An Update On The "March Banking Panic" | Weekly Round Up

Episode Summary

Executive Summary: The episode opens with a hiring announcement for a new crypto-builder podcast, then shifts into a detailed macro discussion on bank funding stress, regional bank deposit flows, Federal Reserve liquidity facilities, consumer spending, and recession risk. Jack Farley argues the banking panic has eased, but lending standards are tightening and the economy likely faces slower growth and possible recession, while rate-cut expectations were too aggressive.

Main Topics: Blockworks hiring announcement for Lightspeed (Priority: 3/5): Mike Ippolito promotes a new Blockworks Podcast Network show focused on builders, engineers, and crypto technology, and invites applications for two podcast host roles. Fed liquidity facilities and banking plumbing (Priority: 5/5): The hosts compare the long-running discount window with the newer Bank Term Funding Program (BTFP), emphasizing how the BTFP lets banks borrow against assets at par and is being used as emergency support. Regional bank deposit stress and recovery (Priority: 5/5): They analyze Western Alliance and similar regional banks, discussing the vicious cycle of falling stock prices and deposit outflows, then noting that deposit flight appears to have slowed or reversed at some institutions. Consumer spending and bank earnings (Priority: 4/5): The discussion reviews bank earnings data showing resilient spending and relatively contained credit losses, though growth is moderating and inflation-adjusted gains are less impressive. Macro outlook: recession, rates, and market positioning (Priority: 5/5): The speakers debate whether the Fed is near the end of its hiking cycle, whether the economy will enter recession, and how equity markets may react as positioning becomes more cautious. China reopening and commodity demand (Priority: 3/5): Farley argues China’s reopening and pent-up demand could support travel and commodities, creating cross-currents against U.S. slowdown fears. Short-term funding market and debt ceiling risk (Priority: 4/5): The one-month Treasury bill’s unusually low yield relative to other short-term rates is flagged as a possible sign of safe-collateral demand, though it may be driven by debt-ceiling concerns.

Key Arguments: The BTFP is preferable to the discount window because banks can borrow against collateral at face value for up to a year, with delayed disclosure, making it a stronger emergency backstop. A rising Fed balance sheet can signal easing, but in context it often reflects stress in the financial system rather than a clean bullish macro signal. Western Alliance-style deposit outflows created a self-reinforcing stock/deposit negative loop, but the latest data suggests those outflows have stalled or reversed at some banks. Bank earnings indicate consumer spending remains positive, yet adjusted for inflation the strength is less dramatic and credit losses are still relatively low from historically depressed levels. The strongest pain ahead may be in private markets, especially commercial real estate and private credit, where refinancing and valuation pressures are building. The U.S. economy appears likely to slow meaningfully and may enter recession, even if timing is uncertain; the Fed is probably near the end of its hiking cycle but not necessarily ready to cut soon. China’s reopening could create a meaningful demand impulse for travel and commodities, offsetting some U.S. weakness. The short end of the Treasury market may be signaling stress or safe-haven demand, but the debt ceiling could be distorting the signal. Markets were too aggressive in pricing rapid Fed cuts after the SVB collapse; those cuts were priced out as conditions stabilized. Even if recession arrives, market timing is difficult; being broadly cautious does not automatically mean immediate downside or that all bearish expectations should be front-run.

Data Points: Discount window age: Over 100 years - Fed’s long-standing primary credit facility used by banks for borrowing BTFP announcement date: March 12, 2023 - Program created two days after Silicon Valley Bank collapsed BTFP maturity: Up to 1 year - Banks can borrow longer-term versus the discount window Fed support balance sheet: Well over $100 billion - Combined assets outstanding through Fed emergency lending facilities Western Alliance deposit outflow: Stalled and later reversed into inflow - Example of regional bank deposit stabilization after panic Bank of America spending growth: Travel and entertainment +16%, food +8%, retail +7% YoY - Q1 2023 spending versus Q1 2022, cited as nominal growth Inflation-adjusted spending: Services net zero; retail -7%; food around flat to +1% - Illustrates that nominal spending gains are less impressive after inflation Bank of America net charge-offs: About one-third of 2019 levels - Shows credit losses remain relatively low JP Morgan deposits: Increased in Q1 - Large-bank deposit inflows during regional bank stress U.S. terminal rate peak: As high as 5.8% - Market’s peak expected Fed funds rate after the banking panic UK CPI: 10.1% - Illustrates persistent inflation in the United Kingdom UK housing and household services inflation: 26% to 27% - Major contributor to UK inflation pressure UK food inflation: 19% - Another sign of sticky inflation across the UK UK restaurants inflation: 11% - Services inflation remained elevated in the UK One-month Treasury bill spread: Over 100 bps below comparable short-term rates at one point - Unusually low yield relative to short-term policy rates, suggesting strong demand for safe collateral Fed meetings/short-term view: May hike likely; June possible but uncertain - Farley’s view on the end of the hiking cycle Consumer/household labor backdrop: Historically low unemployment rate - Used to argue the labor market still has room to weaken before reaching recessionary norms

Pivotal Quotes: "quantitative teasing" — Concordia on Twitter (referenced by Mike Ippolito and Jack Farley): Used to describe the possibility that the Fed’s balance-sheet support may be temporary and not full-blown QE "I'm not bearish. I'm cautious." — Jack Farley: Summarizes his more nuanced market stance as he grows more skeptical but avoids outright doom calls "the short term funding market is sending us a signal that is on the spectrum of a total nothing burger to a doomsday clock" — Jack Farley: Describes the one-month Treasury bill dislocation as ambiguous but potentially worrisome

Implications: Listeners should expect tighter credit, slower growth, and continued market volatility even if bank panic has eased. The Fed may be near its hiking end, but recession risk and funding-market distortions remain key watchpoints.