Blog | CB Investment Management

Next Shoes To Drop. Credit Crunch Then Growth Speed Limit.

The current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come. Essentially, we may be moving, as I read somewhere, from a virtuous cycle to a vicious cycle.”
Jamie Dimon, CEO JPMorgan

In 2008 it was about banks being “Too Big To Fail.” Today’s Banking Crisis is about “Too Many To Fail.” Tomorrow it will be about “Too Many to Save.””
Gordon Long

Global Economy’s “Speed Limit” Set to Fall to Three-Decade Low.”
World Bank

It can only be concluded that the adjustment to market reality is likely to be more violent than anything seen in the 1970s.
Alisdair Mcleod

With the regional bank ETF trading at its 52 week lows, it is clear that the banking crisis is far from over, and this is also the view of Jamie Dimon. This is a major problem for the broader economy as the chart below shows that the S&P 500 Index generally performs poorly when banks are trading poorly. In the current banking crisis there are more shoes to drop.

Credit Crunch

The banks still have a credit crunch ahead. Charles Hugh Smith describes the process that has to play out.

The reality is credit bubbles always pop, as the expansion of borrowing eventually exceeds the income and collateral of marginal borrowers and this tsunami of cash eventually pours into marginal high-risk speculative ventures that go bust.

There is no way to thread the needle so credit-asset bubbles never pop. Yet here we are, watching the global Everything Bubble finally start collapsing, guaranteeing the collapse of collateral and all the debt issued on that collateral, and the rabble is arguing about what policy tweaks are needed to reinflate the bubble and save the global economy from bankruptcy.

Sorry, but global bankruptcy is already baked in. Too much debt has been piled on phantom collateral and income streams derived from bubble assets rising (for example, capital gains, development taxes, etc.).

The asymmetry is now so extreme that even a modest decline in asset valuations/collateral due to a garden-variety business-cycle recession of tightening financial conditions will trigger the collapse of The Everything Bubble and the mountain of global debt resting on the wind-blown sands of phantom collateral.

Growth Crisis

The banking crisis also does not have an easy solution. In the past it has been possible to get a substantial growth boost from policy, even if it was temporary. However, policy is still wrestling with too high inflation and so remains significantly constrained from easing too much to encourage growth. Policy is also now handicapped by a legacy of explosive debt accumulation, and constantly declining long term growth.

Increasingly, it looks like the real Fed Funds rate may not reach positive levels over the current cycle for the first time ever! Does that mean that maintaining the current system requires negative real interest rates indefinitely?

Think about what that could mean for investment allocation.

The World Bank is now seeing this issue in its latest reasearch “Global Economy’s “Speed Limit” Set to Fall to Three-Decade Low“. World Bank

Investors are clinging on to Mega Cap “growth” stocks.

Extreme uncorrelated sector moves within the S&P 500 benchmark continue to make the index much less useful as a barometer of market performance. The chart below shows that just eight stocks reversed the S&P500 Q1 return from negative to positive.

Meanwhile, the bank index fell around 25%, just since Powell’s testimony on March 6th.

In recent Weekly Insights we have highlighted that the fundamental performance of QQQ, which is dominated by big cap technology stocks already experienced the worst results in terms of both revenues and earnings declining in Q4 2022.

Investors may be right to bet on continuing growth in these stocks but the valuations on these stocks are extremely demanding, and the near term results have already turned negative. The chart below demonstrates the underlying level of stock market optimism embedded in most investor portfolio allocations.


In general it seems that many investors have not adjusted to materially changing investment conditions, which were already in evidence prior to the latest banking crisis. It is also possible that investors are underestimating the severity of current credit conditions and growth constraints.

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Transform Your Investment Experience

The room for policy manoeuvre, and the stability of the current system should not be taken for granted. Volatility has increased and is likely to continue to stay high. The outlook has rarely been this uncertain. Investment management needs Best Investor metrics and techniques as never before.

Market and economic events are moving fast at this stage. If you need a quick review of the issues that you may need to know about for your own circumstances, schedule a FREE consultation today.

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Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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