Introduction

In this section, Denny introduces himself and talks about the current market environment. He also discusses the recent banking crisis and how regulators are handling it.

Market Environment

• The market has held up remarkably well in the face of the banking crisis.

• Regulators have jumped in to regulate and supervise banks during this crisis.

• The FED came in with an emergency liquidity facility for banks on March 12th to calm things down.

• The FDIC is doing its job by selling off troubled banks like Silicon Valley Bank.

Banking Crisis

• The FED indirectly guaranteed deposits by providing a liquidity facility for banks.

• The cost of selling Silicon Valley Bank will be around $20 billion, but the FDIC kept some assets that they can sell later.

• Similar situations were handled well in the past, such as with Savings and Loan associations back in the late 80s/early 90s.

• Bears are still growling about more downside for earnings and valuation multiples for S&P 500.

Conclusion

• Atlanta Fed's GDP tracking model shows Q1 tracking at 3.2% so far, with consumer spending inflation-adjusted tracking at an increase of 5%.

Business Surveys and Rolling Recession

In this section, the speaker discusses business surveys and how they tend to be skewed towards manufacturing. They also talk about the rolling recession that has affected single-family housing, goods retailers, and producers.

Key Points:

• Business surveys are heavily skewed towards manufacturing.

• There has been a rolling recession affecting single-family housing, goods retailers, and producers.

• Services PMI have been fairly strong and have supported consumer spending.

• Construction data shows that spending on manufacturing facilities is very strong.

Commercial Real Estate Market

In this section, the speaker talks about issues in the commercial real estate market. They discuss how some commercial properties under duress are being converted into multi-family housing.

Key Points:

• There may be some issues in the commercial real estate market up ahead.

• Some commercial properties under duress are being converted into multi-family housing.

• There is a limit to how many of those can actually be converted.

Likelihood of a Recession

In this section, the speaker explains why they did not raise their odds of a recession when the banking crisis unfolded on March 9th and 10th. They also discuss their assessment of a soft landing versus a hard landing.

Key Points:

• The speaker had been arguing that there was a 60% likelihood of a soft landing and a 40% likelihood of a hard landing.

• The inverted yield curves have historically anticipated financial crises leading to credit crunches and recessions.

• The recent banking crisis does not necessarily have to morph into a credit crunch or recession.

• We've been in a recession since early last year but it's been a rolling recession.

S&P 500 Chart Analysis

In this section, the speaker analyzes the S&P 500 chart and discusses the debate between bulls and bears.

Key Points:

• The S&P 500 seems to be finding some support at the end of the prior year.

• The Bears are arguing that we're going to crash through that and be testing levels down around 3,500-3,600.

• It's just a matter of a difference of opinion in terms of what the probabilities are.

• We may be debating this bull versus bear debate for the rest of the year.

Mega Cap 8 and the Banking Crisis

In this section, the speaker discusses how crises are good for the Mega Cap 8 and why they have held up well in the face of the banking crisis. He also talks about how they were beneficiaries of the pandemic and how all eight of them had some issues but managed to cut costs and get people excited about their prospects again.

Mega Cap 8 Beneficiaries of Crises

• The markets held up well in the face of the banking crisis because crises are good for the Mega Cap 8.

• The Mega Cap 8 did extremely well during the pandemic as they were beneficiaries of high demand goods and services during lockdowns.

• All eight of them had some issues but managed to cut costs and get people excited about their prospects again.

• The market has been very focused on the Mega Cap 8 while other sectors have been down.

Why is Crisis Helping Mega Cap 8?

• They are sensitive to bond yields, which have come down, helping on valuation side.

• Artificial intelligence story has helped on earnings expectations side or at least on hype side.

Deposits, Bank Runs, and Money Market Mutual Funds

In this section, the speaker talks about total deposits through March 15th, small banks vs. large banks, foreign financial institutions' branches included in total deposits. He also discusses money coming out of small banks due to bank runs and going into money market mutual funds due to disintermediation.

Total Deposits

• Total deposits available through March 15th show a decrease in deposits from small banks and an increase in deposits from large banks.

• Deposits came out of some foreign financial institutions, but there was also some money that went into larger banks.

• The total includes foreign branches of foreign financial institutions.

Bank Runs and Money Market Mutual Funds

• Institutions moved out of some deposits to make their payrolls and moved into money market mutual funds due to disintermediation.

• Banks will need to raise deposit rates to solve the ongoing problem, which will squeeze profit margins.

Banking Crisis and Regulation

In this section, the speaker discusses the need for regulation of banks and how they can become too speculative. He also talks about the current banking crisis and how it can be stabilized through confidence-building measures.

Banks Need to be Regulated

• Banks need to be regulated like utilities as they deal with other people's money.

• They can become too speculative and lose sight of their responsibility to manage things properly.

• This leads to a situation where they risk other people's money, which can result in a banking crisis.

Stabilizing the Banking Crisis

• Look for more M&A activity to offset concerns about disintermediation and profitability.

• The Fed's bank liquidity facility is stabilizing the situation by allowing banks to trade bonds at par for liquidity.

• It's all a matter of confidence, and if it doesn't erode any further, we should be able to get through this banking crisis without a credit crunch.

Loans and Leases

• Loans and leases are an area of concern if there is a problem with deposits due to the banking crisis.

• If banks get more conservative, loans could decline, leading to a credit crunch.

• The US depends heavily on banks for credit, but there is still liquidity left over from accumulated debt during the pandemic.

Securities

In this section, the speaker discusses securities that were bought by banks before interest rates went up. He explains how these securities became problematic when categorized as "held-to-maturity" assets but had to be sold due to deposit runs.

Mortgage-backed Securities

• Interest rates went up, causing losses on mortgage-backed securities and treasury bonds agencies bought by banks.

• Banks categorized these securities as "held-to-maturity" assets, which didn't pose an imminent threat to the institution if held to maturity.

• However, if they had to sell them due to deposit runs, it became problematic.

Fed's Bank Liquidity Facility

• The Fed's bank liquidity facility allows banks to trade bonds at par for liquidity, stabilizing the situation.

• Confidence is key in stabilizing the banking crisis.

Loan and Leases by Categories

In this section, the speaker discusses loan and leases by categories and how commercial real estate is a significant area of concern.

Commercial Real Estate

• Commercial real estate loans have been going up significantly into new record highs.

• Small banks have a lot of their portfolio invested in commercial real estate loans.

• This is an area of vulnerability that needs to be watched closely.

Commercial Real Estate Debt REITs

In this section, the speaker discusses commercial real estate debt REITs and how yields above 10% can be either a great sign or a warning sign. The increase in financing rates exacerbates the problem.

Key Points:

• Offices leases are expiring and may not get renewed or will get renewed for half the space.

• This is a major issue in the credit market but not big enough to cause an economy-wide credit crunch or recession.

• Rolling recession means some areas of the economy are doing well while others are not.

• There are opportunities to buy stocks where macro environment is not so negative that you can't find companies that are making money.

Banking Crisis and Disintermediation

In this section, the speaker talks about disintermediation recessions before and how they have caused banking crises. He also mentions that banks will have no choice but to increase their deposit rates which will squeeze their profitability.

Key Points:

• The current environment may help bring inflation down, making stagflation unlikely.

• Mergers and acquisitions could make for more interesting stories.

• It's hard to predict the bond market using supply and demand analysis; it seems to be much more focused on inflation and how the FED will react to inflation.

Restrictive Levels and Gold Prices

In this section, the speaker discusses restrictive levels and gold prices.

Restrictive Levels

• The speaker believes that Japan is already at a restrictive level and does not need to get out of treasuries.

• China may be getting out of treasuries for geopolitical reasons.

Gold Prices

• The banking crisis has caused excitement about gold and Bitcoin.

• Gold tends to have an inverse relationship with the TIPS yield but also tends to be an indicator of what the underlying trend is for commodity prices.

• If there are bank run announcements in the future, gold will do very well. However, if the bank crisis simmers down, it should take some of the excitement out of gold.