I’ve yet to come across anyone who has a better way of describing current monetary policy than Louis Gave from Gavekal.  Paraphrasing Louis, ‘the Fed is dynamite fishing, they’ve lit the fuse, thrown the stick of TNT in the water, we’ve heard the bang and the fish are floating to the surface’.  

Put simply, rate rises of the speed and scale we have seen over the last 12 months put pressure on the financial system.  This pressure quickly translates into risk appetite and quickly percolates through the banking and credit system increasing the cost of capital   Businesses that are heavily dependent on credit or that may be perceived to have misallocated capital come under pressure.  No one quite knows what this process will reveal as no one quite knows what lies beneath the surface.

When such ‘squeezes’ occur, commentators immediately focus on banks, looking for obvious signs of fragility that might lead to reflexive systemic effects.  In this case, it didn’t take long to find a few causes for concern.   The problems at Credit Suisse were well documented and shouldn’t surprise anyone.  The problems at SVB are surprising, but were perhaps only to be expected given their business model.  Perhaps the biggest ‘surprise’ to surface is the headline data that is now appearing on US regional banks and their lending into the US real estate sector, particularly as it seems to carry distinct echoes of 2006-2008 and appears to have been catalysed by marked reduction in US regulatory oversight in 2018 and may have been turbo-charged using the capital markets.  

Central banks and their finance ministries appear to have a good grasp of the risk that these events pose.  They have moved immediately to ensure that there is ample liquidity on offer to those that need it and have acted quickly to stem the systemic risks associated with capital flight.   This problem may have been ‘Born in the USA’ but given events in Switzerland everyone seems to have collectively recognised that viral instability cannot be allowed to spread.  The PTSD from the last crisis serves a purpose.