Blog

It’s been over two weeks of unsettled markets led by multiple banking crises in the US and Europe but given the united front by central bankers (whose rapid rate hikes started the whole debacle), we think confidence has been restored to financial markets. However, in our opinion, we still have one weak link in the whole system. We are referring to the potential for what we would call underhanded short selling combined with aggressive Credit Default Swaps. It’s a one, two punch that hits the stock of a targeted company and its outstanding bonds and is designed to undermine the stability of a company’s credit rating. Sprinkle in some negative social media comments and “poof” another bank could require another bail out.

Of course, we cannot forget the class action lawyers waiting to pounce as well. Yesterday, for example, Hindenburg Research put out a negative report on Block Inc, formerly Square, sending the stock down 16% yesterday. Don’t get me wrong, Block as the name implies, is involved in crypto currencies, but what is not clear is when Hindenburg sold short their shares and when they put out the negative research report. Meanwhile, shareholders have already seen their stock price collapse from $275 eighteen months ago to $52 last year. The stock had recovered to $80 at the beginning of the month and now its back down to $60. Twenty-four hours later I read headlines from not one but three law firms raising the issue of class action suits against management…But I digress.

Back to central bankers and interest rates. We believe they THINK they are between a rock and a hard place. Raise interest rates any higher and they run the very real risk of destabilizing the corporate banking system. Don’t raise interest rates and worry about run away inflation eroding the confidence of bond and stockholders. In our opinion, that is not really the case and in should stop raising rates right now.

Economic research suggests the full effects of rising interest rates take months if not years to materialize. It is compounded by the fact that most of US economy is services not manufacturing. Manufacturers tend to be much more sensitive to interest rate changes because it plays a higher role in their input costs. A factory must finance raw materials, semi finished goods and unsold inventory. Any change to interest rates therefore has a meaningful impact on the company’s bottom line. Did we mention Ford announced yesterday they will lose $3 Billion from EV sales this year.

If our assumptions are correct, then the US Fed can certainly pause with its rate hikes to determine the lag effect on rate hikes and consumption led inflation. We are already seeing producer prices dropping to near zero, it will just take a little more time to hit the service sector.

In the meantime, mid sized banks will no doubt rapidly pull in their horns and raise rates on their entire loan portfolio. We envision phone calls going out to every client with a loan, mortgage, or line of credit with “Dear valued bank customer: Due to changing economic conditions and in light of rising interest rates, we need to raise the rates on your loans and if you were looking for more credit, we apologize but cannot afford to extend anymore to you. Thank you for choosing us for your banking needs!”

In other words, expect to see a contraction in the coming months as middle America gets the shaft. So please Mr. Powell, just hold off for a couple of months.

Does that mean the end of a bull market? No. In fact North American and European markets finished higher this week. The mega cap technology stocks will still generate billions in profits. Global energy demand should continue to grow thanks to non-OECD population growth rates. Great news for our oil companies if you can ignore short term volatility. We also believe China’s economy will rebound this year especially with their central bank cutting interest rates. And finally, industrials and infrastructure should benefit from the Trillion-dollar Infrastructure spending Bill last year.

Happy trading and Stay Safe.

Steve Bokor and the Ocean Wealth Team