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Chart of the Day - credit tightening
The big news over the weekend is the second largest bank failure in US history. First Republic was subsumed by JP Morgan on Sunday at the behest of the Feds. The cost was not as much as feared and some suggest this is the 'end' of the banking crisis

Perhaps this is the 'end' of the near-term deposit crisis because at this point, money that is going to flee smaller banks to big banks or big banks to money markets has probably happened. The Fed has lines in place now to give banks liquidity even

However, the next phase is the second wave credit tightening that will inevitably come. It won't come because of a recession. it will come because of accounting principles where Assets = Liabilities + Owners Equity

For banks that basically means Loans + Investments = Deposits + Bank Capital. If you don't have deposits, you can't make loans. You could borrow from the mkt to lend to firms like wholesale banks used to do & peer-to-peer does now. That is very costly though

Thus, small and mid-sized banks are losing deposits & won't be able to make loans. I wrote about this over a month ago on my Substack (Plot twist - by Richard Excell - Stay Vigilant). It is also the subject of today's chart

The companies most affected will be the small companies that rely on banks for loans & can't go to the market to raise funds. The white line is the Natl Federation of Independent Businesses small business credit availability index. It is closely tied to ISM & GDP

We will get ISM later this morning. There is reason to think it may bounce this month. This will get everyone excited. We have seen regional Fed surveys bounce. We have seen S&P PMI bounce. We have seen housing bounce. Mkts will like this

However, if small biz can't get access to capital, they can't grow. Small biz employ half of all employees in the US & have been 80% of the growth in employment. The outlook for this does not look particularly promising going forward without capital

Yes, this may not be a systemic issue because JP Morgan took over a bank. However, JP Morgan won't disproportionately increase loans, especially to areas of the mkt it was not serving before. JPM also will be laying off many of these bankers it just took over

There may well be a sense that we are past the worst with First Republic gone. Maybe the ISM even bounces. The markets could rally more. However, looking out a bit further, do we feel better or worse about the forward outlook

Stay Vigilant
#markets #investing #smallbusiness #credittightening #stayvigilant

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