Compardo, Wienstroer, Conrad & Janes at Moneta

Friday, May 19, 2023

The X Factor: Congress Faces Tight Timeline for Debt Ceiling Resolution

Chris Kamykowski, CFA®, CFP® – Head of Investment Strategy and Research
Rich McDonald, MBA – Head of Portfolio Management and Trading

Back in January, we wrote about the extraordinary measures being undertaken by the US Treasury to allow for payment of government bills. While newsworthy, this action had been taken many times before so it was not exactly unusual. At the same time, we noted that Secretary of the Treasury, Janet Yellen, had warned these measures would likely only be effective until early June, giving Congress ample time to solve for the coming debt ceiling issue. We noted: “Clearly, the closer we get to June without a resolution, the more perilous the situation could become.”

Today we see a “perilous” moment on the horizon as negotiations have finally started in earnest as markets stare down a shifting X date; this date represents when the US Treasury can no longer use its extraordinary measures to pay all expenses. With 2022 personal tax receipts coming in well lower than last year, the US Treasury faces a sooner-than-expected date by which it will require additional funding to cover bills. The Treasury department has estimated that the government will run out of money to pay its bills as early as June 1, 2023. If Congress does not raise the debt ceiling by then, the government runs the risk of a default on its debt, which would likely create significant market volatility. This doesn’t mean that the U.S. is out of money, but rather it must make choices on how to use the money it has for bills due. A situation where it prioritizes payments is often referred to as a technical default as they could choose to make all debt payments (Treasury bonds) and make partial payments on other obligations like Medicare, Social Security or national defense. To be sure, Janet Yellen has made statements that there are no plans to prioritize certain payments over others, currently.

Source: US Treasury – https://fiscaldata.treasury.gov/datasets/daily-treasury-statement/operating-cash-balance.

Politics are front and center, for better or worse. Many may loathe politicians playing with fire such as the US’s credit status, but they are the ones elected who must come together to negotiate and resolve the issue. The positions currently between Republicans and Democrats on how best to deal with the debt ceiling are clearly disparate and not made easier by very vocal constituencies in both parties. Starting positions for each party are noted below:

Republicans’ key desires are:

Government spending reductions and cap on annual increase to federal discretionary spending
Work requirements for government aid recipients.
Accountability for future changes to the debt ceiling
Recover unused COVID relief funds from various bills enacted from 2020-2022.
Eliminate student loan relief efforts by the White House

Democrats on the other hand are seeking:

Unconditional increase in debt ceiling
A bipartisan agreement
A long-term debt ceiling increase

Something will have to give between the two parties’ demands as it relates to a debt ceiling deal, and much political maneuvering will be required of both parties to secure enough votes to pass in both the House of Representatives and Senate. Negotiations between senior leadership in both parties and the White House have started. The negotiations are currently a central story for the market as it assesses any comments coming from those involved with the negotiations and those privy to them. Both parties have expressed support in avoiding a default on US Treasury debt which provides a degree of confidence that something will get done in time to avoid a default. Events could move very swiftly as discussions move forward, and for good reason: some market commentators have noted that the procedural elements of drafting, reviewing and passing an agreement is facing an ever-tightening period of time, forcing parties involved to move with deliberate intention. As of mid-day Friday, May 19th, there is word of potential concessions between the two sides to strike an agreement next week, although an impasse has led to a pause in the negotiations.

For all the talk about the debt-ceiling and concern over a potential default by the US on its debt, markets have been surprisingly calm. The S&P 500 just reached a new high for the year and Treasury rates have been generally range-bound, floating in a +/- 0.30% range the last month. That said, things could change rapidly if a resolution is not seen as probable by the markets or time seemingly runs out. In 2011, the S&P 500 fell sharply as negotiations drew closer to the X Date and only bottomed after a resolution was enacted before beginning a recovery over the rest of the year. An on-going European debt crisis was also jostling markets at the same time, providing ample catalysts for a risk-off move in the markets. Today, tightening monetary policy and concerns over a looming recession presents additional circumstances the market must navigate alongside the debt ceiling concern.

Source: Morningstar. As of 5/18/2023.

As we noted in our piece earlier in the year, any failure by the U.S. to make interest payments on time could cause havoc in the financial markets, as markets prefer certainty to uncertainty; when we are talking about THE risk-free rate that underpins global financial markets, this is even more apparent. No one – Democrat or Republican – wants a default given the high stakes and serious consequences of such an event; 2024 elections are on the horizon. Investors can expect to see some increased volatility given the situation but should remember that markets are very efficient at processing news on both the positive and negative ends. To that end, our recommendation through this period of political and fiscal uncertainty is that is it important to control what you can and maintain a balanced portfolio in line with your goals. Hopefully, elected officials will take heed of the fast-approaching X date and work together toward a resolution that avoids unnecessary impact to the soundness of US credit.

Definitions

The Treasury General Account is the U.S. government’s operating account that is maintained by designated depositaries, primarily Federal Reserve Banks and their branches, to handle daily public money transactions.

The S&P 500 Index is a free-float capitalization-weighted index of the prices of approximately 500 large-cap common stocks actively traded in the United States.

Disclaimer

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

The post The X Factor: Congress Faces Tight Timeline for Debt Ceiling Resolution appeared first on Moneta Group.

source https://monetagroup.com/blog/the-x-factor-congress-faces-tight-timeline-for-debt-ceiling-resolution/

Have You Received “Phantom” Stock from Your Company? Here’s How It Works

By Michael Torney, CFP, J.D., LL.M.

Key executives at privately-owned or public companies may receive shares of stock in their employer. Sometimes the shares of stock are synthetic stock, otherwise known as “phantom stock”. This kind of stock can give many benefits of ownership and tangible value to an executive, yet is different than owning actual shares of the company. Phantom stock can potentially be valuable for executives and managers as a part of a long-term incentive program to help propel the company’s growth.

Unlike other types of stock grants, “phantom” stock does not include actual shares in the company or any type of ownership or voting rights. Its value and stock price are usually determined by an independent firm employed by the company. As the value of the stock increases, so does the value of the phantom stock.

Owners of companies need to retain talented people. They know that any potential buyer will want a strong management team in place, so offering the issuance of phantom stock is one possible way to help a company retain its key management team. These plans are intended to provide significant rewards so that the executive does not, for example, move to a competitor or start their own company. These plans can also help align senior executives’ interests with the interests of the company.

Types of Phantom Stock

While companies have plenty of flexibility in how they structure a phantom stock plan, there are generally two kinds: full value and appreciation-only.

An executive receiving stock at “full value” gets both the current value of the stock when it is granted, plus any appreciation. For example, if an executive receives 10,000 shares at $5 per share, and the share price grows to $20 a share when a key event triggers payment, they would receive $200,000 before taxes. Some phantom stock plans allow for the payment of dividends.

Appreciation-only means the executive does not receive the current value of the stock. Instead, as their company stock price rises, they earn the amount the stock increases before a key event triggers payment. In the example above, 10,000 shares of stock would have appreciated by $15 per share, or $150,000 before taxes. These plans are sometimes called “stock appreciation rights.”

Vesting

To quality for phantom stock grants, companies usually require that executives meet specific performance metrics over a number of years or the vesting may be time-based. Companies have flexibility in setting a vesting schedule. The vesting usually occurs over a number of years. Instead of receiving compensation periodically, the executive may need a key event to occur before they receive any compensation.

Taxes

If the phantom stock plan is a valid deferred compensation plan, Social Security and Medicare taxes are owed at the time of vesting. Income tax is owed once the cash is received. Just like an annual bonus, this amount becomes part of the executive’s annual income in the year it is received. Compensation related to phantom stock is taxed at ordinary income rates; the income is reported on the executive’s W-2.

Summary

Phantom stock may be valuable for executives and can add a significant amount to your wealth. Because each company sets its own rules for how these plans work, it’s critical to understand all the plans details, including which events trigger payment. If you have been granted shares of phantom stock and would like to discuss them as part of an overall financial strategy, contact our team at Duffteam@monetagroup.com. We are happy to discuss how we can help people maximize their wealth.

The post Have You Received “Phantom” Stock from Your Company? Here’s How It Works appeared first on Moneta Group.

source https://monetagroup.com/blog/have-you-received-phantom-stock-from-your-company-heres-how-it-works/

Thursday, May 18, 2023

How to Clarify Your Brilliant Processes

Many successful business owners are successful because they think about things differently than most people. Others may recognize your personal brilliance and say to themselves, “I wish I could understand how she does it.” 

This “secret sauce” can be a great differentiator. However, when it comes to planning for your successful future, it may also be a roadblock. 

Let’s examine a few strategies that can help you leverage the methods that contribute to your unique success into a planning process that lets you pursue your goals on your terms. 

1. Create a paper trail

When it comes to long-term planning for future success, documentation is key. This can be challenging for business owners who tend to work in a more stream-of-consciousness style. For these kinds of business owners, documentation can seem constraining. 

However, as your business grows—and with it the stakes that determine your success—having a method to guide what makes your business successful becomes more important. 

For example, say you’re the creative force behind business-development concepts at your company. You might come up with your best ideas after 3 hours of sleep, 15 cups of coffee, and an intense brainstorming session with trusted partners. 

After going through this process, you’ll likely need to guide others toward how to implement the ideas that come from the process. It’s unlikely that the people who will implement the ideas will be able to do the exact same things you do to rouse the muse. 

Having a documented method to pursue your great ideas is key to consistent success. It gives others who may not have the same strengths as you a way to make your ideas come to life. It can also insulate your company against risks, such as if you were to fall ill for an extended time and couldn’t be the catalyst. 

2. Consider next-level managers

Successful business owners often recognize that they can’t do everything themselves. This recognition is an important touchstone for continuing business success. It allows business owners to search for and implement next-level managers to keep moving the business forward. 

If you find that your business isn’t quite executing on your ideas—or perhaps you’re having difficulty articulating what you need the business to do—next-level managers could be the solution. 

Next-level managers have proven track records of solving problems relevant to their field of expertise. Their presence can strengthen a company both because of their inherent expertise and because they may have the skill to clarify and implement your unique strategic style. 

3. Ask for help

Even if your processes make sense to you, it’s a prudent strategy to explain those processes as clearly as possible to others to reduce risks. This can be a challenge if you tend to view and do things differently. That’s why it’s critical to ask for help when necessary.   

In certain aspects of planning for a successful future, objectivity is key. For example, reducing your tax burdens is a crucial step toward your goal of financial independence. But these methods can be complex, and without proper guidance, you may position yourself to miss opportunities to reduce your burdens. 

We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience. 

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need. 

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest. 

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity. 

© 2023 Advisory services offered by Moneta Group Investment Advisors, LLC, 100 South Brentwood Blvd., St. Louis, MO 63105 (“MGIA”), an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax, or legal decision. Past performance is not indicative of future returns. You cannot invest directly in an index. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise. Trademarks and copyrights of materials linked herein are the property of their respective owners.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

The Chartered Advisor for Senior Living (CASL®) designation is conferred by The American College of Financial Services.
©2020 Business Enterprise Institute, Inc. All rights reserved.

The post How to Clarify Your Brilliant Processes appeared first on Moneta Group.

source https://monetagroup.com/blog/how-to-clarify-your-brilliant-processes/

Monday, May 15, 2023

Ask the CFP® – Why Don’t Wills Avoid Probate?

In this installment of Ask the CFP ®, our question is Why don’t wills avoid probate?

We are frequently asked whether a will is subject to going through probate. There is a common misconception that if you have a will, your estate will not have to go through probate. It’s possible to avoid probate court with proper estate planning, but a will by itself doesn’t avoid probate. On the contrary, it’s used by probate.

When anyone who has a will dies, their will is submitted to probate, which is the process of being reviewed by a local court to determine its authenticity. Probate ensures that creditors are paid and that your assets are distributed to the correct beneficiaries based upon the instructions your will provides to the executor of your estate.

However, if you die without a will, you are considered to have died intestate and the probate courts will distribute your assets based upon your state’s intestacy laws. This is normally something people try to avoid. In fact, due to the time, cost and privacy issues that can exist with probate court, people often try to avoid it altogether by using beneficiary designations or trusts. However, if you only have a will, remember that it’s not meant to avoid probate. It’s meant to be used by probate so the court and your executor may implement your wishes versus your state’s intestacy laws being used.

If you have assets that are only titled in your name with no beneficiary designation, even if you have a trust, they may be subject to probate court. That’s why proper titling and beneficiary designations are important if you want to avoid probate court.

Here are a few reminders of how you might avoid probate court with your assets:

Assets like life insurance policies, retirement accounts, etc. will pass to the named beneficiary, assuming you don’t name your estate as the beneficiary. It’s important to make sure your beneficiary designations are up-to-date to avoid probate of these assets.
Co-owned assets with rights of survivorship will pass to the surviving co-owner without having to go through probate.

Assets titled in the name of a trust can transfer without probate.
Bank or investment accounts with a Payable on Death (POD) designation or vehicles with a Transfer on Death (TOD) designated also avoid probate and go directly to the individual you have named.
Not every state allows them, but real estate assets can avoid probate by using a beneficiary deed. It’s generally recorded with the title in the city or county records department.

Probate can take a lot of time, as well as being costly and stressful for your loved ones. We’re here to help if you want to review your overall estate plan to avoid probate.

If you have a suggestion for a future Ask the CFP ® video, please email TFreeman@MonetaGroup.com. Thanks for watching and we’ll see you next month.

The post Ask the CFP® – Why Don’t Wills Avoid Probate? appeared first on Moneta Group.

source https://monetagroup.com/blog/ask-the-cfp-why-dont-wills-avoid-probate/

Wednesday, May 10, 2023

Exam Season

Aoifinn Devitt – Chief Investment Officer

It was a week that saw great pomp and fanfare across the Atlantic as the official coronation of King Charles III took place in the UK. On this side of the Atlantic, the week was rather more mundane as markets wrestled with the “exam question” of how to handle contradictory data points. It is somewhat like the multiple-choice questions that are set up with two questions built into one – is the answer: A but not B, B but not A, neither A nor B, or both A and B? The examiner has craftily combined two bits of knowledge into one question, and finding the right answer requires twice the knowledge.

Markets feel similar today. It is not enough merely to look at the direction hinted at by the Fed in its decision making, which was the study for last week. It is also important to know the sometimes contradictory data in the form of ebullient employment data (253,000 jobs added in April) and the fact that 79% of S&P 500 companies have reported a positive EPS surprise in the last quarter. These data points might send us in opposite directions in terms of forecasting the path of the economy for the rest of the year.

Markets have been flat over recent days, but the persistently strong momentum around tech stocks has lifted the Nasdaq out of its official “bear market”:

Source: Morningstar as of 05/09/23

Whether or not to trust banks and regional banks in particular is another exam question, probably one demanding a long form response in this case. On the one hand, we have reassurances from the swift action taken by regulators and JP Morgan to absorb the flailing First Republic Bank. On the other hand, we have stern warnings from the Fed produced this week that suggest that the recent bank failures will lead to tighter lending standards and falling asset prices.

Other commentators have used evocative imagery such as a “Bank Walk” as opposed to a “Bank Run” to depict the steady but orderly departure away from banks as deposit institutions as other instruments such as short-term bond funds present more compelling returns. Another one is the “Credit Squeeze”, a term used by Austan Goolsbee, president of the Federal Reserve Bank of Chicago, as opposed to a credit crunch. To him, that pointed to protracted woes in commercial real estate lending in particular, as well as a higher likelihood of a recession.

As you may surmise, exams are on my mind this week. Good luck to all exam-takers and graduates.

© 2023 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment adviser does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

The post Exam Season appeared first on Moneta Group.

source https://monetagroup.com/blog/exam-season/

Thursday, May 4, 2023

Moneta Continues Longstanding Partnership with Missouri Baptist Medical Center

Moneta Partner Jim Blair spearheaded a fundraising drive for Missouri Baptist Medical Center in St. Louis, culminating in a $55,950 collective gift from the Moneta Charitable Foundation for the hospital’s cardiovascular conference room renovations.

Blair had the honor of cutting the ribbon to celebrate the re-opening of the Moneta Conference Room at the hospital on April 26, 2023. The space has been upgraded with state-of-the-art technologies that enable doctors to confer on best practices for patient care.

Moneta has a longstanding relationship with the Missouri Baptist hospital system: Blair is currently a Missouri Baptist Medical Center Board member, Moneta Partner Mark Conrad is a Missouri Baptist Healthcare Foundation Board member (Moneta Partner Hunter Brown formerly served the Foundation in that capacity), and Moneta Partner Kara Harmon serves on the Missouri Baptist Healthcare Foundation Legacy Advisory Council.

The conference room was originally created in 2004 through a donation by longtime Moneta Partner Peter Schick.

The renovations create new opportunities for physicians to research and consult on life-saving care. At the ribbon-cutting, the Missouri Baptist Hospital Foundation team expressed their appreciation to the Moneta Charitable Foundation for this gift and extended special thanks to Jim Blair for his leadership.

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

The post Moneta Continues Longstanding Partnership with Missouri Baptist Medical Center appeared first on Moneta Group.

source https://monetagroup.com/blog/moneta-continues-longstanding-partnership-with-missouri-baptist-medical-center/

Tuesday, May 2, 2023

From the Ceiling to the Floor

Aoifinn Devitt – Chief Investment Officer

Yesterday was May 1, also known as International Worker’s Day, which was a timely reminder to note the workers that have been shoring up the still-resilient economy and are continuing to enjoy low unemployment rates relative to their history. We have been talking a lot about workers in recent months, as the robustness in labor has been a sticking point for the Fed as it looks to the health of the economy, and announcements of mass tech layoffs have punctuated news flow. Just recently, it has seemed that this robust picture is starting to fray at the edges, as US job openings dropped to their lowest level in nearly two years in March and layoffs rose.

As we look to the Fed decision this Wednesday, we are, as is now typical in 2023, wading through a mass of sometimes contradictory datapoints. The softening labor data has accompanied evidence of slowing inflation, while slackening GDP growth, falling oil prices, and cautious company outlooks are dovetailing to the narrative of a slowing economy. The problem is that inflation retains the element of surprise, and just when it appears to be getting more muted, a stubborn number will appear to muddy the narrative.

That wasn’t it for recent news flow, however. Last week, we spent some time discussing the debt ceiling and how the deadline for resolution of issues was being pulled forward due to lower tax receipts and greater strains on finances. This chatter has not abated, and in fact Secretary of the Treasury, Janet Yellen, suggested a new urgency around the talks and that June 1st was a more appropriate deadline for raising the ceiling.

This week, we have moved from the ceiling to the floor – and the floor that US regulators seem content to place under bank failures. The weekend saw a frenetic set of negotiations that ran past the Sunday midnight deadline to seal a solution for the beleaguered First Republic bank, and on Monday morning, investors awoke to the news that the bank had been taken over by JP Morgan.

This “strong” solution for the bank differed from the Silicon Valley Bank (SVB) saga in that the FDIC did not intervene first and finding a buyer – urgently – was seen as a preemptive move. However, there were other important similarities in the outcome for both banks – both banks had practiced the art of focusing on gathering deposits at a time when rates offered on deposits were comparatively low. First Republic prided itself on its “white glove”, concierge-style service for its clientele, believing that building this customer loyalty would trump the slightly less favorable economics that low-rate deposit accounts began to represent. As the interest rate cycle entered what has become the steepest set of rate-rises in recent history, the return on bank accounts started to pale in comparison to rates that could be obtained in short term government bonds and money market funds, prompting investors to vote with their feet. Ultimately, the online ease of all modern banking – not just that with a white-glove service – made the decision to defect a low friction one, and customers defected en masse.

Both banks were ill-prepared for a cycle of rising rates – particularly in the case of SVB, which had hoarded low-risk government securities and was then forced to mark them to market – which is even more surprising given how well telegraphed the direction of rates had been. Was it that these institutions were slow to adapt? Or was it that it could not have been possible to adapt – to turn the supertanker that bank business models and capital structures can be – in the course of a year? And if it could not have been possible to adapt, should the Fed have anticipated the effect that their tightening agenda would have had on financial institutions?

There is a fascinating podcast by Tim Harford (otherwise known as the Undercover Economist) which describes the doomed inventions of the inventor Thomas Midgley which involved adding lead to gasoline, inventing CFCs and another wayward invention that ultimately caused his own death. [1]

Like all of these podcasts, this is a riveting tale. The moral of this story was that these dire consequences may have been unintended but were not necessarily unanticipated. At the time, the fact that the consequences were unintended was used to grant him – and the institutions that profited from these inventions – a “pass” to avoid responsibility later. He takes issue with this “pass” and argues that even if consequences are not “intended” but if they could be “anticipated”, the perpetrators should be held accountable.

This echoes something that I have been recently mulling about: the effect of the steep rate rising cycle on banks – clearly, four bank failures were not the intended consequences of the rate hiking cycle. But could they have been anticipated?

Arguably, they could have been. For months, markets and the Fed itself focused on the transmission effect of raising rates – whether consumption was being affected, and whether economic activity was being suitably subdued. This scrutiny seemed to expect real-time results, while in actuality, all monetary tightening has a lagging effect, something that was known. The adage goes that the Fed tightens interest rates until something breaks – and now, the open question is whether these bank failures are the things that have broken? If the rate rising cycle continues – as it is expected to – then clearly, the bank crisis is not (yet) considered sufficient to halt the trajectory.

But let’s look a bit more closely at the fallout from this weekend’s news. With the JP Morgan purchase of First Republic, JP Morgan now controls over 10% of US deposits, but this was permitted by a waiver of the guideline around excessive concentration. It would seem unusual if the same circumstances facing First Republic were not being faced by scores of regional banks around the country. They had built business models around falling rates, and then the music had stopped. All of a sudden, the economy was marching to a different beat and the banks were forced to keep dancing. But the lights were on and it wasn’t as much fun anymore.

All of these banks offer the same ease at moving money in and out and as both the SVB and First Republic showed; the mere hint of trouble can spark an irretrievable loss of trust and confidence by depositors and capital flight. Therefore, for some banks, the fears will be existential, while for others, renewed regulatory scrutiny is likely to result in a more conservative approach to credit extension at the very least.

In the past, banks retreating from providing credit have had a systemically tightening effect on the economy, but in today’s markets, private credit is approaching 20% of credit markets – offering an alternative to bank financing, albeit a pricey one.

So, we do not yet know the impact on markets of the latest banking crisis. One thing is certain though, and that is that we should be very wary of the comforting voices suggesting that the worst is over. These were in many cases the same voices that failed to pivot and adapt to a shifting economic backdrop. And let’s not forget that shareholders in both banks were wiped out despite the fact that both banks ultimately found a safety net. This is already serious collateral damage, and perhaps there is more to come.

As we write, markets remain surprisingly resilient given the magnitude of this week’s headlines. Sometimes, it is true that investors cannot understand large numbers [2] or maybe it is a distraction of other more tangible things like tech and AI.

Source: Morningstar as of 05/01/23

All we do know is that it will likely be an exciting month of May.

Sources:

1: https://timharford.com/2022/11/cautionary-tales-the-inventor-who-almost-ended-the-world/
2: https://www.ft.com/content/1a19fcb9-fe64-4371-8922-02e1a8d768e8 – Subscription to Financial Times needed.

The post From the Ceiling to the Floor appeared first on Moneta Group.

source https://monetagroup.com/blog/from-the-ceiling-to-the-floor/