“The only liquidity (banks) have in a crisis is the liquidity you bring to the crisis. So you better have some.”
Phil Green, CEO Frost Bank, March 10, 2023
Sometimes you can Google until you rub off a fingerprint and not find an answer to what you’re researching. A friend passed along the following anecdote I loved but could not verify. (That’s a QI disclaimer.) Born in 1833, Thomas Claiborne ‘T.C.’ Frost founded what would, in 1899, receive a national charter to become my hometown of San Antonio’s Frost Bank. Here’s the here-say part I’d love any of you to verify if you can. It’s said that during the banking run of 1907, Frost’s son, Thomas C. Frost, stacked cash on a conference table. He then told depositors, “There it is. But if you take it, don’t ever come back.” Apparently, a visitor to the family’s home saw the original “Deposit Run Table,” a cherished keepsake. During the Great Financial Crisis (GFC), Frost refused to take Troubled Asset Relief Program bailout funds. According to the bank’s current CEO, Phil Green, the bank today has only loaned out 40% of its deposit base and maintains 20% of its deposit base in a checking account with the Federal Reserve.
Sadly, even prudent banks can be subject to runs. As detailed in yesterday’s Quill, the smallest banks with the lowest insured deposit coverage ratios are also one and the same with those whose loan books are the most concentrated in commercial real estate (CRE) loans. As opposed to the 55% of their loan books in the GFC, today banks are sitting on 69% of the banking system’s total CRE loans. Between the risk of runs and defaults, the writing is either on the wall today, or when Treasury Secretary Janet Yellen sells hundreds of billions of T-Bills upon resolution of the debt ceiling.
As we’ve maintained all week, absent an obvious turn in the current banking crisis from orderly to systemic, we see no reason Federal Reserve Chair Jerome Powell won’t push ahead with a 25-basis point (bps) rate hike come Wednesday. The S&P 500 is up 3.6% year-to-date. If Powell’s aim is to lay down the Fed Put once and for all, which we believe to be the case, a steady-as-she-goes stock market will embolden him further.
As for that other thing we call analyzing the macroeconomic data, QI’s raison d’etre, that sure as heck is not giving Powell any cover to continue raising the fed funds rate. Not that anyone noticed, but Thursday morning’s data deluge packed quite the punch.
Let’s start in the City of Brotherly Love. The consensus called for the Philadelphia Fed Manufacturing Survey to rebound to -15 last month from -24.3. Instead, it inched up to -23.2. The internals were awful. Per QI’s Dr. Gates, “February marked the first time Future Capex (red line) and Future Inventories (blue line) were simultaneously underwater since the Great Recession. This has happened 18 other times since the series’ 1968 inception.” Peeling the history onion back one more layer, of those 18 occurrences, 14 (78%) were either during recession, one month from the onset of recession (2), or within 5 months of a recession’s start (2). The remaining instances were the only false signals.
North of Philly, U.S.-based aluminum packaging maker Ball is negotiating the closure of a plant that’s been open since 1972 in Wallkill, New York. A latitudinal line up on the map in Buffalo, auto parts producer Powerflow announced it was closing its plant in July. These two are among the 130 closings reported nationwide so far in March. Not seasonally adjusted initial state jobless claims in New York are up 11.4% year-over-year (YoY); that compares to +6.6% YoY nationwide. There are 18 states with claims rising at a faster pace. Broadening out, 63% of states have rising YoY claims (green line). That sweeps up 83% of the U.S. population living in states with weakening job markets (yellow bars). These statistics, more than any other, illustrate why the level of jobless claims reported every week is among the most misleading to market participants.
The Fed’s Third District of Philadelphia is also home to the U.S. chemicals industry. We refer to this sector as the “leader of leading indicators.” If cyclicals signal where the broader services economy is headed, chemicals are at the forefront of the cyclical pipeline. They guide the export pricing of industrial supplies and materials, which was another notable weak spot on yesterday’s economic docket as it flipped from +2.2% YoY to -0.8% YoY. Zeroing in on Industrial Supplies & Materials, export pricing in that leading metric sunk to -6.5% YoY from January’s -0.1% pace (purple line). As Gates cautioned, “Persistent contraction in leading chemical rail carloads (orange line) helped draw the other side of inflation mountain for industrial material exports. Deflation has returned.”
As the recession deepens, price pressures promise to exert themselves to a greater extent in the U.S. housing market. As eagle-eyed housing guru Ivy Zelman noted when the National Association of Home Builders’ “optimism surrounding future sales (lilac line) declined one point sequentially to 47, inching lower from the highest reading since last July…(highlighting) homebuilders’ incremental cautiousness following strong January and February sales results.” A year ago, this subindex was 87. We sense that the nascent rebound in single-family housing permits will prove equally short-lived (light blue line) as banks increasingly channel their inner T.C. Frost.