We have no special insights into the likely depth or duration of the banking crisis, but the impact on credit has already been severe. That might seal the fate of the economic expansion. It’s worth noting that in 2008, the recession seemed to have “caused” the credit crunch—not the other way around.
A way to gain perspective on the present is by trying to view it from the future. Ask yourself, “What are the signs of impending decline, now ignored by investors, that will one day be memorialized by the same investors as the most obvious in retrospect?”
We expect much higher volatility in interest rates this year as the market grapples with the prospect and timing of the Fed’s first rate hike. Our base case is for the Fed to raise rates in the third quarter. There are various reasons for the Fed to be patient. Inflation will be the biggest one. The threat of oil-related risk contagion is certainly real. We are concerned that equities have not fully priced in this threat.