‘Tell Me You’re Pausing, Without Telling Me You’re Pausing’ Stock Market…

On Wednesday, Chairman Powell bumbled his way to another selloff. Par for the course – as he holds the record for worst market performance following his communications:

To a man with a hammer, everything looks like a nail. Powell is single-mindedly focused on lagging inflation data. He fiddles at the altar while Rome burns (more banks will follow the liquidation path with no clear cap on funding costs and no enhanced deposit insurance plan).

I covered this specific issue (Powell vs. Volker) on Sunday night when I joined Karishma Vaswani on the BBC. Thanks to Joao Da Silva and Karishma for having me on:

I covered it in greater detail with David Lin on Thursday afternoon – along with many other positions and general market outlook:

Among the statements I found completely out of touch with reality was the FOMC press release that began with the following assertion, “the U.S. banking system is sound and resilient.” Tell that to the 1000s of employees, equity holders and debt holders of the four large banks that have failed in the last few months.

Does this look like a “sound and resilient” banking system that you want to kick in the teeth when it’s down?

Here are the statement changes from the last Fed meeting to Wednesday’s Fed statement (in red via CNBC):

I also found this statement odd:

But it wasn’t all bad news:

Listen and judge for yourself (if you understand people who speak out of both sides of their mouth you will understand exactly what he is saying):

Ultimately, this waffling will wind up being more inflationary than explicitly pausing today. More banks will fail in coming weeks and the FDIC insurance fund will likely be drained as no one steps up to buy the underwater assets. The balance sheet will re-expand back to record levels as they try to keep toothpaste in a tube with holes on both sides. It is a reactive versus proactive stance that will ultimately be more costly than doing the right thing now. But, it will probably work…

Here’s the latest bank dead pool. Hopefully, Powell (and other policymakers) wake up before too many get ticked off the list. So far, they are not hearing the message of the markets:

Since I find people who identify problems without offering solutions relatively intolerable, I will reiterate the two solutions I have been repeating since the mini-banking crisis began:

1. The executive branch has the authority to act in times of emergency. They could instantaneously enact a temporary deposit backstop for 12-24 months until things cool down and Congress can formally pass legislation to increase the insurance cap. Currently, 45% of US deposits are uninsured.
2. The Fed needs to explicitly pause (not cut), in their “Fed Speak” parade in the coming days and weeks. This will stop/slow bank funding cost acceleration and deposit flight (competition with money markets/treasuries). If the Fed wants to continue to drain liquidity/battle inflation, do it through slow/methodical balance sheet reduction (sell bonds), not more hikes.

The outcome will not be like 2008 because they will pump mass liquidity into the system and expand the balance sheet to record levels, but it is not the prudent, proactive way to deal with the situation (and will ultimately be more inflationary and directly or indirectly more costly to taxpayers).

Everyone knows this, but, for now, they remain like an ostrich with their head in the sand hoping and praying the wind goes away by itself. It can’t and won’t as the genie is out of the bottle. Only proper and swift action can put her back in.

Constructive?

With that mouthful out of the way, we remain constructive. Presley – who cuts all of my media appearances and posts them on social media – came up with this excerpt (from the David Lin Report) on Wednesday. Presley (a college student) has a better feel for the markets than most members of the FOMC and here’s what he thought was important for the day:

CPS

Cooper-Standard (CPS) reported after the bell. Revenues blew away estimates coming in at $682.5M vs. $663M estimate. This compares to $613M in sales for Q1 2022:

$81.9M of the loss was a 1x refinancing fee. We saw +$12.5M in Adjusted EBITDA for the quarter compared to $0.1M same period last year. We will learn more from management on the conference call today.

Car sales continue to recover in line with our original thesis (when the stock was $5.50):

VNO

Vornado (VNO) reported on Monday. The stock…