Is The US Sliding Toward Another Credit Crisis, Part II: Five Key Things to Watch

This is Part II of a conversation between Jeff Black, VP of Content and Education at Tornado, and guest Eric Rosen, recorded in April 2023. Eric’s a former Head of Credit Trading at JP Morgan and now authors “The Rosen Report.” All views Eric expresses are his own. They are not investment recommendations or advice.

ER on investment strategy: We are finally getting paid in short-dated risk in government bonds after years of zero rates. Take advantage of it. I would not have any significant capital at regional banks today.

I don’t feel the banking crisis is over and do not feel the US government can back every bank deposit. Systemically important institutions are where I have cash. I am keeping less in deposits and more in securities. Front-end US Treasuries, money market funds or muni bonds rather than in deposits.

Five key things to watch:

Consumer data: Given crashing savings rate, maxed out credit cards and wages not keeping pace with inflation, how much will the consumer retract in the next 12 months? The consumer drives the US economy and accounts for almost 70% of GDP. The retail data last week was weaker. Is this the beginning of something more?

Bank lending: Higher deposit costs, lower deposit base and the need to be less levered with better ratios will reduce lending capacity. New loans will be harder to come by, more expensive and lower loan-to-values than a year ago. There will be realized losses in the next 24 months on office, retail, business hotels.

Earnings: Earnings for S&P are forecast to be -7.5% in the 1st quarter. How do they look the rest of the year given the banking issues, higher rates, and slowing consumers?

Rates: On a positive note, inflation is coming down faster given the banking crisis and open supply chains. The question is what does the Fed do? The market still anticipates the Fed will cut rates prior to year-end. The Fed only cuts rates if the economy is truly slowing.

Inflation: I called peak inflation late last summer and stand by my comments. Again, this is largely a Fed mistake coupled with the government overspending. Does China coming online and oil supply disruption coupled with labor issues keep inflation sticky? Does the pullback by banks and struggling consumers have inflation continuing to slow?

Long-term Issues: My longer-term fear is around growing deficits, the fading reliance on the US dollar and the impact of higher debt and interest rate levels coupled with an aging population. Non-discretionary spending around education, healthcare, defense and debt service will crowd out almost all other spending. As a country, we need to be more judicious with our capital and reign in spending.

You can find the original audio / blog, and a range of others, at Tornado.com

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