Jamie Dimon, JP Morgan Chase’s CEO and Tufts alumnus, appearing this morning on Bloomberg from Paris said that the largest regional banks with which he speaks are all in good financial shape. They, however, are exposed to the sudden and instant messaging through Twitter or other forums from hedge fund gurus who - by casting aspersions and having front run a large short position - can easily create a bank run and put them out of business. In order to prevent this, Dimon said that the US government and SEC need to act immediately to ban short-selling of banks and to impose strict penalties for violations.
The Bloomberg interview, which is quite good, is here.
While I am ordinarily not a fan of interfering with the free market and limiting short selling, temporary impositions on short-selling have been used around the world at times of extreme volatility to calm the markets.
It is also clear that short-sellers played a significant role – with some benefitting tremendously and the government’s (taxpayer’s) expense – in the quick demise of Silicon Valley Bank.
Against the backdrop of the debt ceiling, banks are still considered at risk due to their interest rate exposure, even after the US Treasury and Janet Yellen have created extraordinary backstop measures. Hedge funds, in many cases, are now so large and powerful and could continue to use social media to instantly take down midsize and large banks. Extaordinary times call for extraordinary measures. Dimon therefore is correct that – albeit an extreme measure – banning short selling of banks has become a proper way to protect banks.
Additionally, I want to address some of the theories being circulated on social media that the US banking system can do fine with far fewer banks and credit unions than it has. Europe and Japan with far fewer banks are often cited as examples here.
The reality is that the US financial system is far more vigorous and robust than any other due to its many different players each vying to fill a niche is certain markets. Especially now, small and medium sized banks are necessary to fill the void that has caused the US to fall behind much of Europe in solar and wind energy. Chase, Citibank, Wells Fargo and others all have extraordinary exposure to the carbon industry and cannot reasonably be expected to lead the necessary (and now cost-effective) transformation of our economy to a carbon-free one.
The Federal Reserve has raised its benchmark Fed Funds target to a 5.00% to 5.25% target at its May meeting that concluded today. Today’s move marks the Fed’s 10th hike since the beginning of 2022 at a 0 to 0.25% target, as the Fed fights the inflation that it created itself by leaving rates too low for too long in order to inject liquidity into the market through out the pandemic.
The Fed said that inflation remains elevated and it remains highly sensitive to inflationary risk. The Fed’s statement said that it is still determining whether additional policy firming will be appropriate.
Those analysts who have been hoping for a pivot in the Fed’s policy are again disappointed. Chair Jay Powell indicates that he remains prepared to raise rates as high as necessary and to keep them there as long as necessary in order to fight inflation.
The idea that inflation is some sort of a passing post-pandemic feature of the economy is increasingly looking less likely. Many economists believe that shortages in supply, especially the supply of labor, in the post-pandemic world will continue to be manifest in the form of upwards pricing pressure for an indefinite period.
Most recently, the end-of-April extreme heat wave in Portugal and Spain, where temperatures reached over 40 Celsius (over 100 degrees Fahrenheit) and resulted in price increases all across Europe of key economic staples (wheat, corn, etc.) has finally lead many economists to predict that the climate catastrophe that we are now entering globally will cause such a disruption in agricultural powerhouse regions like Spain that we could see inflation for generations.
Under any case, it seems early to assume that we have inflation under control and naïve to assume that it will remain under control for long.
The Federal Reserve acted today to increase the Fed Funds rate to a target of 4.75% to 5.00%, and said that additional policy firming may be appropriate.
Many observers wanted the Fed to suspend raising rates, in light of the collapse two weeks ago of Silicon Valley Bank and Signature Bank and resulting banking turmoil. Chairman Powell and the committee decided that today’s action was consistent with its dual mandate of controlling inflation and maintaining maximum employment.
The Fed observed that these recent banking developments were likely to result in tighter credit conditions weighing on the economy, including business fixed investment and housing. The impact is unknown, and possibly deflationary over time and, therefore, the Fed may not need to move as high as Chairman Powell had predicted just weeks ago.
The Fed is still targeting an end of year Fed funds rate of 5.10%, implying one more 25 basis point hike and then a pause. In his news conference, Powell indicated at least twice that market expectations about cuts in the Fed funds rate before the end of 2023 are unlikely. He stated they would not be consistent with the Fed’s resolve to maintain rates at an elevated level until it has seen meaningful progress in its fight to get inflation back to a 2% target, measured by the Consumer Price Index (CPI) and core CPI. These indicators remain in the 5.50% to 6% range.
During his conference, Powell noted that distress in the market has been felt by only a small handful of banks and the FDIC has created ample liquidity to address this condition. The banking system overall is strong and resilient. But when queried, Powell did not give much comfort to depositors looking for more certainty above FDIC limits, or to bank shareholders. And, regional banks came off quickly and sharply after the conference ended.
