This time two months ago, the question was: Is it Bear (Stearns) or LTCM?
“It” meant SVB, and so far, the answer is it was LTCM.
Everyday people apparently are worried about their deposits, but because we don’t ask them very often, and because the very act of asking might skew the responses, it’s hard to take much away from a recent Gallup poll which found that nearly half the country is at least a little concerned about the sanctity of their checking and savings accounts.
What the country doesn’t seem too concerned about, though, is what happened at SVB. Sure, there were hearings. Michael Barr wrote a report and the commoners weren’t enamored with the idea of a backdoor VC bailout. But the truth is, the majority of Americans probably couldn’t tell you what “SVB” is, and the same goes for “VC.”
History doesn’t repeat, but it does rhyme and as BofA’s Michael Hartnett wrote, “Main Street did not care about LTCM.” Following its collapse in late 1998, the economy “remained blissfully strong and [a] Fed policy misstep and excess liquidity simply ignited the internet bubble,” he said.
Of course, that doesn’t mean it’s a good idea to chase 2023’s A.I.-driven tech rally, and BofA cautioned against it for all the usual fundamental reasons, but as Hartnett quipped, “fundamentals mean diddly-squat in a speculative bubble.”
Is this a speculative bubble? Well, maybe. According to one bank, A.I. has generated (get it?) the entirety of 2023’s equity gains in the US+.
There are all manner of lessons one can take away from LTCM (voluminous ink, digital and real, was dedicated to its collapse), but Hartnett summarized the market lesson concisely. “As the Nasdaq bubbled to 5,000 in 1999, Treasury yields rose very sharply [and] one definition of a ‘bubble’ is when an asset price ignores a rise in the cost of capital,” he said.
If A.I. is “the new internet” (as some are keen to suggest) and if the Fed is making a mistake by pondering a pause, Hartnett cautioned that Treasury yields would tell you as much by rising back above 4% and staying there. If that happens, he said, “we most certainly ain’t seen the last rate hike of the cycle.”
Summarizing the current state of affairs, he wrote that the market is “trading SVB as LTCM, A.I. as the internet bubble [and] the Nasdaq is still below the midpoint of its three-year range, so new highs in Microsoft and Nvidia.” It looks, he mused, like a “melt-up.”