2008, Happiness, Pain and Recovery

By Jeff Kelly on March 24, 2023

We all have years in our lives that stand out in our memory. Some of the years hold special places in our hearts. I’ll always remember the year I met Sandra, the years the girls were born, the year Ryan was adopted and the year we bought our first house. Other years generate vivid memories of a different kind. Pain, death, stress, and tears. 2004 was such a year for me. In the same year my dad, my father-in-law, and a client I’d spoken to everyday for 20 years all died in a 3-month period. Days were long and stressful. I had trouble focusing on anything but my self-pity. I wasn’t there when my dad died. I thought I should have been but wasn’t…it haunted me.

Other years generated happiness and catastrophe. My mom died a few months before I graduated from high school. I heard a song the other day and I was back there. Funny how music can take you to a place and time. Young, crushed and just trying to get through the day. Getting up in the morning was a chore. But life was changing, opportunities were arising, and self-pity and sadness couldn’t carry the day. There was a contrast each day between the joy of thinking about college and the terror of starting college particularly without my biggest supporter around.

My experience isn’t unique, you’ve all been there. Some had days, weeks, and years much worse than anything I’ve ever experienced. All these experiences helped me grow up, get stronger and be better prepared to face adversity. It all helped prepare me for 2008.

For our family 2008 was always going to be a mixed year. Our oldest was graduating from high school and heading off to college 2,000 miles from home. Happy for her accomplishments, excited she had been accepted to the college of her choice, worried and anxious about life without her always in our days. This was our oldest. They can be the glue in a family. Then the S&P 500 was down 15% in the 1^st few weeks of the year. Bear Stearns was vaporized. My work life had challenges I’d never thought could occur.

S&P 500 2008 – Declines and Rallies galore.

Thus began the saga of that wild, painful, scary, and eventful year. We don’t know if 2023 is morphing into a 2008 scenario. History doesn’t repeat but it does rhyme. The situation looks eerily similar. A banking crisis, inept federal reserve, inflation above 5%, declining corporate earnings, a real estate bubble, all present then and all present now.

The differences are stark also. The large U.S. banks don’t have the toxic debt on their balance sheets they did in 2008. At least given what we know. The other thing causing acceleration in 2008 was AIG. AIG had guaranteed many of the worthless bonds through a variety of instruments. As of now we don’t have that accelerant present.

The chart above shows the many rallies and declines that occurred in 2008. It wasn’t straight down. The largest portion of the decline for the broad average was in the fall after many, many warning signs. By August 31, 2008, the following things had occurred:

• Bear Stearns collapsed and bought by JP Morgan.
• Federal Reserve lowered rates with CPI north of 5%.
• The Fed lowered rates by .75% in one meeting.
• Fed created the term auction facility – giving banks liquidity.
• Fannie Mae and Freddie Mac shares had declined to single digits.
• IndyMac bank failed. It was a 32-billion-dollar bank. Roughly the size of SVB and Signature bank combined.
• FDIC raised deposit insurance to 250,000 from 100,000.
• Treasury bailed out Fannie Mae and Freddie Mac.
• The all-time high in the S&P 500 was 1,576. It was at 1,440 in May and 1,313 in August. It bottomed at 666 in March of 2009.
• Countrywide Credit had been acquired by Bank of America after an epic decline.

There was ample time to prepare and be ready for what happened later in the year. We aren’t writing this to scare anyone or worry people unnecessarily. But we can’t put our head in the sand either. Forces currently at work can produce outcomes outside of those we’d like to see.

What works in this environment? Just like 2008, high quality fixed income can carry the day. We’ve mentioned this often and continue to see the potential in this area. The Fed can fight it all they want but they will be cutting rates later this year. These cuts will further the case for bonds.

Markets need periods of stress to set up for better times. Despite what those buying the big Nasdaq name this week think, there is no free lunch. Employment will roll over soon and big tech will feel the pain along with the rest of the market. Out of these times of stress come great things. Bargains are created, valuations become attractive, and the cycle begins again.

None of us know the future but having lived through the past we can map out a successful approach to the road ahead. We look forward to the weeks and months ahead with excitement and anticipation. Ahead lies great opportunity and compelling chances to practice our craft.

It wasn’t a “dovish” hike.

It was a hike ignorant of history and full of hubris. Our job is to avoid the poop on the head.

CHARTS FROM THE WEEK PAST

Bank failure have disappeared over the past 15 years.

They are now making a strong come back.

Countrywide Financial 2007-2008.

Silvergate Capital Corp. 2022-2023.

History doesn’t repeat it rhymes.

Mortgages in America are in very fine shape.

One of the reasons it’s not 2008 but could be painful none the less.

Deposits on the move, out of banks.

High market return emanates from lower not higher levels of Consumer confidence.

A clear positive.

In the 2-month rally after Bear Stearns collapse and purchase by JP Morgan the VIX (volatility index) declined to 14.8.

Many fewer U.S. Banks today.

Will the big get even bigger?

Banks hold lots of U.S. treasuries and Mortgage-Backed Securities.

These fluctuate with interest rates. Do you think they bought more or less when Powell was saying in late 2021 he wouldn’t raise rates until at least 2024?

The press has focused on the deposit risk for small banks.

The real risk is the outsized share of commercial real estate loans they hold. Many of these loans are in trouble.

Small banks share of these loans has increased over the years since the financial crisis.

Different, yes, I’d say so.

15:00:10 *YELLEN: NOT CONSIDERING BROAD INCREASE IN DEPOSIT INSURANCE

15:00:49 *POWELL: FED OFFICIALS `JUST DON’T’ SEE RATE CUTS THIS YEAR

Markets didn’t like this verbiage.

China exporting to and importing from Russia.

The concentration of two stocks in an index has never been higher.

Tighter lending standards is not an economic positive.

CPI will likely head lower.

Powell is a putz (technical term).

Investors perceive more risk.

More distribution signals = more trouble.

More stocks declining than advancing with the Nasdaq moving higher isn’t sustainable.

Not a surprise but spreads widened last week, narrowed Monday & Tuesday, and widen again as reality set in.

Rents are starting to move lower.

This is a big deal because of how inflation is calculated.

Leading economic indicators continue to decline.

Time makes a big difference.

Zero energy stocks above their 50-day moving average.

Source: Bespoke, 03/17/2023

Stress levels are building but like most thing it expands and contracts.

It is expanding to higher levels and then contracting less.

I can “obviously” say, Private credit is not the place to be right now.

It’s not just me who thinks the Fed has errored here.

Chris Whalen is widely respected.

“With deposits cratering, SVB is forced to begin selling the HTM (hold to maturity) portfolio to obtain liquidity.  This action will push the unrealized losses from the HTM portfolio onto the income statement and impair SVB’s equity. Hence the need to raise equity capital. They never stood a chance”. Source: Mike Green

Banks hold large quantities of Treasury and Agency securities.

Tier one capital ratios show what an outlier SVB was.

Source: Bloomberg, 03/17/2023

“Banks with less than $250 billion in assets account for 50% of US commercial and industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending, and 45% of consumer lending.” Source: Danielle DiMartino Booth

Lots of Hubris at SVB.

Not a surprise.

WEEKEND HOMEWORK

Sanofi to cut U.S. price of its most prescribed insulin by 78% – THEY didn’t do this because they wanted to, they did it because people demanded it.

Sanofi to cut US price of its most-prescribed insulin by 78%

Putin critic dies of “drowning”- don’t they all die of drowning or poisons?

Russian Pop Star Who Criticized Putin Found Dead After Drowning

Don’t say gay, say convict!

‘Don’t Say Gay’ lawmaker pleads guilty to COVID relief fraud

Auren has been in the business of data for decades. He runs us through his matrix of data business models, how companies like Bloomberg keep getting better, and the characteristics of great founders in the data industry.

Invest Like the Best | Auren Hoffman – A Deep Dive on Data

Another good one.

It’s Our Moral Obligation to Make Data More Accessible

What a story!

When veteran war reporter Benjamin Hall woke up in Kyiv on the morning of March 14, 2022, he had no idea that, within hours, Russian bombs would nearly end his life. As a journalist for Fox News, Hall had worked in dangerous war zones like Syria and Afghanistan, but with three young daughters at home, life on the edge was supposed to be a thing of the past. Yet when Russia viciously attacked Ukraine in February 2022, Hall quickly volunteered to go. A few weeks later, while on assignment, Hall and his crew were blown up in a Russian strike. With Hall himself gravely injured and stuck in Kyiv, it was unclear if he would make it out alive.

A big NCAA Tournament weekend. My bracket went down long ago. Relax and enjoy the time. Spring is coming on the calendar and later this year in the markets. Let’s make it a great weekend. Call a friend, hug a loved one, make the days count!