This week I was joined by Ryan Lemand, the CEO and Co-Founder of Neovision Wealth Management, based out of the Middle East.
We had a very insightful discussion about the recent events that rocked the financial markets, the FOMC meeting, asset allocation and the way forward for the US economy.
First, we discussed the FOMC policy and how the circumstances changed post the fallout of SVB and the turmoil in other regional banks. Furthermore, I chatted about how the expectations of bond markets have drastically altered, and the terminal rate has shifted from 5.71% to less than 5% in just a few days.
Ryan believes that the tightening cycle has probably concluded as there is political pressure on the Fed Chair amid the banking crisis.
He also talked about the recent increase in the Fed’s balance sheet as the loans to banks under BFTP crossed $50 billion. In addition, though the discount usage had a considerable markdown from the highs, there was a strange uptick in the FIMA Repo Facility as most likely the Switzerland CB tapped $60 billion as pressure rose on deposit outflows from Credit Suisse.
Ironically, as Ryan mentioned, 2/3 of the QT has been reversed, and the Fed’s balance sheet is now down by only 2.58% from the peak.
He referred to the Volcker Era and shared that more than 1000 savings and loan institutions, also known as Quasi-banking institutions (now called shadow banking), went bust when Volcker raised rates to more than 20%.
Ryan believes that there will be multiple casualties and 25% of the S&P companies are zombie companies and cannot survive the impending recession.
We are already witnessing carnage in highly leveraged companies. Do watch out for this space, as Ryan mentioned.
While the market believes 75 bps of rate cuts will happen this year, Powell’s base case scenario involves no rate cuts.
Ryan agrees with Powell and says that there will be no rate cuts this year “unless” we get a systematic event or a credit event, and the Fed will resort to other measures as they are doing now in case of idiosyncratic blowups (regional banks)
Ryan believes Q323 or Q124 will be when we see the maximum pain in the banking sector. This is because small banks account for the lion’s share (around 70%) of the total banking sector loans outstanding to the Commercial Real Estate Sector (CRE), leading to an enormous rise in loan loss provisions for the small banks as CRE loans go sour.
Ryan believes there is no soft landing and the US economy will soon undergo a recession.
I mentioned that, as per JPM, around $1.1 trillion of deposits have moved out of the banking system in the last year, roughly 6% of the total $18 trillion deposits.
The astounding fact is that more than half of it was only in the last month post the SVB fallout as panic and fear gripped the US banking system.
The root cause of the deposit flight is the high spread between the Money Market Funds (MMFs) / USTs (>4%) and the bank deposit rates (0.5%). Also, lower bank reserves in small banks are exacerbating the crisis.
He thinks that the outflows from smaller banks will continue, and thus, the regional bank crisis will intensify.
Next, we discussed Europe and the shotgun wedding between Credit Suisse and UBS.
Ryan believes that Swiss regulators declared the viability event as CS was on a weak footing, and as a result, AT1 bondholders faced the shock of their lives.
He also believes there is a risk of contagion in Europe, as visible from a spike in the CDS of several large banks like Deutsche Bank in the last 48 hours.
The Largest AT1/Coco Exposures In Europe: Barclays, Santander and Deutsche Bank.
When I asked about the knee-jerk reaction in AT1 bonds of Asian Banks and the resulting increase in the cost of capital and lower return ratios in the future, Ryan replied that there are a lot of zombie banks and financial institutions which will be unable to survive this dramatic increase in the cost of capital.
Survival Of The Fittest!!
Ryan was the first to call the bear market in the US equities last year in April.
He is pretty optimistic about GCC (Gulf) equities among Emerging Markets.
He believes valuations are still not conducive for US equities and will stay away from them.
He believes that USTs will outperform US Equities.
He is also bullish on high-quality credit and private lending.
I shared the Copper/Gold ratio with him and discussed how Gold had performed well in the recessionary periods.
Ryan always has a small part of his portfolio in Gold and believes that Gold prices are heading to All-Time Highs and will rally more than 20% from heron and reach $2500/ounce.
Ryan thinks that though Chinese equities remain cheap historically, risks are involved as geopolitics take centre stage when investing in China.
He referred to China-Taiwan and South China Sea tensions, Xi’s recent visit to Russia and the subsequent announcement of the new global reserve currency as the potential headwinds which make Chinese equities unattractive.
The Bitcoin holders believe that the current banking crisis in the US is the moment of BTC and point out the recent 70-80% rally from its lows as testimony that it’s the alternate currency.
Ryan confirmed that wealthy institutional investors have started allocating some part of their portfolio to BTC in the Gulf as they consider BTC a safe haven if things go haywire in the banking system.
Though he believes that if infrastructure improves, institutional adoption will massively increase.
Do follow Ryan on Linkedin; his rich experience and expert views will help you to navigate the muddy macro waters we are currently in.
Hope you enjoyed the discussion as much as I enjoyed it!
Disclaimer
This publication and its author is not licensed investment professional. Nothing produced under Marquee Finance by Sagar should be construed as investment advice. Do your own research and contact your financial advisor before making investment decisions.
Episode 2: Ryan Lemand, PhD!