'Very Big Mistake': Cathie Wood Warns Banking Crisis Could Bleed Into Earnings

Ark Investment Management CEO Cathie Wood repeated her criticism of the Federal Reserve for its policy actions and also delved into the ongoing banking crisis and how it would play out.

Another Crisis On Horizon: The liquidity crisis is beginning to get under control, as seen by the improvement in the credit default swaps of regional banks, Wood said in a Twitter Spaces hosted by Pensions & Investment’s editor-in-chief Jennifer Ablan on Tuesday.

She also noted that the SPDR S&P Regional Banking ETF KRE, an exchange-traded fund tracking regional banks, has also improved. It’s more of a bottoming out, and there is unlikely to be a “V-shaped” recovery because “we are moving from the liquidity crisis to solvency crisis,” she added.

The liquidity crisis that resulted from bank runs is under control, and banks still have problems with solvency, the fund manager. That stems mainly from an interest-rate mismatch, she said.

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Earnings Hit Foreseen: From a liquidity point of view, the "hole is plugged," but this is going to bleed out over to earnings, Wood said. To the extent that banks continue to lose deposits and it precipitates into a situation, where there the banking system is in deposit outflow mode, they need to tap the facility that the Federal Reserve and the Federal Deposit Insurance Corporation have put together, she said.

These banks will be tapping funds at roughly 4.5% or possibly higher due to the Fed’s recent rate hike, whereas the yield on their held maturity securities varies with institutions, she said.

Wood noted that the now-defunct Silicon Valley Bank’s yield was 1.6% and Charles Schwab Corp.’s SCHW was likely around 1.7%.

The net interest margins of banks will turn into net interest losses, which will feed into earnings and so there will be a slow bleed, she said. The fund manager also noted that the M2 money supply turned flat and then negative in January and February.

“I don't see why it is going to turn around, especially with the Fed continuing to move interest rates up. So I do believe that there has been a very big mistake,” Wood said. She underlined the fact there were warnings such as the credit default swap bumps since January 2022 and the inversion in the yield curve that started with it.

“The Fed is looking at lagging indicators and it does not seem to be populated by people who have had experience in the market. That has to be my only conclusion,” she added.

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