The Liquidity Squeeze Is the Elephant in the room

As we step into the year 2023, the finance market continues to grapple with liquidity issues that have persisted since the outbreak of the COVID-19 pandemic. Liquidity is often referred to as the lifeblood of financial markets as it allows investors to buy and sell assets with ease, and helps businesses to access financing to keep their operations afloat. The ongoing liquidity issues have led to significant disruptions in the market, which have far-reaching impacts on investors, private equity, companies that need credit, and the government.

Investors have been hit hard by the liquidity crunch, with many struggling to find buyers for their assets or cash out equities. This has led to a drop in stock prices, which has directly impacted the value of investment portfolios. The reduced liquidity has also made it challenging for investors to rebalance their portfolios, selling off assets in one area and investing in others that may provide a better return.

The liquidity crisis is putting significant pressure on private equity firms that rely on financing to buy companies or grow their assets. The shortage of liquidity makes it challenging for these firms to get the funding they need to carry out their investment strategies, leading to a reduction in deal-making activity.

Companies that need credit are also feeling the squeeze as lenders tighten their standards and reduce the availability of financing. Companies that are already vulnerable are hit the hardest, and are finding it difficult to access the funding needed to keep the lights on or expand their business. As a result, many companies are being forced to cut costs, reduce staff or even shut down operations entirely.

Finally, governments are not immune to the market disruptions caused by the liquidity crisis. Central banks have had to take action to inject liquidity into the market by lowering interest rates. While this may help stimulate the economy in the short term, has lead to long-term negative effects like current historic inflation.

In conclusion, the ongoing liquidity issues in the finance market are having significant impacts on investors, private equity, companies that need credit and the government. The potential consequences include a reduction in investment activity, a slowing of economic growth, and an increase in bankruptcies. While the solutions to these issues may be complex, it is essential to address the liquidity crisis to ensure that the finance market can function effectively and that economies can continue to grow. The flip-side is stagflation and multi decade uncertainty.

Could SVB be the Beginning of Another Banking Collapse?

The demise of SVB and Signature should be a cause for concern. Members of the WHP team were heavily involved in the 2008 banking crisis advising the UK government. Like the SVB saga, 2008 started slowly. Banks knew much more about the problem than they initially let on. By the time it reached the desk of then-Prime Minister, Gordon Brown, it was a full-on public panic.

Much of what is currently being done around SVB was done in 2008 to try and stop the crash which ultimately came. Guaranteed deposits or arm twisting of banks that were seen to be strong to either prop up or buy the failing institutions. HSBC bought the European assets of SVB on Sunday night, President Biden was forced to get up early, according to his previous press secretary, and blame the mess on Trump but reassure the nation that everything is under control.

It remains to be seen if SVB, which was heavily bought into the Biden ESG and green agenda is a victim of too much government or an increasingly expensive interest environment or both. There is little doubt they didn’t have their eye on risk. The Chief Risk Officer left a number of months back and was never replaced. Again, another story to peruse. Why did she or he leave?

Banking Contaigens are Created in Labs run by Governments

Banking systems are a lot like humans. They can be bombarded by small relatively insignificant events and come through the other side relatively unscathed. Infrequently contagions occur that can be catastrophic to capital markets. The foundation for the 2008 crash was laid in 1995 by the Clinton White House. That year they passed the Community Reinvestment Act. The Act would target as discrimination, banks which would not lend to customers they considered a credit risk. Government action could cost banks millions in suits and fines, so the doors to homeownership through easy money were thrown wide open.

Billions were lost most banks needed a government bailout and history was written, change promised by the very culprits who created the last crash, and I don’t mean the banks. If anything banks were useful idiots in the whole process.

To allow themselves to bail out all of the failing banks, the government decided on Quantitive Easing, a nice way of saying they would flood the financial markets with billions of new financial assets.

To try and control the flow of these funds the Federal Reserve sold the “new money” to financial institutions like SVB. The intention was that they would lend the money in a structured way. The stock market’s frothy valuation tells us that there was significantly more money in the system than had been intended. As do the prices of other commodities from cars to homes.

Has President Bodén’s team by throttling back on the real driver of the American dream, energy, insuring a huge spike in cost while at the same time propping up inefficient alternatives, created a perfect storm? Let’s hope the pangolin has not escaped the lab and that SVB and Signature are just a speed bump and not a full-blown financial pandemic. Either way, we won’t have long to wait.