With the stock market whipsawed over concerns about a banking crisis, there’s been a lot of debate on Wall Street and in Washington about the actions that the Federal Reserve and the Treasury have taken since the failures of Silicon Valley Bank and Signature Bank. Two phrases are being thrown around on CNBC and elsewhere: “moral hazard” and “hawkish pause.” Here’s what they mean and how these four words are shaping this evolving situation. We hope Club members can take what they learn here to better inform their understanding of the issues dominating the market and how they may impact their portfolios. moral hazard (noun) — lack of reason to try to avoid risk when protected from its consequences, for example by insurance Oxford Learner’s Dictionary of Academic English Regarding the appropriateness of backing deposits, there are those that argue that FDIC insurance is up to $250,000, premiums paid by the banks for that insurance have been based on that amount and we cannot simply increase the payout now that the risks have increased. If you underinsure your home, you don’t get to demand a larger payout once the house has burned down, you get what you paid for so to speak. On the other hand, there is the view that depositors should not pay the price for mismanagement. If we were to fail to guarantee all deposits it would spark an even larger bank runs as depositors either look to spread deposits over the $250,000 limit across multiple banks or simply decide to withdraw everything and deposit at an institution that is implicitly backed by the government due to its “too big to fail” status. That’s the debate. Thus far, in the current banking upheaval, the Treasury and the Fed have aimed to reassure depositors, while making clear they’re not rescuing bank shareholders. Treasury Secretary Janet Yellen told lawmakers Thursday: “Our banking system remains sound and Americans can feel confident that their deposits will be there when they need them.” We’re not trying to determine what’s right in this situation — but rather, look at how the current path of backing deposits might create a “moral hazard” that allows companies and consumers to take risks they might not have otherwise knowing the government will be there to catch them if they fall. After all, if they take the increased risk and it pays off it means a payday for them and shareholders; and if they take it and lose, well no worries, the government is going to pay back the depositors anyway. Now that’s not to say there isn’t a middle ground, a scenario in which deposits are 100% guaranteed nationwide and regulations are put in place to protect against any resulting moral hazard. Notably, while writing this, we learned that several banks, including Club holdings Wells Fargo (WFC) and Morgan Stanley (MS), will deposit a total of $30 billion in troubled First Republic Bank (FRC). The deposit, which is being led by the best banks in the world, run by management teams that understand the baking business better than anyone, will be uninsured. This is an interesting solution that does address the concern of moral hazard — at least at First Republic Bank — while providing needed liquidity. FCR management is going to think twice before taking on unwarranted risk while under close scrutiny from the best bankers in the world, all of whom now have a very serious interest in First Republic’s solvency. I don’t know what the feds gonna do next week but I just wanna be the first to say ‘hawkish pause.’ CNBC’s Steve Liesman’s tweet Concerns about the banking system and signs of some cooler inflation data are giving the Fed some cover to take a measured approach to further interest rate hikes. According to the CME FedWatch tool, the market puts more than 80% odds on a second straight meeting of increasing rates by a quarter-point. On one hand, there’s a view that sustained Fed hikes created the conditions that led to the two bank failures just days apart, which just so happened to be the second- and third-biggest in U.S. history. There’s normally an estimated lag of 12 to 18 months between a monetary policy action and its impact being felt in the economy. However, it’s been sped up following the fall of SVB and Signature. While the odds of no hike are small, there’s an argument for what CNBC’s Steve Liesman called a “hawkish pause,” referring to pausing rate hikes but making it clear the tightening cycle is not over yet. Playing into this thinking: Bank failures are deflationary, and they’re doing some of the work for the Fed. That’s because they have a chilling effect on lending requirements. If money is harder to borrow then less of it will flow into and circulate through the economy and that will help bring down prices. No need to rush with another hike hold proponents would say. On the other hand, recent cooler inflation data are still way higher than the Fed’s 2% target. The consumer price index for February rose 6% annually, while unemployment remains near record lows. Given the Fed’s dual mandate to ensure price stability and maximize unemployment, the argument for a rate hike is relatively straightforward — keep going until inflation reaches more sustainable levels. The bullish market reaction following Thursday’s half-point interest rate hike by the European Central Bank (EBC) might make the Fed more comfortable to raise rates at next week’s policy meeting. The other concern supporters of a hike call out is that failure to do so would signal nervousness on the part of the Fed — the thinking being that if they don’t hike now, it’s not because they are seeing something we don’t. Arguably, post-meeting commentary from Fed Chairman Jerome Powell will be just as important as the decision on rates. Two possible scenarios: a rate hike with more dovish commentary or the “hawkish pause.” (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
With the stock market whipsawed over concerns about a banking crisis, there’s been a lot of debate on Wall Street and in Washington about the actions that the Federal Reserve and the Treasury have taken since the failures of Silicon Valley Bank and Signature Bank. Two phrases are being thrown around on CNBC and elsewhere: “moral hazard” and “hawkish pause.” Here’s what they mean and how these four words are shaping this evolving situation. We hope Club members can take what they learn here to better inform their understanding of the issues dominating the market and how they may impact their portfolios.
Source: Finance - cnbc.com
