Ed Yardeni and David Rosenberg are two of the most respected and widely followed strategists out there.
Yardeni, President of Yardeni Research, and Rosenberg, founder of Rosenberg Research & Associates, provide subscription-based research and their data-driven views are often utilized by money managers as point, counterpoint inputs to each other to give them a balance of information and opinion in order to help make their investment decisions.
Generally speaking, Yardeni tends to have relatively optimistic impressions of the economy and financial markets while Rosenberg sometimes jokes about the perception of him as a perma-bear.
Amid the bank-induced turmoil, and to get a deeper understanding of what is transpiring in the economy, credit conditions and financial markets, we have brief excerpts from some of Messrs. Yardeni (see below for our interview with him) and Rosenberg’s writings from this week.
One from Yardeni’s Quick Takes and one from a Rosenberg Financial Post article.
by Ed Yardeni
With the benefit of hindsight, the era of free money under Fed Chairs Ben Bernanke, Janet Yellen, and Jerome Powell created a big bubble in the banks’ bond portfolios.
The Treasury contributed to the bubble by issuing lots of bonds that the banks purchased at much higher prices.
The inverted yield curve has been predicting since last summer that something will break in the financial system as a result of the Fed’s abrupt pivoting away from free money.
Silicon Valley Bank is that broken something that has raised concern about small community and regional banks.
In his news conference this week, Powell said,
“Our banking system is sound and resilient, with strong capital and liquidity.
We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools as needed to keep it safe and sound.”
Yellen needs to sing from the same hymn book.
When she was Fed Chair, we often referred to her as the Fairy Godmother of the bull market.
She didn’t play that role this week.
Finally, we would feel better if both Yellen and Powell wouldn’t feel the need to assure us that the banking system is sound.
Even prior to this current round of turbulence, the Fed senior loan officer survey showed that a net 61.1 per cent of banks had been tightening their credit guidelines in commercial real estate loans (CRE) (in the first quarter) compared to a net 16 per cent that were easing their standards a year ago.
That is a massive shift.
The other times in the past when credit guidelines for commercial real estate were at least this tight were in third quarter of 2020, the first quarter of 2008 to the second quarter of 2009, and the third and fourth quarters of 1990.
All credit crunches. All recessions.
As for business credit — commercial and industrial loans — the small banks have really been tightening the reins here: net tightening of loan standards of 43.8 per cent this quarter compared with a net 9.4 per cent balance of banks easing a year ago.
Again, we last saw this in the second and third quarter of 2020, second quarter of 2008 and first quarter of 2009, the first quarter of 2001 and the second quarter of 1990.
No soft landings in these periods, I hate to tell you.
Lightning never strikes twice, but what is a consistent pattern following every Fed tightening cycle that inverts the yield curve for many months is a financial crisis somewhere in the system.
As such, we are merely living through history.
That the big banks end up being just fine does not mean the economy escapes a recession or that we don’t endure a broad credit contraction and default cycle.
This ends with the weak banks being recapitalized and that can take on many forms (equity stakes, mergers) and government policy that instils confidence (so far lacking), and, of course, the Fed will be compelled at some point to cut rates and return the yield curve to its more normal positive slope.