What Goes Up

When Steve Sosnick recalls 2008 and tries to make parallels to the current turmoil in the banking sector, one memory sticks out: riding the elevator with Thomas Peterffy, founder of Interactive Brokers, who offhandedly asked him “what’s new?” “And I said, ‘what’s really interesting to me is the story that I’m reading this morning about how Bear Stearns may have as much as $20 billion in losses at some of their hedge funds,” recalled Sosnick, who’s currently chief strategist at Interactive. “And he said, ‘what’s their market cap?’ And I said, ‘I think about $20 billion.’” “‘Are you telling me Bear Stearns is broke?’” Peterffy asked. Sosnick recalls saying, “‘I guess I am, aren’t I?’” Sosnick joined the What Goes Up podcast to discuss what lessons from the 2008 financial crisis can be applied today. Though the current predicament isn’t similar to that period—banks are in much stronger positions and the economic backdrop is vastly different—it’s important to keep lessons learned in mind, he says.  “They say history doesn’t repeat, but it often rhymes,” Sosnick says. “And I think there’s a certain rhyme to it, but we’re not there yet. And I certainly hope we don’t get there.”

Torsten Slok had been firmly in the “no landing” camp of economists. More positive than a “soft landing,” its adherents say the Federal Reserve will tame inflation without triggering a recession at all. But for Slok, chief economist of Apollo Global Management, that all changed with the failure of Silicon Valley Bank. Now he’s bracing for a “hard landing.” Slok joined the What Goes Up podcast to discuss the sizeable role regional banks play in the US economy, and the reasons why SVB’s collapse changed his outlook. A big reason is how regional banks may now change their behavior. “Regional banks make up 30% of assets and roughly 40% of all lending,” he explains. That big chunk of the US banking sector is now looking at what happened to SVB and worrying what comes next. With a slowdown potentially underway thanks to the central bank’s rate hikes, Slok warns a reluctance to lend by SVB’s mid-size brethren might mean it comes “faster simply because of this banking situation.”

Jeremy Grantham blames the US Federal Reserve for creating a bubble in asset prices—one he says has a long way to go before it’s fully deflated. As a result, stock prices may not reach bottom until late next year, he warns. The 84-year-old co-founder of investment firm GMO joined the What Goes Up podcast to explain what he calls the current, “meat grinder” phase of the market, and why he believes the central bank has “hardly gotten anything right.”   “Since Alan Greenspan first arrived—Paul Volcker knew what he was doing—but since then it’s been a long, continuous horror show,” Grantham says of US monetary policy. “They’ve engaged in policies that drive up the prices of assets, other things being even, and create spectacular overpriced bubbles. They then break because that’s what bubbles have to do. They simply break of their own extreme overpricing, and we pay a very tough price.” Grantham also discusses broader market risks, including shortages of labor and natural resources, the climate crisis, de-globalization and a new version of the Cold War. “All of these long-term factors are beginning to bite,” he says. “This will make this particular down-leg more dangerous, and perhaps worse than we anticipated.”

Princeton University’s Alan Blinder is one of the most prominent economists to have expressed optimism that the Federal Reserve can engineer a so-called “soft landing” for the US economy—taming inflation without triggering a recession. But Blinder, who served in the 1990s as a vice chair of the Fed and a member of the president’s Council of Economic Advisers, explains on this episode of What Goes Up why he’s toned down his assessment. A big reason is the change in the way the Bureau of Labor Statistics adjusts inflation data for seasonal factors, he says. The result is that, while inflation moderated in the second half of 2022, it didn’t cool off as quickly as previous data indicated. Blinder says that means there’s reason to expect more rate hikes from the Fed. “I think they still have a chance” at a soft landing, he concludes, “but it's a tougher chance than it was.”

Exchange-traded fund managers have seen massive inflows into fixed-income ETFs in recent months. As the dust settles from the bond market’s worst year on record, ETFs focused on safe and simple Treasuries have attracted the bulk of the money. Stephen Laipply, the US head of fixed income ETFs at BlackRock, explains this state of affairs on the latest episode of the What Goes Up podcast. Many investors who follow a standard strategy of investing 60% of their portfolio in stocks and 40% in bonds have found it to be the right time to “fix” that 40% segment, Laipply says. “Investors are looking at this market, the public fixed-income markets, and realizing that they can ‘fix’ their 40 by de-risking it to varying degrees,” he says. “You don’t have to have the majority in high yield to get a certain yield target. You can allocate to the front end of the Treasury curve and get yields that you were seeing at some point in the high-yield market. So it really is an opportunity to get back to what that 40 was supposed to do, which is diversify your risk assets.”