Wednesday's Market Minute: Awaiting The Recession That's Already Here

Panic surrounding the Tech Bank Collapse really put into perspective the degree to which many market participants are still missing the obvious. There is a lot of hyperventilating about what the “next shoe to drop” will be, and there’s nothing wrong with being on high alert in volatile times, but the biggest threat to investors and the economy may be the simplest: a deflating speculative bubble and the inflation left in its wake. 

As I argued last week, all of us, should have events like what happened at Silicon Valley Bank in our framework. Some very specifically did. We warned about this sector on multiple occasions over the past three months as becoming uniquely susceptible to the inevitable stress of an inverted yield curve. Portfolio concentration and leverage in high-correlation, effectively long-duration assets was the entire story of last year!

It looks like the market is cordoning off the specifically at-risk banks based on regional proximity and client overlap with those California banks. More stable, diversified peers are absorbing the money flow and there is likely more consolidation in the sector coming. Sounds pretty natural.

Will there be more bankruptcies? Possibly. They’ve been piling up for more than a year. When it happens in groups like banks, it understandably induces a bit more of a panic than when an unprofitable SPAC everyone knew was speculative closes down. This is the process of getting the economy onto a more stable path, and it is with plentiful historical precedent. As much as doomsayers would like to turn this situation into a redux of 2008, the best analog is still some hybrid of the dot-com bust and the early 80s fallout from Fed policy.

People the past week have been fretting over the incoming crash in commercial real estate. I’m sorry, but if markets haven’t adequately prepared for the most obvious and permanent structural economic shift from COVID (remote work), we could potentially be in the thick of the bubble.

If you’re losing sleep over when the recession will start and how bad it will be, consider this: it may have already begun! And so far it’s not that bad – after all, Olive Garden stock is at highs! Hopefully by now it’s becoming obvious how silly the “recession” semantics debate was six months ago. Consecutive GDP declines is a good yardstick because it reflects rate of change, which is what drives markets and sentiment. Things are far from awful, but indeed likely to worsen before they improve.

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