This video, we need to talk about the banking crisis. Not only do we need to talk about the banking crisis and how things are actually unfolding, but what I'd like to do is look at what the Economist tells us about left tail risks along with Goldman Sachs. Now left at tail risks or lack of growth risks. think about it like a bell curve.

Okay, if in the middle, we're growing steady, if on the far right, we are hyperinflating and things are, you know, basically taking off in such a way that we have to get Paul Volckert. The left tail risk is really that uh oh, we have damaged the economy too much, the Federal Reserve has gone too far in hiking and we are going to be in a dirty and deep and dark recession. Well, in this segment, we've got two important pieces to cover one. I'm going to give you the Economist's conclusion on whether or not we are going to face a deep, dark and dirty recession.

The Economist By the way, one of my favorite Publications and I think they are very, very good. Just know if you read The Economist they don't like Donald Trump and lean left. but they have very, very good economic Insight anyway and notice you can still like people who have different political opinions than you. That's very important.

But first, let's look at Goldman Sachs because Goldman Sachs has uh, some some neat look or a nice look. Should I say uh into exactly what's going on with uh with the banking crisis Goldman Sachs uh obviously is uh, a finite massive Financial partner. It's one of the biggest 10 banks that we have in the country. It's also a huge financial partner for uh for for Apple they back the Apple credit card.

So they're getting a lot of data on consumers. So when Goldman Sachs tends to give us some insights I like to pay attention although I don't take everything at face value of what what these individuals like to say because uh, they could be wrong. but then again, everybody can so. but it's good to look at perspective So Speaking of perspective, let's hop into it right now.

there we go. and let's throw up the coupon code. There we go. Okay, fantastic.

So first let's start here on the banking crisis and then we'll talk left tail risk. So this segment was very interesting. They say here further signs of stabilization in the banking system. Although money market funds continue to see largely institutional inflows, the pace declined by about roughly half of that scene in the prior week.

Now we've talked about this before: this idea that the banking crisis is stabilizing. You're actually seeing small Bank deposits level out. In other words, they kind of. These were small Bank deposits, then they fell and now you're kind of getting this leveling of small Bank deposits.

It really feels like the banking crisis has slowed or come to a halt. Goldman Sachs Here tells us that even the pace of money market movements has slowed. We've talked about this yesterday about how discount, borrow or discount window borrowing of the FED has also slowed and that really, the Fed's lending to bridge Banks via the bank term funding program. In other words, by the FED pivot.

although I don't really think that's the FED pivot, it was just really a tool that they deployed is also stable. And what they talk about here is really this this idea that last week we were talking about how this Scramble for dollars had gone Global Remember when I came to you from ski resort talking about how the Fed was injecting liquidity via new daily liquidity swap operations on a Sunday Uh, though we expected it would be one-off. In other words, we're really saying look, we we had this sort of one-off Crisis where everybody was freaking out. but so far every indication of struggles is waning, the demand for the dollar is waning internationally.

This is not to be confused with the Petro dollar. Okay, I'm talking emergency lending dollars This Is This different different topic. Okay, we can talk about The Disappearance of the dollar in a different video. People keep bringing that up, but it's just not that important right now.

Uh, so discount window borrowing Bank term funding facility, money market movement, small Bank movement and a dollar movement all relatively stable. This is actually phenomenal. Uh, Insight right? We want to pay attention to stability in the banking crisis. Uh, and so really, the question then is okay.

Well, how is the banking crisis really going to affect us? So let's see here: North America United States Yield response to near-term news. Potentially asymmetric, Our Baseline view is that credit tightening resulting from the current banking turmoil should be contained. Listen to this. So many people are saying.

That said, our economy is going to go into a deep dark recession because oh my gosh, What about all of the credit tightening? Oh my gosh. Kevin Quickly change the banner to the paid promotion on life insurance. Met Kevin.com Life because everything's going to hell. The reality is no, the reality frankly is no, the the banking crisis is not that big of a deal.

I Was having actually a slight debate about this yesterday, somebody was asking me but Kevin like Big Banks they're going to be forced uh to to like lend less and I'm like, how many times have you gone to a big bank for a loan in real estate? Uh, and if you're not familiar with going to Big banks for loans, you know that you don't go to big banks for loans. You usually go to smaller banks for loans. And then there's a thought. Oh, but they're going to regulate smaller Banks More, right? No Guess what the Biden Administration just talked about.

They talked about how we're not going to punish the big Banks because they've already been punished. well. Then we're going to punish the small, right? No, Because that's not fair to the small. Banks So whom are we going to punish them? Let's punish the medium Banks I Kid you not, you can't make this stuff up.

The Binding Administration Now wants to punish the medium-sized Banks and Titan Landing standards and medium-sized Banks and I Believe what this is all this is going to do is basically turn the medium-sized Banks the more closer to systemically important banks that 250 mil a bill threshold rather and you're going to see the medium Banks become more regulated like the larger Banks so we don't have another. Silicon Valley Bank Which basically just means the smaller banks are going to be like we just had a lot of deposit outflows. You know what that means? We're going to have to get more creative to bring customers back. How about better mortgages, business loans? You want rental property, lines of credit? Again, what could we come up with to bring customers back? They will come up with an endless Suite of lending products and I believe you already know this so this I don't want to sound redundant.

You already know that I am of the belief that we are in a Nike Swoosh style recovery. That will we we now I believe are in the beginning of what will likely be a 10-year bull run. My opinion. But guess what I think is going to add fuel to the fire of that bull run? It is none other than small Bank lending taking off to support a return of deposits to small Banks And they're going to do that by enticing you with with cheap loans and beautiful sexy loans, beautiful curvy delicious loans that you can't get anywhere else.

And and we'll be tempted by those and drawn in by these delicious loans and we'll just have to go back to the small Banks and re-engage relationships. And then you know what the small banks are going to do. They're going to say hey, look, we know you have concerns about the FDIC limits of 250k but you know what? Look, we have made a menu for you. if you open up a discount and this count and discount and this account and this account we could get you up to three million dollars of FDIC coverage.

Just have multiple different business accounts and multiple different LLC accounts and multiple different accounts of businesses and all of your deposits will be protected. In fact, if I was a small bank right now, that's exactly what I would be doing if I was a small Bank I'd be thinking about exactly how I'm going to milk FDIC for everything it's worth. I would start LLC formation within my bank and I would be like dude, let's just create another LLC and then you're going to put 250 into that subsidiary and 215 to that subsidiary of your business. and guess what, We'll basically make it easy and seamless for you to always be FDIC Insurance In the meantime, you want some sweet, sexy, delicious loans, Because guess what? The big and medium Banks ain't going to be able to provide for you.

But we can. It's hell yeah, it's It's like the the game is just hilarious I I Strongly believe in it. and I actually think it's a good thing because it'll contribute to to a bull market. Uh and uh.

and yes. Is risky financing? risky? Absolutely. Uh. But worst case scenarios: Small, non-systemically important Banks Go kaput, And who really cares? Uh, and and the people who bank at those banks will will be enticed to be at those Banks under the promise of FDIC insurance.

and then guess who's really going to pay for the small? Banks Taking risk the medium and big Banks Once again, it's corporate socialism, folks, foreign. so the banking crisis really isn't that bad. But anyway, we'll listen to this: The credit tightening will likely not be large enough to push the economy into recession or Force the FED to ease aggressively to the extent markets appear to be anticipating, even in a probability weighted sense. Why do they talk like this? They talk so complicatedly.

Basically they're saying yo, credit crisis ain't gonna be at bad. Don't worry, people are overblowing credit crisis. That's all they needed to say. But I'll go back to their words even in a proper you know what, It's hoity toity, even at a probability weight.

It's so where we ascribe increased odds to a recessionary outcome. We Believe Yields have declined too much. Who writes this trash? This is basically saying people have fled to bonds. Despite this, we do not think fading this pricing via duration shorts is particularly attractive in the short term.

In other words, uh, don't don't Even though we don't think that, Uh, even though we think that bonds are going to fall and rates are going to go up, it's probably not a good idea to short. So even though we say this, don't bet on it. Uh, By contrast, restoring full confidence and assessing the impact of diminished credit provisioning could take time. This is something we do hear about as well.

The lag that it takes to actually get any kind of credit tightness. This is something we do regularly see is is this idea that it could take potentially six to 12 months. But take a look at this banking turmoils distributional effects on rates. The evolution of the options implied skew of risks to interest rates has largely mirrored our own views, though with some differences in magnitude on the front end.

We believe the recent events significantly reduce the odds of a much higher terminal rate, though our Baseline projection is roughly about 30 bips above the market we incr. but the increase in probability of deep Cuts is is probably a little too optimistic. In other words, investors are clearly much more concerned about recessionary left tail risks and that's why investors are pricing in all of these. Cuts But the reality is, the economy has been incredibly resilient and that's where we have to get into the next pieces on how resilient the economy has been.

I Mean consider what the Economist says JP Morgan has some insight into this as well. Morgan Stanley Uh, Citibank gives us some credit card data. We'll go through all of this quickly here, but what does The Economist tell us The Economist I wrote this down here because I thought it was. It was a fantastic piece here.

Uh, The Economist says the current activity index released by Goldman Sachs is steady. So even through the banking crisis, we haven't actually really seen current activity fall. the purchaser's manager index, which would be a leading indicator of stress at manufacturing steady weekly measures of GDP steady. Is it really? Maybe just that we're too early to see the recession at the moment? Well, Ipsos finds that American confidence in the economy during the banking crisis is actually growing.

Maybe it's rigged, but the Economist is like, why are people so blase and I actually have a very interesting idea about why people are so blase. Potentially because people are like dude, we just went through War Basically with Russia Not only did we go through war with Russia, but we went through a pandemic. We made lots of money during the last two years, so we have a lot of extra stability. More stability than we previously had in 2019.

That's not to say there still isn't poverty and there's still aren't food insecure people which is terrible and the government should do something about that. But in many regards, the government as a whole is relatively incompetent. And and that's like if you work for the government I believe in you as an individual, they don't believe in the entity. totally.

You know, in total, uh, the the sum of its parts are not greater than the parts itself. Anyway, so uh, point being uh yeah. I Think there's actually a really good chance the reason people are so indifferent right now is because they have money to just continue to spend and like the things that are occurring. At this point, we kind of just roll our eyes to it's just like, okay, Putin's yapping again.

All right, we're over it. Another covid variant. All right. Really like you expect me to get like, excited or agitated.

Now you think I'm gonna go sign up for your life insurance just because you mentioned another coveted variant Kevin that's racial thinking. although I would like it if you try checked out Metcaven.com Life I Think it'd be pretty cool. It's a paid promotion, but they're pretty awesome. But anyway.

um really, the resilience is is very, very clear here. Now let's look at what. JP Morgan has to say about this because they have a phenomenal piece on this as well. Let's let's throw them up on screen here.

They're one of these is is the better option. I Gotta label the Stream Yard. Lets you label these in a pretty cool way. That was the Moscow piece we covered I Can't figure it out.

now that's did you know the best example? the Stream Yard right now. Kevin You're screwing it up. There we go. but that's just my fault.

I'm just pushing the wrong buttons. All right here we are. So what does JP Morgan say? Recession forecasts have been moved back modestly and easing expectations have been brought forward. The upshot of these developments is that recession narratives built on the view of private sector fragility are being challenged.

In other words, we're like stronger I actually wrote this I Go. Maybe Covid and War on such War like a dress rehearsal for for Hard Times ahead, right? But anyway, JPMorgan says the private sector fragility. In other words, the the weakness of the private sector. the idea that private sector is weak is really being challenged, and that downbeat, near-term economic forecasts are becoming far more reliant on the emergence of disruptive.

Financial Market Developments In other words, everybody's paying so much attention to this banking crisis. But the reality is, it's just sort of a bearish excuse in terms of, well, the economy is still doing well. So what are the Bears going to talk about? How about a banking crisis now? In Fairness. We did just have a banking crisis, but uh, whoops, you know it wasn't that big of a deal.

You know there was actually a piece from a Goldman Sachs Trader Uh, I didn't save it here actually I saved it on my iPad Let me just read this to you really quick. I Thought this was really interesting bull case for Tech If the leading crunch because of this credit crisis is only 25 to 50 basis points to: GDP Secular growth Technology companies benefit from gross growth scarcity. Okay, in English in English the Goldman Who is this? this is Uh, Goldman Sachs Equity Observations: I'm trying to see who wrote this. Let me go to the end of it.

I Don't think it really matters, but it's a Goldman Sachs Analyst is basically saying, look, if the credit crisis squeezes, uh, the economy by 25 to 50 bips, it probably actually benefits big Tech because they could actually hold up their numbers to the pain of smaller technology companies and they'll be able to more appropriately. Leverage The Gains of Artificial Intelligence Now there are risks that we continue to face some form of wage price spiral and increasing labor costs. but if those risks go away, there is actually a very clear bull case for Tech as the economy continues to be so resilient, especially since Global GDP is still on track for 3.7 percent annualized gains. the U.S is on track for 3.3 percent annualized gains of GDP this quarter.

That's phenomenal that's not even below Trend Growth below Trend growth would be like one percent we're tracking at 3.3 right now. So yeah, maybe it's coming. Maybe the pain is coming. but uh, current strength has been very, very well strong now.

JPMorgan doesn't actually think that current strength is going to stay JPMorgan thinks we are going to end up in a recession towards the end of the year. JP Morgan suggests uh, we've had some upside is surprises on retail sales and I thought this was really incredible. Listen to this. even though JP Morgan is convinced we're going to see a recession.

look what they wrote here. the gain from real consumption did not come from a drawdown in savings as strong gains in the labor market and reduced Energy prices actually helped support real. G Real disposable income growth on an average annualized rate of 6.5 percent over the past two quarters. So even though corporate profits may be moderating, they're far from falling the way a lot of people expect it.

and profit margins remain stable, which really aligns with what we've seen with this idea from Goldman that big Tech could actually win in this pricing. Power style stocks could win in this. We talked about non-bank lenders as well. Actually, we didn't talk about non-bank lenders.

We talked about small Banks Being a little bit more. sort of like. you know, maybe if they're going from wearing like a bathing suit to going to wearing a bikini and a thong, you know, uh, like they got, they gotta turn up the sex appeal a little bit. We expect that to happen.

They're also non-bank lenders. Uh, whether that's private money, whether that's direct lenders for mortgages, they, they're the ones who usually have easy credit for you. So this idea about, you know, uh, significant stress in the in the financial system, It just we're just not seeing it right now. Uh, and uh.

JPMorgan talks a little bit about how these these are not necessarily indicators that are going to push us into a recession even though their base case is still a recession now. JPMorgan Also suggests here that uh, actually this is just sort of a reiteration of what we just talked about. So let's skip that. Let's now look at Morgan Stanley right here.

So Morgan Stanley had a piece on tighter credit and then I want to look at credit card data from City Credit Shocks take a toll on the economy, but they take time to build. Tightening credit conditions should drag down Global growth in the second half of the year, and additional loan growth deceleration will potentially pressure GDP by oh my. Lord a third of a percent or I'm sorry 10 basis points really? Morgan Stanley You think tighter lending standards are going to affect a GDP growth in the fourth quarter by 10 bips? Nobody cares like this is so minor. Even these estimates of and Morgan Stanley's being a bear in this piece, they're not that big of a deal.

Our banking analysts see a meaningful increase in funding costs ahead, so you haven't yet seen them, which will likely lead to tighter lending standards, slower loan growth, and wider loan spreads than previously expected. The the stage is now set for an even sharper deceleration and credit growth over the course of the Year. This is the base case right that we're going to see a loan slowdown potentially of 11 by the fourth quarter of Uh 2023 compared to the fourth quarter of 2022. Uh, but uh, but uh, I'm sorry.

this is, um, this is down from 11 in the fourth quarter. The bear case would bring us to two percent loan growth at the end of 2023 compared with a baseline of four percent loan growth. So in other words, Morgan Stanley's saying things are so bad: loan growth will only be two percent at the end of the year, whereas we want it to be four percent. Even the Bears are starting to sound a little weak.

here. Within GDP the impact of consumption and business investment is roughly equal. They say a quicker resolution. Oh, look at this.

they actually hedge their bearishness. They say risks around the Outlook are large and two-sided. A quicker resolution. of financial system troubles could see the economy remain on solid footing.

Yes, in line with recent payroll prints. On the other hand, a more non-linear tightening of financial conditions from Huron could see larger and more rapid deteriorations of growth in the labor market. Yet if we see more tight loan growth. but we're not sure that we're actually going to see this.

everybody's talking about it. But as NatWest told us last week, the short-term indications are far and few. Between that we're actually seeing any kind of credit stress. You know the most.

The biggest irony is going to be that if we end up going through this cycle and everybody's talking about recession, everybody's talking about this credit stress and it just never ends up happening. Uh, so then we have here all told they see a negative one percentage Point Shock to real GDP Uh, All told, sorry a negative one percentage Point Shocked. credit growth ends up decreasing Real GDP by 20 bips. Okay, so if you're two percent below Trend so you're 40 lower or 40 basis points lower on GDP it's It's relatively a nominal impact.

So Morgan Stanley does go a little bit further on and then I Want to look at credit card data with you all. So at this time our estimates lean heavily on the variation of data in the 1980s and 90s, a time when the banking sector was more prevalent in terms of a source of financing today. Bank Lending only accounts for one third of all private non-credit relative to 50 in the 1980s. Okay, let me translate that to English for a moment.

So in English and this relates to what we talked about at the beginning of the video in a commercial: Jack In English today, we are 20 percentage points less reliant on big banks for Lending than we were careful with the cable there than we were in the 1980s. The last time we actually had to worry about credit shocks. What's up, dude? did you just wake up? You want to come say hi to everyone? Awesome. So so anyway, really, this is not that big of a deal.

Uh, in comparison, a uh, 100 basis point increase of the FED funds rate lowers growth by around 40 basis points. That's fine. Uh, so really, even Morgan Stanley here a bear is hedging this idea. Uh, that, uh, that maybe it's not going to be as terribly as expected.

Uh, so these right here are impacts on GDP Okay, let's go to the let me see if there's anything else that I really want to hit from this Morgan Stanley piece. They do think, uh, more potential layoffs in Q1 24 I Find it interesting that we continue to see a uh delay of when we're actually going to see these layoffs. it just seems like it's always delay delay delay. Everything keeps getting pushed back because the economy continues to be strong.

Uh, However, technically employment is sensitive to credit tightening, but as it was during the Great Recession But remember, the Great Recession was a global or great financial crisis. Are we actually really going through a financial crisis right now? or are we just going through dare I say transitory inflation? We do not expect the actual implications for drop growth to be as significant this time around because this time is different given Staffing Shortages in the economy will likely continue to support labor hoarding this year as economic growth slows Further, we think limited upside in labor force participation will keep the unemployment rate relatively low, somewhat offsetting the significant slowing in jobs we expect. Okay in English Once again, before we get to credit card data, Morgan Stanley is a bear because they think we're going to have a lot of credit tightening which will slow GDP and you'll have low loan growth. However, they're going to hedge that by telling you the big Banks don't even matter that much anymore and maybe people will keep labor hoarding.

which means people keep having money and we're really just going to end up spending through this recession. The biggest risk to all of this is that inflation skyrockets. Inflation. skyrockets were screwed.

Then all these problems come to a halt. Now let's quickly look at credit card data. So what do we have for credit card data? City's credit card data Uh, across 16 sub-sectors not including spending on Services I Read that and I'm like that's stupid. uh showed the weakest spending since April of 2022.

Now that's great for disinflation, but potentially not that great for economic growth. So I want to do I do want to bring that up. They do talk about though, that likely the disruption in the financial sector briefly led to a divot in spending I Noticed in a YouTube ad uh, spend that it seemed like YouTube ad spend did a little bit of this during the banking crisis that there was somewhat of a trough, basically because of the banking crisis. And so it's likely that this, uh, this credit card data and this weakness, uh, may be temporary.

Because of the banking crisis, though, it's something we'll want to pay attention to. I'll show you a few things in here first: I'll show you that there was an acceleration in pet stores up 8.5 percent over the prior week and a decline in e-commerce e-commerce Pure Play Apparel appliances Electronics Home Improvement and Home Furnishings You can see the percentages on screen here, but yesterday you can jack says bye. You're welcome to grab a sandwich from the refrigerator as well the ones with Jack on it. All right.

So um, this is the an important chart over here because in my opinion it just shows you the trajectory and shows you. You know that these negative changes really are something we've seen for a while. Look for example, at Home Improvement. There was really only one week people spent more money on Home Improvement.

it was Christmas of 22. Otherwise, Home Improvement has been negative across the board. You can see that here, you could see that electronic spending has been negative across the board, so not a surprise. You can see that Pet Shops and pet foods and Supply positive for retail spend for for the entire last.

What? On a weekly basis? Four months, three and a half months for three and a half months pets have been positive. Not a single break in that appliance stores have pretty much been negative the entire time, and as a result, overall spend has declined uh, pretty much with the exception of the week of Christmas over the last four months. So there is this potential idea that yes, look at this chart here. This shows you that we could could end up seeing that earnings Crush that Morgan Stanley's Mike Wilson keeps talking about.

But look at how this chart how beautiful this is. This shows you normal growth in 2019. Then you get the coveted pandemic and you get this crazy v-shaped recovery here where basically, uh, retail sales fell around 10.7 percent. Uh, and and then they started increasing.

Then the stimulus money hit. When the stimulus money hit. Boy, that's really what spending skyrocketed the different rounds of stimulus. We really saw spending balloon on a weekly basis.

uh, you know, averaged out over here by month in Uh in 2021 and now we're getting into that recessionary territory. So yes, In fairness, retail sales are going down. but it is entirely possible that the Market's already priced in some form of Eps declines for some stocks. and even if as long as inflation goes away, if we can look through some EPS declines which are expected to show up, the market does not necessarily have to decline solely because of Eps declines because a lot of those may end up being priced in.

And we see this leading indicator, these leading indicators from a mile away. So uh, very, very interesting. I'm a big fan of that. uh and uh yeah, look I mean for me again every single day.

What do I do I read reports on the banking crisis, on consumers consumption, on what's going on at Uh at companies earnings calls, and I'm trying to understand uh, where the risks are. We've been saying for I would say over six to eight months now, there is no wage price spiral, and uh, and the inflationary data is fantastic, but that doesn't seem to be the big concern now. now. the big concern seems to be the recession.

uh, well, banking crisis briefly. but so far that's turning out to be a nothing burger and the idea that bears are amplifying the banking crisis as a reason for why spending in EPS is going to decline more is the only reasonable argument that's left. Uh, and and it is a reasonable argument I Will not say the Bears do not have a point. they have a point.

EPS could decline substantially more meaningfully than we expect. but so far, uh with with uh, labor hoarding and uh, the reports that we're getting on earnings, things aren't looking that terrible. Uh, so I'm very, very excited for the future. I'm very optimistic.

Maybe I'm too optimistic, but that's my thought, so hopefully that's very insightful for you on the banking.