Schwab’s $7 Trillion Empire Built on Low Rates Is Showing Cracks

via @antoniabmassa (and me @edwardnh too) /1 Here's the deal:

Schwab has a huge MBS portfolio that pays it half the prevailing rate of interest about 1.75% vs about 3.50% for 10-year Treasuries. That's a drag on profits.

Meanwhile, it is going to have to increase deposit rates in its sweep accounts /2

FINANCIAL CRISIS?

1. Here's my thinking:

The collapse of SIVB set in motion a big shift in market pricing and risk aversion, especially for the most vulnerable banks, including regionals, those with high unsecured deposits and now Credit Suisse The Credit Suisse problem makes the picture more systemic in nature. All prior bets are off regarding any predictions we had about what CBs are likely to do. First they have to calm things down and go from there. /2

The sudden collapse of SVB points to systemic risks associated with the new higher-for-longer rate environment’s impact on asset values. This has strong echoes of the early 1980s. Here's how bloomberg.com/news/newslette…

/1 The rise in interest rates last year caused SVB’s assets to decline significantly in value. We're talking mark-to-market losses in excess of $15 billion at the end of 2022 for securities it was preparing to hold to maturity

/2

DEBT CEILING:

(Thread) Is 2011 a guide to what we should expect for markets in a debt ceiling standoff?

I have my doubts. But if it is, then we can expect sinking consumer confidence and government outlays to exert a drag on growth /1 For an economy that many think is slowing that would push us over the edge into recession.

For markets, a recession eventually means Fed rate cuts -- so lower Treasury yields. But equities and all other bonds would take it on the chin as earnings slow and spreads widen /2

THREAD: Here's my narrative on the US economy.

Inflation is biting into discretionary spending even though nominal GDP was up at an annualized 7.8% rate last quarter. Real consumption growth is up, but it's weak /1 Meanwhile, businesses (as in most periods before a garden-variety recession) are responding by trimming bloated inventories after the slowdown in consumption growth. And they are reducing capital investment, especially in housing /2