This is Not 2008 Redux

Stocks opened sharply lower this morning, reversing yesterday’s gains. As of 1pm EST the Dow was down over 700 points, but then began to climb, finally closing down 279 points. In the wake of Silicon Valley Bank’s failure—and ugly news from European bank Credit Suisse—traders are trying to discount emerging risks to the banking system.

Credit Suisse is known as banker to the world’s rich, but in recent years its performance has been challenged. The bank was convicted of involvement in several international crimes (i.e. helping Bulgarian drug dealers launder money). And last week the Securities & Exchange Commission (SEC) started asking questions about the company’s annual report, which forced a delay in its publication. An internal investigation then revealed accounting irregularities resulting from “material weaknesses in the financial reporting controls.” This, of all times, is perhaps the worst moment to make such an announcement. The stock—which, to be clear, has been in a down-trend since 2007—fell 18% today.

On the surface, this this situation may look like the 2008 Credit Crisis. But it is very different. First, this is not a credit contagion. In other words, assets on bank balance sheets aren’t questionable (or “toxic”) as in 2008. Silicon Valley Bank’s problem was duration, buying long-term vs. short-term bonds. And most analysts agree that Credit Suisse’s balance sheet is solid; its government regulator says the bank meets all capital & liquidity requirements. Second, the regulatory response has been night-and-day different compared with 2008. The Fed/Treasury/FDIC quickly announced they would backstop all Silicon Valley depositors, and funds were available this past Monday. This morning we’re hearing that the Swiss National Bank will provide liquidity to Credit Suisse to avert failure.

While not as serious as 2008, these events have clearly riled markets. We’re seeing wild daily swings driven by alternating recession fears and soft landing hopes. As CNBC reporter Mike Santolli said this morning, “I think we’re just trading at shadows out there. We’re just sort of flinching because maybe there’s something there.” The promise of government bailouts certainly goes a long way toward mitigating risk. But even so, banks are now likely to focus less on loan growth and more on beefing up balance sheets. And that means slower economic growth.

Today we got economic data suggesting that inflation and the economy are slowing a bit. Wholesale inflation fell significantly more than expected last month. The Producer Price Index (PPI) decelerated to an annual rate of 4.6% and January’s reading was revised down to 5.0%. Core PPI (excluding food & energy) slowed to 4.4%. Wholesale inflation has been trending lower for a year now. Separately, a gauge of manufacturing business activity in the New York area fell for the fourth straight month. And finally, US retail sales fell .4% last month, reversing some of January’s huge gain. On a year-over-year basis sales decelerated to a 5.4% rate. That’s still considered healthy, but it’s also the lowest annual rate since the end of 2020.