Not So Invincible? Giant Credit Crunch Could Still Be On Its Way
Hard landing, soft landing… What really matters is the monetary policy lag, argues Julian Brigden
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Picture the classic demise of the GoldenEye Bond villain, hacker Boris Grishenko.
In the usual climactic ending to any 007 flick, the villain’s base is blowing up. The Russian computer programmer flinches as equipment in the satellite control room collapses in flames surrounding him.
Discovering that, yet again, he has miraculously survived another life-threatening encounter, he stands victorious and confidently exclaims his tagline, “I am invincible!”
And then some canisters of liquid nitrogen explode and instantly freeze him to death.
On a recent On the Margin podcast, Macro Intelligence 2 Partners co-founder Julian Brigden compares the current financial situation to the doomed villain’s over-confident outlook. “This whole concept about this ‘no landing’ or ‘soft landing’ stuff” looks eerily familiar.
Just as the over-confident character celebrated his survival, people looked at the “400-odd basis points of rate hikes,” he says, “they looked at an equity market that was still up… at the consumer that was still strong… at business earnings that were still robust and they screamed, ‘I am invincible!’”
“They forget that monetary policy works with lag — and it is coming.”
We’re not done yet
Brigden expects that markets have not yet seen the full impact of the SVB collapse and the subsequent contagion. Crypto-friendly banking services like SVB, Silvergate and Signature met their demise at least in part due to the rapid rise in Federal Reserve rate hikes and the subsequent balance sheet blowup, leaving the crypto banking segment in a shaky state.
Some crypto experts suspect the recent collapse was not so incidental, but instead was a carefully orchestrated pinpoint attack on crypto-friendly banks in particular. The purportedly coordinated attack on the industry is often referred to as Chokepoint 2.0 — a follow-up to government-directed attacks against the sector that took place a decade prior.
But the credit crunch phenomenon extends far beyond crypto banking to every sector of the market, Brigden argues. “It is a classic saying,” he says, “‘monetary policy is a blunt tool.’ It hits everything, every node, right? It’s going to ripple all the way through the economy.”
“Only probably beginning next month,” he says “will we have some indication of what’s really happened.”
This is not a new phenomenon, Brigden says. “Credit cycles are what leads the economic cycle.”
“This idea that we weren’t going to get a credit cycle was just ridiculous. That’s how monetary policy works.”
“I’m sorry,” Brigden says, “but I’m in the hard landing camp. I find it hard to believe anything but that.”
In an effort to avoid impact, the Federal Reserve continues to provide increasing liquidity to the system. “The Fed has created a crack addict to whom they are beholden and they are the supplier – and they just boosted the crack,” he says.
The boost is pumping inflation despite market fundamentals, Brigden says. “There’s no greater proof that fundamentals don’t really count when it comes to asset prices than COVID, right?”
“We were literally going to end the world. We were all going to die, right? And asset prices went up!” Brigden exclaims.
“Why? Because they printed a shitload of money!”
Banking system is a con at the best of times
The banking system, Brigden suggests, “is a con trick at the best of times,” wherein the bank fractionally lends more money than they can provide back to depositors at once.
“You hope that not everyone comes and asks for their money back at the same time, because you definitively can’t provide that money.”
What dictates the amount of money a bank can lend is the profitability of the lending, Brigden explains. Banks make their money by borrowing at a lower rate and then lending out at a higher rate “further down the curve.”
“When the central bank starts to raise those short term rates and the curve starts to flatten,” Brigden explains, the banks are finally crunched by a lack of lending profitability, which only worsens when the curve inverts.
At that point, Brigden explains, “it’s very hard for banks to lend money profitably. If they can borrow at half a percent and lend it at three, great. But when they’re paying three and lending it at three and a half, the profit margin isn’t there.”
Thus, a liquid nitrogen lending freeze ensues. “The risk-reward is no longer there. And that’s what tightens the credit cycle.”
Accompanying the credit crunch, a sudden hysteria-fueled rush to withdraw deposits can push banks to the precipice, with already unstable banks like SVB and Silvergate as examples, falling off the insolvency cliff. Their implosion created a crisis for crypto-focused companies who held significant uninsured deposits in the regional banks.
But Brigden insists, “This was already happening even before SVB. SVB was just the cherry on the cake.”
A couple weeks ago, Brigden observes, “we had all that hand-wringing about the big drop in bank lending, but there were leading indicators that lead by at least six to nine months that told you that was coming.”
“And it’s still coming.”
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