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SVB Stops Fed Hikes

Monday, 13 March, 2023.

Good morning,

Just as the world catches up with our long held Federal Reserve target of 6.5%, from left field, comes a tectonic shift that could well mean we have already seen the very last Federal reserve rate hike.

Momentarily supporting stocks, but potentially lethal to the US dollar.

Such is the sentiment shock and very real flow through the financial system of both the SVB event, and the immediate contagion risk that is already happening across other regional banks, that even the big banks could suffer significant losses.

The Federal Reserve does not exist in a bubble. It will not blindly continue raising rates as major cracks appear in the surface of the financial system. 

There is no way of know how deep those fissures run and this will not be known by the time of the upcoming FOMC. It is highly likely the Federal Reserve will at least pause at this next meeting. So as to further assess the ripple impact of the collapse of SVB. 

Just to make sure, those ripples, are not in fact yet another Tsunami about to hit the US economy.

Such a view on immediate interest rate movements bu the Fed could see some stock market buying, but this would be a mistake. As credit generally is likely to get somewhat more expensive even without the Fed’s help. 

The bigger point however, is that who really wants to be long stocks at risk of another GFC style situation beginning to unfold. Stocks could rally at first, but it may not last.

This is not a GFC situation, but it does have similarities.

When the first large mortgage firm went bust and laid off 3,000 employees, everyone thought this was an isolated event. It was in fact the early warning of the coming Crisis. It was the first link in a very big chain to break, and the pressure on the system was still growing. It was a financial market sector that gave way to implode the rest of the system. Right now, we have a specific financial sector that is clearly in trouble.

Then, there’re the linkages with the crypto space. 

Mainstream banking may well rue the day they began to embrace crypto as a real and diversified asset class. It is a house of cards ready for collapse, and is so fragile it is vulnerable to all and any developments in any other part of the financial system. 

The continued demise of crypto is a separate yet added weight to the events currently unfolding.

The US dollar could be badly exposed. 

A cessation of rate rises and a weakening US financial sector may finally be too much to the idea of the Greenback remaining the safe-haven currency. Especially, when the problems are of its own making.

The US dollar is backed by the world’s largest economy that is facing risk of default on its debt, massive trade and fiscal deficits, and rampant inflation with manufacturing and housing industry recessions already underway. While investing heavily in the conflict in Ukraine. This is a lot for a currency to bare.

The only thing that has been holding the US dollar up was the prospect of ever higher rate settings by the Federal Reserve?

If that rug is suddenly pulled from under the dollar, just as it enters a financial crisis of some order and degree, then we may, right now, be witnessing an important historic high point for the US dollar. 

Clifford Bennett

Clifford Bennett + Chief Economist

We see things and make forecasts before anyone else.

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