Right now the market’s resilience to all of its current headwinds reminds me of the “Unsinkable Ship” the Titanic. Since there are generally more movie buffs than history buffs in the world today, we’ll discuss the movie version. The Titanic holds a special place in my heart as it was the first movie Rachel (my wife) and I went to the movies to go see together in 1998.
Every boat has a captain who will go down with the ship. One would think this would substantiate reasonable caution and cooler heads prevailing, but as we saw with the Titanic, it doesn’t always work that way. Many times, ego can get in the way of a sound mind. The captain of the Titanic was out to prove its speed and prowess. He knew he was in dangerous waters with massive icebergs all around, but his ego did not let those headwinds get in the way of his vision. He also knew there were not enough lifeboats to save all the lives on the ship, but there were, for the most part, enough to save the lives of the wealthy.
When the ship first struck the “berg”, did the captain sound the alarm to let everyone know? Absolutely not. There are more than likely two main reasons for the delay. The first being the crew needed time to assess the damage, and the second reason was to prevent immediate panic. It gave the crew sufficient time to lock up the poor and stricken so that the wealthy would be able to board the limited number of life boats.
Ah, the parallels of the Titanic and our current state of affairs in the economy are so eerily the same. We have 2 separate captains on this boat, however. One is the Government and the second is the “independent” Federal Reserve. I’m not sure how independent they really are as they both worked in tandem to create massive amounts of inflation over the past several years. The broke government handed out stymie checks to EVERYONE and the Federal Reserve (Fed) kept interest rates way too low for way too long. The government simply printed money by taking on massive amounts of debt. Even though there were signs everywhere that inflation (rising prices of goods and services) was taking off, both captains deemed it transitory (temporary).
A little over a year ago, the independence of the Fed began to emerge once again. Jerome Powell, the Chairman of the Fed, began to lead his committee on a battle against inflation (otherwise known as a return to price stability). The other captain did not. The Government continued to fight to print money all the while marketing it as “anti-inflation”.
The Fed has a number of tools to fight inflation, but there are two primary tools. They can either decrease the amount of money in our economic system and or raise short-term interest rates. They chose to use both, which is like powering up the ship’s engines at full steam ahead.
The interesting parallel to the Titanic starts here. We have a Fed who knows very well what will happen if you run up interest rates and decrease the money supply at such a rapid rate through troubled waters. But they did it anyhow (they didn’t have much of a choice). Often over the past year, Mr. Powell was citing the efforts of Paul Volker (a former Fed chair) who achieved price stability after Volker fought inflation for 7 years in the late ‘70s through the mid ‘80s. That was a painful time, but it did bring the sought after results. Is Powell’s ego to be the next Volker getting the best of him or is his ego trying to regain its reputation. After all the idea of inflation being “transitory” was completely inaccurate in the first place. It doesn’t matter because either way, it’s his ego that is driving the ship.
The same ego applies to the Government, but to save myself from a political debate in this extremely polarized world we live in, I’m going to leave it at that.
As with most policies of the Government and the Fed, there is a lagged effect. It took about a year this time to hit the iceberg which was similar in duration to the last financial crisis. Just the day or so before Silicon Valley Bank failed, Powell was in front of the U.S. Congress testifying. He was asked about the soundness of the banking system and he reportedly told Congress that he did not see any threats to the banking system. One of the Fed’s jobs is to oversee the banking system along with Congress. Even after the announced failure, President Biden is also publicly stating to the American people that they should not worry about the banking system. Two days later we see another failure in Signature Bank.
I had to laugh at the Signature Bank failure because guess who is on the board of that bank. The one and only Barney Frank. The ex-congressman who drafted the Dodd-Frank Act which was designed to highly regulate the banking industry after the 2008 financial crisis. A board member is supposed to have oversight (and fiduciary responsibility) over a company. Mr. Frank’s legislation and board responsibilities have obviously failed to “save” the American people. But they have saved the wealthy at the expense of the commoner. That’s right, both captains have decided it to be a good idea to insure all sizes of deposits (but only for the currently failed banks). You see, most of the depositors at those banks weren’t small potatoes. Most of them were big time corporations and venture capitalists with $25 million or more in single account deposits.
I listen weekly to the All-In podcast with 4 such big time VC’s. They were all able to get their money out of those banks even though they knew very well their deposits were not insured at the time they made the deposits. If you listen to the last couple of episodes you will hear their justification as to why they should be able to get their money. It’s a sob story around the idea that; how could they possibly have known better. How could they have possibly done research to discover the financial status of the banks they put their money with? Well, it seems they were pretty good at doing research up to the point of collecting millions of dollars in assets to put in those banks. You tell me. I don’t buy their story one bit.
So we hit an iceberg, the ship is sinking and our captains are assuring us everything will be okay while they work diligently to assess the damage and get the wealthy off the ship first. Once that objective is complete, we will more than likely see the ship sink and many lives will or may be permanently damaged. Most of it will be financial damage, but unfortunately some of it will be more than that. People’s stress levels will rise causing damage to their health.
Stay tuned for my next writing as I will embellish the current events out further and postulate on the future outcomes of these events unfolding. In the meantime, some things to think about are: Have we experienced peak inflation? Think about the 7 years it took Volker to fight it in the ‘70s and ‘80s. Do recessions start when rates start rising and the yield curve inverts or do they start when the inverted yield curve begins to normalize and the Fed pauses?
Now I will go back to navigating these waters for my own clients.