I was really hoping to write a column this month in which I did not feel compelled to discuss the subjects of inflation, interest rates and Fed policy. Those topics have dominated the news for many months, but as of a couple of weeks ago, it seemed the situation was starting to stabilize.
Recent data indicated the pace of inflation was moderating and the labor market was showing signs of cooling. Jerome Powell had confidently and credibly testified to Congress that the Fed was resolute in its efforts to do whatever it took to get inflation back to acceptable levels. So I was starting to look forward to columns focused on topics and end markets specific to the plastics industry.
Then there was a run on a large U.S. bank (Silicon Valley Bank), and shortly thereafter, regulators took control of another large bank (Signature Bank). An actual run on a U.S. bank — that was something my grandfather told me about recalling his experiences from the Great Depression, but I never worried about one. We live in a world with the FDIC and Dodd-Frank and instantaneous market data and enlightened regulators, etc. Besides that, we are not in an economic recession, and there are no signs of any kind of market bubble anywhere.
Nevertheless, we had a run on a large, well-established bank. By the way, just a month before SVB collapsed, Jim Cramer rated its stock very favorably to all his viewers. And just two weeks before SVB's demise, KPMG had submitted an audit report that gave SVB's books a clean bill of health.
As of this moment, there does not appear to be any contagion effect. But it is still too early to say we are out of danger, and the longer-term implications pertaining to the path forward for policy makers and regulators are far from certain.
This was a wake-up call for any business owner or senior executive whose job requires them to manage risk. And that is true for all companies in the plastics industry. Let's be brutally honest with ourselves: How many of us even had "a run on our preferred banking institution" on our list of potential risks for our respective businesses this year? For me, this particular risk was on the list of "unknown unknowns" — a black swan, if you will.
So now that I am armed with this new information, I want to review my list of known risks and make any necessary revisions.
As I said, it was clear to me that the Fed's recent policy of rapidly tightening financial conditions was starting to have the desired effect: The rate of inflation was moderating. The only question up until the SVB collapse was how much more tightening would be required. We know there is a lag between when the Fed starts a tightening cycle and when the effects of higher interest rates start to show up in the data. But there is great uncertainty about how long the lag will be; therefore, there is great uncertainty about how much tightening is required to slow the economy just enough, but not too much.
As the Fed raised interest rates, which, by the way, were raised higher and faster than at any other time in history, I am sure their only focus was on inflation. But as we now know, they tightened so quickly that some financial institutions did not have time to adjust. Many individuals and businesses with portfolios of fixed-income securities have taken a hit. And many depositors have discovered there are much higher rates of a safe return outside of a bank account.