In a recent CNBC interview, Larry McDonald, author of “The Bear Traps Report,” believes that the current turmoil in financial markets could lead to a sharp reversal from the Federal Reserve’s aggressive monetary tightening aimed at controlling inflation.
Hawkish rule of the Federal Reserve
With the collapse of Silicon Valley Bank, McDonald predicted that the Federal Reserve would reduce interest rates by up to 100 basis points by December to prevent contagion in the financial system.
The Fed has gradually raised interest rates over the past few years to 4.75% through March 2023. This monetary policy decision is aimed at curbing inflation, which has seen consumer prices increase by 7% year-on-year since December 2021. The effect of the rate hike has raised short-term interest rates, making Treasuries more attractive to citizens and leading to an outflow of deposits from regional banks such as SVB.
On the other hand, the Fed’s aggressive governance also makes it more difficult and expensive for citizens to borrow, thereby reducing the money supply through the economy. Accordingly, investments in stocks and cryptocurrencies contracted as capital moved to safe havens such as USD and bonds, impacting coin prices such as bitcoin.
SVB lost $1.8 billion on its portfolio due to higher interest rates. In turn, this put pressure on the bank, eventually triggering a dump of SVB shares when they failed to find a buyer. The situation worsened when several venture capital firms advised their portfolio companies to withdraw money from the bank.
Silicon Valley Bank Transition Risk
While some analysts fear that SVB’s troubles could spread to other financial institutions and trigger a systemic crisis, McDonald thinks the risks are limited.
They argue that large banks have the resources and risk management expertise to manage the current interest rate. Furthermore, they believe that regional banks like SVB are ill-equipped for this flamboyant regime.
The CNBC contributor believes the Fed may need to bring out “another firehose” and cut rates within six to nine months as it transitions. spreads In the ecosystem, affects high-yield and leveraged loans.
The Fed’s decision to cut rates could mark a significant change from its current policy of aggressive tightening. Subsequently, this may expose it to risks and uncertainties in the current economic environment.
While the big banks may face turmoil, the impact on the technology industry and crypto startups should not be underestimated. Given that many technology startups use SVBs, these entrepreneurs are at risk of a liquidity crunch.
Credit : www.newsbtc.com