Federal Reserve may tighten financial rules after US bank failures, Powell says

Joining me now to break it all down is Eric Lynch, Managing Director of Sharp Investments. Eric, thanks for joining. Thanks for having me today to talk about in the stock market. Our viewers see *** mixed market today. The fed as expected, *** pausing on rate rises. What do investors need to know? Yeah, I think it's quite clear. Fed has basically said look, our priority is inflation. We're going to bring it down. We don't care about full employment and that was basically Chairman Powell's first statement in the press conference. We're worried about those that are suffering from inflation. What happens next? Where do stocks go from here? And how does the economy factor into that? You know, I've looked back at the last four rate hike cycles and all the way back to 1989. And it's been basically kind of shockingly surprising that there's about *** 12 month lag between when the fed pauses, not when it increases the rate for the first time, but when it pauses the hike for *** recession to occur. So if that's the case, the implication is that this kind of bull case sentiment that the second half of 23 is going to be *** re acceleration of the economy and earnings could be premature. And especially now after today, because I think Powell basically said in no uncertain terms, we are here to slow it down, we want employment to go down. Do you see *** recession on the horizon? Yes. The question is when that's not profound. We've all been wondering this for *** long time now, but you see it in the leading indicators, you're seeing it basically, even though people are kind of excited that the economy is hanging in there. Remember that its GDP and employment. These are always the last two generals to fall in every economic cycle. And so it's just *** matter of time because the Fed has basically said in no uncertain terms today, we will slow this down. So the takeaway for investors is really what do we do? Where do we find opportunities to still get price appreciation if the market itself is going to be facing some significant headwinds? And what are some of those opportunities that you see in the market? Yeah, I think it's an earnings recession playbook, right? And the bad news is this earnings recession we're in probably is going to continue as this credit tightening continues to impact the economy. But there's always ways to make money, right? That's the good news. And what you want to do is find companies that are still growing in this environment one way is to basically shift play, the shift and spend from goods to services. So the revenge travel space, right? Booking holdings is doing great Target Home Depot or bringing guidance down. That's one way another way is to invest in businesses whose earnings are GDP in sensitive health care is *** name that grew its earnings double digits in 8 2009, the heart of the financial crisis because they just ship pills from *** to B. And then finally, *** third way is really to invest in companies with *** lot of cash. Cash is king because it gives you three levers, you can buy back shares and increase your profits. That way for share, you can issue dividends or you can buy companies. So all those allow you to grow your earnings even in *** economy. So for investors dipping their toes back into the markets right now, those are some of the sectors that you would suggest short term or long term. I would say intermediate term. Yes, they should all do. Well, I expect the economy to slow. The fed is going to make it slow. Earnings are not going to bounce back. And so you got to find non GDP correlated earnings growth. Those are good opportunities. Let's talk about cash because for some people even in *** high yield savings account, they're getting 4% maybe even *** hair more in certain high yield savings accounts. Should that money stay there? Parked in cash at 4% or do you think it is time to perhaps unload some into stocks. It's probably wise to make small reallocations along the way. So you're not making this binary decision. It's *** great question. I think, you know, obviously the problem is if interest rates do start coming down back after this year or next year, let's say next year you're going to have reinvestment risk, right. And the client or investors are going to have to put that money to work at lower rates. So it probably would be wise to slowly build some equity, particularly if those clients or investors are kind of underweight in equities. And in terms of what we see globally, I also want to talk about the international market because us stocks obviously are *** place to play international stocks, developed markets, emerging markets, of course, oil, these are all options as well. Any particular views on those asset classes. Yes, it's *** great question. This looks *** lot like the set up in 2000, Kristen where at that point, tech stocks the world in the late 19 nineties and so international stocks value stocks, small cap stocks all lagged terribly. But then from 2000, the financial crisis, the non tech leadership assumes leadership of the market and so international looks great. Those valuations are several, multiple terms less than the US. The S and P 500 is trading at 20 times 23 earnings. The MSC aqui U is trading at 12.7 times so much reduced valuation. Japan is also very interesting that Japan has been this great hope for years that they would get focused on corporate governance. You just saw the Toyota news here today, but it is happening. They're getting some teeth and I'll tell you why the Tokyo Stock Exchange is now basically threatening delisting in 2025 if Japanese companies do not improve their corporate governance. And so what you're seeing is already some significant share buyback announcements. Citizen watch basically announced *** 25% reduction in their share count. Stock went up in proportion of 25% this year. Sony just did *** big buyback announcement. Honda just did that as well. So I expect Japan which has had *** good run so far, but the multiples are still cheap to continue to outperform in the years ahead. Yeah, there's been *** lot of talk about Japan. I think in the wake of certainly the banking crises that we saw this year. Buffett coming in saying Japan looked attractive, one of several markets guests just that I've had on the show in the past few weeks that do say Japan looks attractive so maybe our viewers can give it *** look as well. Eric Lynch, Managing Director of Sharp Investments, Eric, thank you. Thank you.

Federal Reserve Chair Jerome Powell said Thursday that the central bank may have to tighten its oversight of the American financial system in the wake of the failure of three large U.S. banks this spring.Related video above: Analyst discusses what lies ahead in the market as fed pauses rate hikesPowell said in prepared remarks delivered at a banking conference in Madrid that tougher regulations put in place after the 2007-2008 financial crisis have made large multinational banks much more resilient to widespread loan defaults, such as the bursting of the housing bubble that led to that crisis.But the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank exposed different vulnerabilities that the Fed will likely address through new proposals, Powell said.He did not provide details, but other Fed officials have said banks should be required to hold more capital in reserve to guard against loan losses.Such proposals are likely to face resistance from the banking industry and some congressional Republicans, who argue that the Fed had the necessary tools to prevent the bank collapses but failed to use them.One reason regulators missed the threats to the three banks was "the natural human tendency to fight the last war," Powell said.The 2008 financial crisis occurred because of widespread defaults after the housing bubble burst. But Silicon Valley Bank failed for different reasons: A rapid increase in interest rates sharply lowered the value of its bond holdings, because they paid out lower interest rates than newer bonds."These events suggest a need to strengthen our supervision and regulation of institutions of the size of SVB," Powell said. "I look forward to evaluating proposals for such changes and implementing them where appropriate."In a question and answer session, he indicated that the rules needed to be updated to account for how quickly a bank run could happen."A bank run used to be people standing in line at an ATM," the Fed chief said. "That's very different from what we saw at Silicon Valley Bank," with depositors using smartphones to move money instantly.Fed supervisors had spotted bank vulnerabilities, including exposure to rising rates, but were working within a system that moved too slowly to head off trouble, Powell said."The supervisors were on the right issues, but they were operating under a standard playbook where you escalate things fairly carefully, fairly slowly," he said.An ongoing review of Fed supervision would "try to find ways to be more agile and, where appropriate, more forceful," Powell said.Banks with $100 billion to $250 billion in assets — which included all three failed banks — were freed from some requirements in 2018 under legislation passed by Congress and rules issued by the Fed.Last week, Powell faced significant pushback from Republicans during House and Senate hearings over the potential for tighter rules. Michael Barr, the Fed's top regulator, has said the central bank might require larger banks to hold more capital in reserve.Yet GOP members of Congress charge that such requirements would limit banks' ability to lend and slow the economy.Powell said during those hearings that a proposal might be issued next month. But he repeated Thursday that any new rules would require a public comment process and would be phased in over time, meaning they might not come into effect for several years."The bank runs and failures in 2023 ... were painful reminders that we cannot predict all of the stresses that will inevitably come with time and chance," Powell said. "We therefore must not grow complacent about the financial system's resilience."___AP Business Writer David McHugh contributed from Frankfurt, Germany.

WASHINGTON —

Related video above: Analyst discusses what lies ahead in the market as fed pauses rate hikes

Powell said in prepared remarks delivered at a banking conference in Madrid that tougher regulations put in place after the 2007-2008 financial crisis have made large multinational banks much more resilient to widespread loan defaults, such as the bursting of the housing bubble that led to that crisis.

But the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank exposed different vulnerabilities that the Fed will likely address through new proposals, Powell said.

He did not provide details, but other Fed officials have said banks should be required to hold more capital in reserve to guard against loan losses.

Such proposals are likely to face resistance from the banking industry and some congressional Republicans, who argue that the Fed had the necessary tools to prevent the bank collapses but failed to use them.

One reason regulators missed the threats to the three banks was "the natural human tendency to fight the last war," Powell said.

The 2008 financial crisis occurred because of widespread defaults after the housing bubble burst. But Silicon Valley Bank failed for different reasons: A rapid increase in interest rates sharply lowered the value of its bond holdings, because they paid out lower interest rates than newer bonds.

"These events suggest a need to strengthen our supervision and regulation of institutions of the size of SVB," Powell said. "I look forward to evaluating proposals for such changes and implementing them where appropriate."

In a question and answer session, he indicated that the rules needed to be updated to account for how quickly a bank run could happen.

"A bank run used to be people standing in line at an ATM," the Fed chief said. "That's very different from what we saw at Silicon Valley Bank," with depositors using smartphones to move money instantly.

Fed supervisors had spotted bank vulnerabilities, including exposure to rising rates, but were working within a system that moved too slowly to head off trouble, Powell said.

"The supervisors were on the right issues, but they were operating under a standard playbook where you escalate things fairly carefully, fairly slowly," he said.

An ongoing review of Fed supervision would "try to find ways to be more agile and, where appropriate, more forceful," Powell said.

Banks with $100 billion to $250 billion in assets — which included all three failed banks — were freed from some requirements in 2018 under legislation passed by Congress and rules issued by the Fed.

Last week, Powell faced significant pushback from Republicans during House and Senate hearings over the potential for tighter rules. Michael Barr, the Fed's top regulator, has said the central bank might require larger banks to hold more capital in reserve.

Yet GOP members of Congress charge that such requirements would limit banks' ability to lend and slow the economy.

Powell said during those hearings that a proposal might be issued next month. But he repeated Thursday that any new rules would require a public comment process and would be phased in over time, meaning they might not come into effect for several years.

"The bank runs and failures in 2023 ... were painful reminders that we cannot predict all of the stresses that will inevitably come with time and chance," Powell said. "We therefore must not grow complacent about the financial system's resilience."

___

AP Business Writer David McHugh contributed from Frankfurt, Germany.

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