Financial Markets at Risk: Impending Giant Credit Crunch Threatens Investor Confidence
During a recent On the Margin podcast, Julian Brigden, co-founder of Macro Intelligence 2 Partners, drew parallels between the current financial situation and a fictional character's overconfidence.
He points out that the belief in a ‘no landing’ or ‘soft landing’ is reminiscent of the character’s overconfidence in his survival.
Brigden’s Warning about Complacency in Financial Markets
Brigden believes people have become complacent, citing the 400 basis points of rate hikes, a strong equity market, and robust business earnings that made people feel invincible.
However, Brigden warns that monetary policy works with a lag and will soon take effect.
Brigden predicts that the markets have not yet felt the full impact of the collapse of SVB and subsequent contagion.
The impact of the collapse of SVB on the crypto banking sector
Banks that were supportive of cryptocurrencies, such as SVB, Silvergate, and Signature, experienced a significant downturn partly due to the sudden increase in Federal Reserve interest rates, resulting in a massive imbalance in their financial statements.
Brigden believes the credit crunch issue is not limited to the crypto banking sector but has affected all market segments. This has put the crypto banking industry in a vulnerable position. It remains to be seen next month whether the true extent of the situation will be revealed.
He says that credit cycles lead the economic cycle and that the idea of not having a credit cycle was ridiculous. Despite the Federal Reserve’s efforts to avoid an impact, Brigden argues that the boost is pumping inflation, and there is no greater proof that fundamentals do not count when it comes to asset prices than COVID.
Brigden’s View on Credit Cycles and the Banking System
Brigden argues that the banking system operates deceptively by lending out more money than it has on hand to repay depositors. When the central bank raises short-term interest rates, and the yield curve flattens, banks struggle to lend money profitably, which decreases their profit margin.
This, in turn, triggers a credit cycle that tightens credit and can lead to a freeze in lending. Banks are deterred from taking on the risk due to insufficient reward, thus tightening the credit cycle.
Brigden believes that the collapse of SVB was already happening before it occurred and that there were leading indicators that predicted it. He warns that it’s still coming.