A house in Lynch, Kentucky.
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The March banking turmoil, which saw several US regional lenders collapse, will result in a credit crunch for “America’s small town,” according to veteran strategist David Roche.
The collapse of Silicon Valley Bank and two other small US lenders last month sparked contagion fears that led to record deposit outflows from smaller banks.
Earnings reports last week showed that billions of dollars in deposit outflows were diverted to Wall Street giants from small and midsize lenders executed amid the panic — with JPMorgan Chase, Wells Fargo And Citigroup reported massive inflows.
“I think we’ve learned that the big banks are seen as a safe haven and the deposits that flow out of the small and regional banks flow into them (big banks), but we have to remember a lot of the key sectors make up the smaller ones Banks account for over 50% of lending,” Roche, president of Independent Strategy, told CNBC’s Squawk Box Europe on Thursday.
“So I think the net result on the bottom line is going to be further tightening of credit policies, willingness to lend and a reduction in credit to the economy, particularly the real economy — things like services, hospitality, construction and indeed small and medium-sized companies – and we have to remember that those sectors, the small America, small town America kind of, are 35% or 40% of production.”
The impact of the Silicon Valley bank collapse was enormous, setting in motion a chain of events that eventually led to the collapse of the 167-year-old Swiss institution Credit Suisse and its bailout by domestic rival UBS.
Central banks in Europe, the US and the UK acted to assure they would provide liquidity backstops to prevent a domino effect and calm markets.
Roche, who correctly predicted the trajectory of the 1997 Asian crisis and the 2008 global financial crisis, argued that central banks are “trying to do two things at the same time” alongside their efforts to curb skyrocketing inflation.
“They are trying to keep liquidity high so that the problems with withdrawing deposits and other problems related to the market valuation of assets in banks do not lead to further crises and to more threats of systemic risk,” he said.
“At the same time, they’re trying to tighten monetary policy, so you kind of have a schizophrenic personality of every central bank that does one right-hand and one left-hand thing.”
He predicted this will eventually lead to a credit crunch, with the fear spilling over to big commercial banks, which will receive fleeing assets and “don’t want to get into a systemic crisis” and be more cautious about lending.
Roche does not expect a full-blown recession for the US economy, although he believes credit conditions will tighten. Against this backdrop, he recommended investors take a conservative approach, parking cash in money market funds and taking a “neutral to underweight” position in stocks, which he says are at the forefront of their recent wave.
“We’re probably going to get off here because we’re not going to get quick rate cuts from central banks,” he said.
He added 10-year US government bonds are “pretty safe” at the moment, as are long positions Japanese yen and briefly on the U.S. dollar.
Investors take long positions by buying assets that they expect to appreciate in value over time. Short positions are held when investors sell securities they do not own in anticipation of purchasing them at a later date at a lower price.
Although commodities aren’t yielding much this year, Roche is sticking with long calls on grains like soy, corn and wheat.
“Aside from the geopolitical risks that still exist, the supply and demand balances for these products are very good five years from now,” he said.