Andrew: Let’s start with the macroeconomic environment. What is your assessment of the banking crisis that kicked off in March and its likely impact?
Bill: We think a systemic banking crisis in America is unlikely. Bank deposits are declining, but as far as we are concerned, instead of a panic this reflects the fact that banks have been very slow to raise the interest rates on savings accounts. Savers are heading to money-market funds or lending to the government for a better rate.
Note that the last time bank deposits (which usually trend upwards with GDP and income, so they tend to rise year on year) fell on an annual basis was 1994, when the Fed was also tightening. What’s more, regulators have erected a strong safety net. Instead of having to sell assets at distressed valuations, the US Federal Reserve will lend money relative to the par value of eligible assets.
