Here Are the Signs of a Slow-Moving Credit Crunch

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

So Joe, we are recording this on April 19th, and we are firmly in the middle of bank earning season. And so far, it seems pretty good.

Joe Weisenthal (0:26)

You always know it's gonna be a good one when we have to state the date upfront. That's a sign, it's like, okay, we're right in the thick of it.

Tracy Alloway (0:33)

That stuff is happening.

Joe Weisenthal (0:34)

We're talking about news, it's going on right now. This is not some big theoretical thing where we're gonna be talking about some ancient economic theory from 100 years ago. This is right now.

Tracy Alloway (0:44)

That's right. So, obviously we had the banking crisis in March and we have seen some signs of distress in the financial system start to fade since then. So things like borrowing from the discount window that has gone down from the peak that we saw at the end of last month. And then of course, if you'd been listening to Odd Lots before then, you would have known that discount lending was ticking up for months even before March.

But the point is that if you look behind some of these headlines, headlines about bank earnings, headlines about discount borrowing starting to come down, some signs of strain beginning to evaporate, if you actually look into the guts of the financial system, there are still some issues and some maybe suggestions that there are more problems to come.

Joe Weisenthal (1:37)

Right, I think that's a really good summary. Early March with the Silicon Valley Bank implosion and some other concerns, that was like fears of financial crisis and it faded pretty quickly, like those acute fears.

But then there are the other questions is like, okay, well, it's like, all right, the banking system maybe is still chugging along, but what does it mean for credit and how much of a mark will it leave on the sort of broader economy in general that we had this moment and that all these sort of banks saw what can happen if they get on the wrong side of certain trends?

Tracy Alloway (2:11)

Totally, and banks are obviously big players in a lot of different markets, but a big one would have to be bonds, all sorts of different types of bonds. So everything from treasuries to T-bills to commercial mortgage-backed securities to residential mortgage-backed securities. And so the question is, if there's more regulatory scrutiny on all of these things, if there's more concern about interest rate risk and duration exposure, is the appetite, the bank appetite for those assets still going to be there? And even though we've seen some of the crisis headlines fade away, we know that use of the Fed's reverse repo facility, for instance, the RRP is still pretty high, which means a lot of money is still moving out of banks into money market funds, and they're parking that at the Fed.

So the major disaster headlines may be gone, but there is still this evidence of strains in the background, worries about a credit crunch, a possible collateral crunch. Of course, those two things are interrelated.

So we need to talk about all this. We need to get deep into the guts of the financial system and talk about what's going on.

And I'm very pleased to say we have the perfect guest. We are going to be speaking with Ben Emons. He is a portfolio manager over at NewEdge Wealth. And before that, for a long time, he was a portfolio manager at Pimco. I believe it sat fairly close to Bill Gross at the time, which must have been an interesting experience, to put it mildly. But someone who can talk to us about, you know, what is going on in this market? What do banks actually mean for bonds? Are we seeing signs of an unfolding credit crunch and collateral issues? So Ben, thank you so much for coming on Odd Lots.

Ben Emons (3:51)

Hi Tracy, hi Joe. It's great to be here. Thank you.

Tracy Alloway (3:54)

I'm glad we could finally get you on.

One thing I was wondering, just as I was sort of doing some of the prep for this episode, how do we actually measure credit in the banking system? And what do we look at for signs of strains? I'm aware, for instance, that suddenly everyone has woken up to the Fed's H8 data, which hasn't gotten a lot of attention for a long time, but what are we looking at here?

Ben Emons (4:17)

Yeah, the H8 data, the arcane data, if you think about it, right? It's like, you know, you wouldn't really pay attention to it unless you were in the 1980s, a trader then, and standing at the Xerox fax machine, eagerly seeing the money supply numbers coming off, and then making an assessment, okay, the Fed is doing this or the Fed is doing that. And that's a little bit what we're dealing with today too, though, and you would say that that data now is important because this term called bank credit that's in there, there's 17 trillion or unchanged currently, that accounts for all the loans and securities that the banks have on their books. And that's ultimately how they extend credit or contract it.