Bank runs raise the stakes in the Fragmentation Game Bank runs raise the stakes in the Fragmentation Game Bank runs raise the stakes in the Fragmentation Game

Bank runs raise the stakes in the Fragmentation Game

Steen Jakobsen

Chief Investment Officer

Summary:  A new fragmented world order can render some of today's infrastructure obsolete, but it also calls for massive new investments across the globe, which requires a new set of strategic and tactical investment strategies.


We have the highest bond volatility in history, the war in Ukraine looks to have no end, and monetary authorities have moved the interest dial into a position which was finally able to “break something”. This is partly their strategy, partly a fall-out from a singular focus on fighting inflation without addressing what else might be at risk.

The jarring market events in March also mean that Fed Chair Powell may pivot after all, even after re-pivoting hawkish from his initial pivot. Confused? You should be! As we look forward to the end of this year, we don’t know whether the Fed will deliver another 75-100 bps hikes to fight inflation or cut by 75 bps to protect the fragile bank system and the taxed economic system behind it. How did we get here – could it really be a couple of bank runs that have completely reset forward expectations? On policy, maybe, but not on inflation.

Since Long Term Capital Management (LTCM) went bust in 1998, the world’s central bankers have used low interest rates and ever larger liquidity injections to induce more and more risk-taking without ever forcing too-leveraged banks and risk takers to take a loss, with the Lehman bankruptcy the exception that really proved the rule on the enormous ensuing bailout during the GFC.

Fast forward to today and we see the March intervention in the wake of the Silicon Valley Bank (SVB) collapse and then the Credit Suisse takeover by UBS arranged and subsidised heavily by the Swiss National Bank. There is even sudden talk of insuring all deposits to prevent bank runs. Are any and all financial institutions now moved into the “systemic” category?

What was SVB’s misstep that saw their stock marked from a price of over 100 to zero in two days? They had no clue what they were doing with their bond portfolio, which they kept growing as deposits came in the door and the Fed, their regulator, kept telling them: “Don’t worry! inflation is transitory, it will be back below 2% soon!”

It seems that transitory didn’t win, so Silicon Valley Bank became the poster child for a very old kind of panic, one in which depositors, lost faith in the bank and made for the exit  all at once. SVB had a very unusual depositor base, but many regional and smaller banks have made similar missteps in investing bank funds in longer duration bonds, risking depositor stampedes to safer shores everywhere.

Regulators helped create the situation with the Held-to-Maturity (HTM) concept in accounting that allows banks to keep their bond holdings at the purchase price despite the mark-to-market value of bonds trading at perhaps a 20-30% discount. After the panic rescue of all of SVB’s depositors regardless of size and a new Fed facility – the BTFP (no, really) that allows any bank to borrow liquidity against its HTM portfolio at par and not mark-to-market, Voila, problem solved! Or is it?

No, because what if a bank’s funding costs on the liability side – the cost of its deposits - rise even if its depositors don’t pull all of their funds but look for places to park their funds at higher rates? Banks have ignored their customers for the longest time, focusing on serving big financial engineering needs of mega caps, private equity, venture capital funds and hedge funds. Now depositors have had enough. Too little transparency, no service and no interest rates. Major US money center banks paid zero interest on the current account as late as last week, where the Fed was expected to take short-term interest rates to well above 5%! 

This banking crisis so far is not about the solvency of banks, but whether the banks can continue to operate profitably if funding costs rise and funds actually “go elsewhere”. How about a US 6-month treasury yielding 4.50%, for example? Big banks can only run with enough liabilities, deposits, to fund their assets. For whatever reason, but especially in a panic, if clients withdraw money, it forces banks to liquidate assets. That’s what this crisis is about.

But enough about bank runs, though the risks mentioned above will inevitably impact what this Q2 Outlook was meant to be about before the bank blowups of March: the Fragmentation Game. This is our term for the global need to secure access to energy, other vital resources, supply chains and computer power (mostly in the shape of semiconductors) but also how new alliances are being formed and shaped to rebalance the world away from western dominance.

We could have called it deglobalisation, but the world is still global in its trade, it’s just fragmenting more into blocs. Navigating these fragments will be key in investing not only this year but for the coming decades.

Being both strategic and tactical has never been more important, as a fragmenting and partially deglobalising world brings new production capacities where none existed before to secure supply chains, which will bring huge investments, as will the ongoing green transformation. Other fragments, on the other hand, may have excess capacity. Regardless, a Fragmentation Game overlay to investment decisions will be critical, as the far-flung, highly tuned and fully globalised networks break into new fragments and alignments.

Safe travels,
Steen

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.