The Bears Eat Goldilocks
We’ve been living in a stock market fairy tale.
Stubbornly strong employment data even as interest rates push 5% has encouraged some strategist-types to suggest that the Fed might engineer a “no-landing” outcome – a “goldilocks” ending where inflation magically falls without any serious damage done to the economy, where everything comes out ju-u-u-st right…
Over the weekend, Morgan Stanley strategist Michael Wilson wrote
“This is exactly how bear markets end – an unforeseen catalyst that is obvious in hindsight forces market participants to acknowledge what has been right in front of them the entire time…”
I’ll call this “unforeseen catalyst” a bank crisis, for lack of a better word.
And it just started, barely two weeks ago. Before Silicon Valley Bank, the Fed had us all looking at interest rates and inflation. And we mostly fell for the sleight of hand, transfixed by the inflation data in one hand, totally ignoring the bank crisis concealed in the other…
Well, another weekend, another bank disaster.
By now I’m sure you know that last week’s attempt to save Credit Suisse (NYSE: CS) failed miserably. UBS (NYSE: UBS) came to the rescue, doling out $3.3 billion to buy Credit Suisse.
That means the stock is still trading, and any insane investors that held the stock while the bank circled the drain can actually recoup some of their investment.
It will not work out so well for the equally-insane bond holders that held, and even added to their Credit Suisse holdings. Some $17 billion worth of bonds are getting wiped out. Poof.
The Saudi National Bank is reportedly losing $1 billion after it started buying Credit Suisse bonds 15 weeks ago. Bloomberg says that the Qatar Investment Authority is probably losing even more than that…
Apparently distressed debt isn’t the goldmine that some investors say it is…
Anyway…
The stock market is higher this morning, in what I guess should be called a “relief rally.” And while I suppose it might make sense to be a little relieved that the Credit Suisse problem is “fixed,” this is absolutely not the time to let down your guard…
Even with some recent conflicting inflation data, investors have been holding out hope that the Fed was nearing the end of the rate hikes that have weighed on the stock market for over a year.
But now, we might as well dial the clock back and start the countdown over. Because the bond and stock markets are about to do what the Fed has been mostly unable to accomplish since it started hiking rates: slow U.S. economic growth to a standstill, or worse.
THIS, ladies and gents, is how a bear market ends. With investors’ faith that we might still get a fairy-tale ending – that the Fed might manage a soft landing, that corporate profits might hold up, and that we might emerge on other side without any panic – are replaced by the certainty that the witch will cook the children, that the bears will gorge themselves on a Goldilocks souffle…
It doesn’t matter what the Fed does with interest rates on Wednesday. Hike by 50 basis points or not at all, the real threat has now emerged. The liquidity that the Fed was trying to mop up with a paper towel is now getting suctioned out of the market with an industrial strength shop vac.
Lending standards will rise to the point that no loans will be available. CAPEX spending will dry up and corporate profits will fall. Companies will stop hiring altogether. Recession is now virtually inevitable…
I hate to just leave you with all that, but I’m visiting my kids in New Orleans, and I’ve got char-grilled oysters to eat. I’ll talk to you on Wednesday…
Briton Ryle
Chief Investment Strategist
Pro Trader Today
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