Broker Check

KEY Insights | March 2023

We are starting to see bank failures. Now what?

We've been concerned about the economic cycle since early 2021, and now the cracks are clearly evident.

After his latest FOX Business interview, Eddie received a lot of questions about his comment, "in my opinion, there is nothing anyone can do to stop what has already happened." There are macroeconomic factors at play that have a tremendous impact on where we go from here.

In our opinion, these are the macro dynamics that make KEY Advisors bearish:

  1. Small businesses are closing their doors at a rate we have not seen since the great recession.
  2. Subprime auto loan delinquencies are accelerating at a rate we have not seen since the great recession - (source
  3. Commercial real estate will continue to be challenging due to lower demand for corporate and retail space (high occupancy rates). Companies will likely have to refinance their debt at 2-4x current levels. (increased cost of capital)
  4. Consumer debt continues to pile up, and they are showing signs of exhaustion - (source

Additionally, we believe the math around this economic situation is commonsense:

Rising Cost of Capital (makes doing business and debt more expensive)
Lower Consumer Demand (meaning less revenue while expenses increase)
= A Hard Landing and Recession (less revenue, less demand, shrinking bottom lines)

On Wednesday, we feel there is a 50/50 chance that the Fed will increase interest rates by 25 basis points (0.25%) or potentially pass on increasing rates in this cycle. Whatever their decision, we do not believe the market response will not have a lasting market impact. What is not on the table? Decreasing interest rates. In the past, the Fed only decreased interest rates when we were in the midst of dire economic conditions, and we believe we are not.

KEY POV: We still believe cash is king and a high cash position will provide great buying opportunities closer to the summer.

Bank failures and bankruptcies have begun, and we believe that this is the beginning of the cycle. This is a risky time to buying bear market bounces because we believe the downside potential is much higher than the upside. This is why we have maintained a high cash position in our client portfolios.

Another critical topic less talked about is the debt ceiling debate that is on pause on Capitol Hill. As a country, we hit our debt ceiling limit in January, but the decision to increase that limit was pushed back by congress until Sept 30. However, the government’s ability to borrow using extraordinary measures will be exhausted between July and September 2023. Combining this issue with our economic downturn will have a compounding effect. The last time the U.S. hit its debt ceiling was in 2011. It was the first time that the federal government's credit rating was downgraded, the stock markets saw downturns of double-digits, and it took months for the economy to recover.

In summary, it is our opinion that the hard landing cycle has already begun. The macroeconomic factors are the momentum behind our trajectory, and there is nothing anyone can do to reverse the impact. It is a good time to be in cash as we believe there will be a great buying opportunity closer to the summer as the markets decline and we feel the impact of the debt ceiling debate.