussion a topic that has been presented to premium subscribers over the course of the past week, including in today’s briefing. Details on membership is available on our Supercast or Substack.

Debt ceiling talks are slowly coming home to roost. They were apparently the cause for yesterday’s selling, which saw the S&P 500 and Nasdaq drop by 1% each. There hasn’t really been any noticeable progress since House Speaker Kevin McCarthy said he had “productive” discussions with the White House.

That was on Monday. No news is bad news here, which makes sense when you’re up against an approaching deadline. This has caused the inevitable doom and gloom headlines and of course plenty of finger-pointing from political partisans.

Reality Check

There is still a week to go before June 1 and even then the US probably won’t be in technical default right away. Secretary Yellen for her part is already quietly backing off the hard June 1 headline. So we can expect to hear more from this for a little while yet. Lawmakers have a vested interest in drawing these talks out to a dramatic conclusion because that attracts media attention and media attention is catnip to these folks.

More than that, actually. It’s their lifeblood. That makes sense in a democratic society. Whoever commands the media can command the voters. Look at the historical record of election outcomes if you don’t believe us. Chances are, the winner won the PR game, whether that individual’s name is Trump or Clinton or Kennedy or Hitler.

The Opportunity

Where stocks are concerned, there hasn’t been all that much in the way of fear-based selling yet. As the reality of a possible default dawns on the market — with each passing day of little or no progress on the debt ceiling talks — one can expect this to change. These could provide an opportunity to buy stocks if one believes this is all political brinkmanship.

That doesn’t mean there aren’t risks. The fears that emerged at the outset, that one or both sides could drive us off a cliff if they decided they could convince their voters it was the other side’s fault, has not changed.

Could the two political parties really be this idiotic? It’s probably not a good idea to discount their idiocy in any way. But if ignore the clickbait and you look at how little actually separates the two sides right now — and it’s basically just a question how much spending to cut, not whether to cut it — then one has to consider the possibility that this is all just theater, and we, the voting public, the audience.

That makes fear-based dips an opportunity to buy the stocks or risk assets of one’s choice.

Not investment advice (duh). There may be other opportunities — and other pitfalls — not covered here. Do your own research, make your own decisions.

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The Trouble Facing Regional Banks

Published March 15, 2023

The following is an aggregation of thoughts on the burgeoning banking crisis, as posted in the Daily Contrarian. Subscribe to receive the briefing and accompanying podcast each market day morning.

Last weekend saw the dramatic rescue of Silicon Valley National Bank (SIVB) and Signature Bank of New York (SBNY). The market reaction was drastic, with investors punishing regional bank stocks and today shifting their focus to European banks. Credit Suisse (CS) dropped to an all-time low after its largest investor ruled out further capital infusions.

Unfortunately, the underlying issue facing banks in the US at least remains unresolved. Banks still hold large amounts of held-to-maturity, or HTM, assets. These are US Treasuries and other government bonds that don’t need to be marked-to-market if they are (you guessed it) held to maturity. The problem is if these assets need to be sold, in which case they do need to be marked-to-market. If that happens it leaves banks with a huge hole in their balance sheets from the ensuing write down. See Silicon Valley Bank, which tried to plug their hole with a capital raise. Didn’t work. This issue of HTMs has been known for some time. Here’s a Wall Street Journal piece from November.

By closing Signature Bank, regulators presumably removed the domino that they believed would be the next to fall. The Fed for its part set up an emergency lending program called the Bank Term Funding Program, or BTFP, to shore up liquidity in the financing system. The question now is how effective these measures will be. There is reason to believe they should be at least somewhat effective, according to our guest on this week’s podcast.

That’s great, but then what about the business viability of these regional banks? If depositors are worried about their money it stands to reason that they will move it to a larger financial institution. How can smaller regional banks compete with these juggernauts, especially if they are faced with larger regulatory burdens as can be expected? At best, their margins will be severely pressured. At worst they will have to deal with a run on their deposits.

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The New Narrative, a lot like the Old Narrative

Published February 13, 2023

Concerns about inflation and Fed rate hikes are front and center again as focus turns to January’s CPI print…

The following is an amended version of the Feb. 13 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack or Supercast.

It’s a big week with the Consumer Price Index supplying a fresh inflation reading Tuesday.

Last week wasn’t great for stocks. In fact, it was the worst week of the year so far. Inflation was one persistent theme to emerge from earnings, which from the looks of it is getting investors to rethink the narrative that the Fed can start cutting rates later this year.

In reality that narrative was foolish to begin with. More importantly, it wasn’t due to any tangible comments by Fed officials — some off-the-cuff hints by Powell that probably weren’t even intended as such were enough to get investors to pile into risk assets, however temporarily.

So apparently the narrative has shifted again, from ‘soft landing’ to ‘higher for longer.’ From ‘don’t fight the tape’ to ‘don’t fight the Fed.’ Which means this meme can safely be unearthed again:

Don't Fight the Med MaryJane meme

Reality Check

This latest market activity is a bit of a relief to those of us who were questioning our sanity coming in to last week. Markets can stay irrational for awhile (longer than we can stay solvent, as the saying goes) but maybe this latest bout of bullish irrationality just wasn’t long for this world to begin with.

Two things we’ve been pointing out the whole way: 1) the Fed record of engineering soft landings is not good, and 2) there is a lag effect between when the Fed sets interest rates and when these are felt in the real economy.

This doesn’t make for a particularly constructive environment for risk allocation and makes the January rally look like a dead cat bounce.

Now that that’s settled, we can consider all the ways that it’s wrong. Have at it.

Podcast Excerpt

Quick highlight from today’s podcast (available in its entirety for premium subscribers) courtesy of our YouTube channel:

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