00:10 • Brian

Welcome everybody, to another episode of Bull v Bear where we tackle all things markets. In today’s Market Matters section, we will be tackling the recent FOMC happenings. But first up we have our charts of the week. Let’s kick it over to Kevin.

00:24 • Kevin

Thanks, Brian. I’m to try and whip through this quick because I definitely want to get to the FOMC talk. But the chart I brought this week was another way to visualize market conditions tightening and the signals of the market sending us. So basically we’re looking at regional banks and the problems that those are facing has obviously been top of mind for pretty much everybody at this point, right? No surprise there. What I wanted to show here is what you’re basically looking at in orange is the Fed Funds target rate, which was just hiked another 25 BPS at the FOMC meeting about an hour ago. In white you’ve got the regional bank index divided by so the ratio relative to the SNP 500, right? So when that line is going down, it shows that regional banks are underperforming the market. And then in blue you’ve got the spread between 30 year US treasury yields versus the average one year CD rate. So deposit rates, right. And if you remember back, I think it was a few weeks ago, one of the charts I brought was looking at just regional banks versus this kind of yield spread, right, the yield curve.

01:27 • Kevin

But looking at 30s and 1s, you can see that the performance was very closely correlated. Right. So when you have that inverted curve, typically regional bank stocks tend to underperform. What I think is interesting is that if we look at this in historical context, and it logically makes sense – what we typically tend to see is playing out – what’s playing out right now in front of us is actually not necessarily unprecedented in terms of how these stocks simply tend to perform. So what you see going back to as early as 2000, we saw a bit of this too, but really 2007 through 2009, as the Fed was hiking rates, yield curve, inverted, regional bank stocks started to underperform and started to actually sell off. And that was what initially was the moment when the Fed paused rate hikes then continue to fall and obviously we had the great financial crisis and that was kind of the bottom in yields, the inverted yields curve. Right. Now if you fast forward to 2018, 2019, we saw something similar. Again, regional bank stocks were sending these kind of smoke signals to the market or to policymakers that market conditions were tightening and that policy was essentially too tight.

02:30 • Kevin

And then obviously what we’ve seen over the last, let’s call it six to eight weeks has been this kind of on steroids. But the stresses that you’re seeing in the regional banking sector and within that industry again are very much a formula of faster, accelerated, more aggressive rate hikes, inverted yield curve, causing a whole bunch of problems for banks and this sizable sell off that we continue to see even through this week. And so, again, it’s just giving more evidence that’s stacking up for the Fed not only to pause here, but potentially getting closer to something breaking that forces their hand. And we’ll get into this in the FOMC talk because I have a few thoughts there, but again, just thought this was another interesting way to visualize that the market is basically telling policymakers that policy is too tight and has been too tight and something needs to change.

03:22 • Brian

Good stuff. And what have you got for us, Jason?

03:25 • Jason

Yeah, something kind of on a similar tone. Right. I know Kev was looking at some regional bank spreads and things like that. And what I decided to do here is I constructed kind of like a basket trade, so to speak, right. Where in the Numerator I have the big four banks, which the Fed has kind of implicitly, or however you want to phrase it, right, declared that they are essentially the favorites. Right? Like J.P Morgan. I would say Citibank, Wells Fargo, Bank of America. I’m excluding things like Goldman Sachs, Morgan Stanley, because they’re not as big as depository institutions. Right. They’re more engaged in investment banking, mergers and acquisitions, those types of banking activities, as opposed to J.P Morgan Chase, Wells Fargo, Bank of America, and even City to an extent. So I have that in the numerator. And then I’m essentially dividing that by KRE, which is the spider regional banking ETF. Right? So it’s essentially a way where you can just visualize the performance of the big four banks versus the smaller regional banks. And I think obviously, this trade looks like it’s probably gone to some certain extent, right? Like, if you’re looking at this from a ranging perspective, it’s definitely towards the upper bound.

04:48 • Jason

But what I think is really interesting here is that and it kind of dovetails into it and it’ll be a good segue for our market matter section on the FOMC. But the history of banking in the United States has essentially been one of consolidation from the beginning, right? It’s been one where we’ve had a lot of banks, and then over the course of time, they’ve gone bankrupt, they’ve gone through mergers and acquisitions, and they’ve slowly consolidated. I’m pretty sure Powell mentioned it in the press, or how even 30 years ago, when he was working in government, there was some odd 14,000 banks and now there’s less than 4000. Right. And I think a big accelerator of these trends or a big exasperator of this consolidation is actually these financial crises that we’re seeing happen more and more frequently. If you look back at, say, 2008 as like a prime example of a financial crisis and ensuing regulation afterwards, you had the Basel Accords, banking reserve ratios. All of these things had been adjusted and looked at and changed in the aftermath of 2008. And generally speaking, compliance, regulatory costs, all of these things are more burdensome to smaller institutions, smaller banks that have less ability, less profitability, less income streams.

06:07 • Jason

Right. You have J.P Morgan, which makes money in every single facet of banking, whereas a small regional bank might not be able to, or definitely is not able to. Right? So as compliance costs and fees like that continue to get bigger and bigger, it essentially auto mandates the consolidation of the banking industry and I think it’s a trend that you’ll likely see continue into the future. Right.

06:31 • Jason

And I think this chart is like a very good indication of this. Right. So this is the bott

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