Will The Fed Get Their Soft Landing? | Weekly Round Up

Episode Summary

Executive Summary: A wide-ranging macro discussion centered on bank stress, liquidity, and whether the economy is headed for recession or soft landing. The speakers compared the Franklin National Bank collapse to Silicon Valley Bank, debated the role of Eurodollars and Federal Reserve backstops, assessed Bank of America’s unrealized losses, and argued that falling inflation, resilient housing, and ongoing fiscal stimulus have kept the economy firmer than many expected.

Main Topics: Bank failures, duration mismatch, and Eurodollar precedent (Priority: 5/5): The conversation used Franklin National Bank’s 1974 collapse to explain how offshore dollar funding, foreign branches, and Fed support created an early precedent for supporting Eurodollar-related banking stress, with parallels to Silicon Valley Bank. Current banking-system health and credit tightening (Priority: 5/5): Jack argued the system is not facing systemic runs but rather a price problem: deposits are more expensive, margins are squeezed, and some regional banks are pulling back on lending, which could act like an additional rate hike. Liquidity, quantitative tightening, and the case for renewed QE (Priority: 4/5): The hosts discussed Michael Howell’s thesis that liquidity can rise even amid QT because of fiscal deficits, falling volatility, reverse repo drawdowns, and Fed emergency lending, while debating whether true QE will eventually be required. Economic resilience and the soft-landing debate (Priority: 5/5): They debated whether recent strength reflects a real soft landing or merely a delayed recession. The discussion highlighted improving GDP, falling inflation, consumer sentiment, and the possibility that prior recession calls were premature. Housing and the white-collar vs. broader economy divide (Priority: 4/5): The episode emphasized that housing has been unusually resilient despite higher mortgage rates, and that finance/tech/media observers may overstate recession risk because their sectors have felt the slowdown more acutely than the broader labor market. Bank lending facilities and funding mechanics (Priority: 4/5): They compared the Fed’s discount window and the Bank Term Funding Program, explaining why BTFP became the preferred emergency facility for banks and how rate dynamics have shifted its attractiveness over time. LIBOR’s end and the transition to SOFR (Priority: 3/5): The discussion closed with the death of LIBOR and why SOFR is a cleaner, more transparent benchmark, even if it removes the stress-time cushion banks used to get from LIBOR rising during market strain.

Key Arguments: Franklin National Bank and Silicon Valley Bank both illustrate duration mismatch: short funding against long-duration assets creates fragility, especially when deposit flight begins. The Fed’s willingness to support foreign branches in the Eurodollar system established an important precedent, and the treatment of SVB’s overseas depositors may signal a retreat from that norm. Bank of America’s huge unrealized bond losses are better understood as balance-sheet management and deposit-flow assumptions than as a speculative bet in the hedge-fund sense. The banking system is under margin pressure, but the biggest issue today is pricing of deposits and loans, not classic liquidity runs. Regional banks are tightening credit because they lost deposits and are substituting higher-cost funding such as CDs, brokered deposits, the Federal Home Loan Bank, or Fed facilities. Michael Howell’s liquidity framework suggests liquidity can improve even during QT because of fiscal deficits, lower volatility, and reserve drainage from the reverse repo facility. A true return to sustained QE would likely require overt Fed bond buying; technical liquidity improvements alone may not be enough to keep risk assets supported. The economy looks stronger than recession callers expected because inflation has fallen sharply, boosting real incomes, spending, and sentiment. Housing has not cracked as expected; locked-in low mortgage rates limit supply, pushing buyers toward new homes and supporting builders and construction materials. The white-collar recession narrative is real in finance, tech, media, and crypto, but those sectors are too small to define the whole labor market. SOFR is a more honest benchmark than LIBOR because it is grounded in secured overnight financing rather than bank survey estimates and manipulation-prone quotes.

Data Points: Franklin National Bank bailout request: Over $1 billion - The bank reportedly urged the Fed to support it during distress in the 1970s. Michel Sindona fraud amount: $30 million - He was said to have defrauded Franklin National Bank. Bank of America unrealized losses: $100 billion+ / $113 billion - Discussion of paper losses from bond holdings and interest-rate moves. Unrealized losses as share of tangible book: 60% - The transcript cited this as the scale of the Bank of America mark-to-market issue. Silicon Valley Bank deposit behavior: Deposits tripled - Used to illustrate how fast growth created instability. PacWest stock move: From about $50 to under $2, then around $8 - Example of regional bank equity volatility during the banking stress. PacWest loan sale: About $2 billion face value - Illustrated banks selling loans amid stress and private buyers stepping in. Fed outstanding lending to banks: About $100 billion - Approximate support through the discount window and Bank Term Funding Program. Federal Home Loan Bank advances: Over $1 trillion - Described as a much larger source of bank funding than the Fed. Federal Reserve rate hikes: 500 basis points - Used in the discussion of liquidity tightening and higher-for-longer rates. S&P 500 level: Close to 4,500 - Referenced as evidence that technical liquidity remains supportive of risk assets. Apple market capitalization: Close to $3 trillion - Mentioned as an example of strong equity market valuations amid liquidity debate. NVIDIA market capitalization: Over $1 trillion - Cited alongside other large-cap winners from the liquidity environment. U.S. deficit: $2 trillion per year - Presented as a major driver of Treasury issuance and liquidity dynamics. GDP Q1 2023: 2.0% annualized - Real GDP growth was revised up, supporting the soft-landing case. GDP growth pattern: Three positive quarters in a row - Q4 2022 and Q1 2023 were cited as evidence of economic resilience. PCE inflation: 4.1% - Used to explain why real GDP growth was lower than nominal growth. Nominal growth cited: 6.1% - Illustrated the impact of falling inflation on real GDP and spending power. Corporate profits, Q4 2022 YoY: -1.6% - Evidence that earnings were weaker than the market recovery suggested. Corporate profits, Q1 2023 YoY: -2.8% - Showed continued earnings contraction despite resilient markets. Projected corporate profits, Q2 2023: -5.1% - Expected decline mentioned ahead of earnings season. Projected corporate profits, Q4 2023: +11% - Analysts had raised estimates in line with rising equity prices. Consumer sentiment impact: Inflation fell from 9% to 5% - Used to explain why sentiment and spending improved as inflation cooled. Bank Term Funding Program rate: 5.41% - Compared with the discount window as the preferred Fed facility shifted. Discount window rate: 5.25% - Referenced as the alternative emergency borrowing rate.

Pivotal Quotes: "This could be seen as the US sort of withdrawing support from this very critical monetary system in the form of the euro dollar system." — Mike Ippolito: On the significance of how SVB’s overseas deposit treatment may alter precedent for offshore dollar funding support. "I mean, it is a price issue. It is the fact that, oh, they can get money. They can get deposits to fund their loans. They're going to be fine, but they're going to be paying 4% on those loans. They're going to be paying 5% on their loans. So their net interest margin is getting squished." — Jack Farrell: Explaining the current banking problem as margin pressure rather than a classic liquidity collapse. "The economy has been a lot stronger than people in those groups. And I obviously would include myself would say so." — Jack Farrell: On the idea that finance, tech, media, and crypto participants may have a more pessimistic view than the broader public.

Implications: Markets may remain supported by fiscal deficits, falling inflation, and housing resilience, but regional banks face ongoing pressure from higher funding costs. The broader economy may avoid recession longer than expected, even if credit tightens further.