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Bad Spaniels

Despite the continued uncertainty with banks, all the major U.S. equity indices closed higher this week.  That’s not to say we’re in the clear.  Issues with banks persist as both the Treasury Department and the Federal Reserve continue to discuss ways to mitigate the underlying issues.  It isn’t that the banks are undercapitalized per se, but that they are undercapitalized in the event of bank runs which are typically rare.  However, given that we live in extraordinary times, it remains a risk.

The big news this week was the Federal Reserve’s decision to raise interest rates another 0.25%.  The odds were evenly split between a 25bp rate hike and a pause.  The rate hike won out, which suggests the Fed believes inflation remains the bigger threat.  It is worth noting that the Fed started raising interest rates approximately one year ago and that the effects of rate hikes typically take twelve to eighteen months to be felt.  Even if the Fed stopped hiking rates today, their effect will be felt for some time to come.  This highlights the latest debate between the market and the Fed in that the Fed anticipates the Fed Funds rate will end the year at 5.1%, while the market expects it to fall to 3.8% suggesting a rate CUT before the end of the year.  They cannot both be right.  

Regarding the banking crisis, there are now calls for the government to backstop all depositors.  This would in effect remove the cap on FDIC insurance.  Some suggest this could be a temporary measure to allay depositor fears, while others believe the cap should be removed permanently.  Making matters more confusing is Treasury Secretary Janet Yellen who flip-flopped no less than three times this week on this issue.  It seems policymakers are undecided on how to proceed and are having difficulty articulating a policy stance on the issue.  The issue with European banks is a bit more dangerous since there are typically larger as there are fewer of them in general.  When Credit Suisse went into distress last week, first the Swiss National Bank stepped in to stabilize it, followed by its acquisition by UBS.  In a sense, this compounds the issue as having these behemoth banks merge just makes the issue of too big to fail even larger.  As the week progressed, the contagion spread to Deutsche Bank which is also among the largest banks in Europe.  While our regional bank issues are serious, they pale in comparison to what’s going on in Europe.

In other news, we learned Accenture and Amazon are cutting 19,000 and 9,000 jobs respectively.  In the aftermath of the pandemic, many companies hired far too many people.  They are now trying to bring their workforce back in line, which is little consolation if you happen to be among the people being let go.  With such large numbers of jobs being eliminated, it is assured some good people and good departments will be gutted.  In the case of Amazon, we learned that DP Review is being shuttered for good.  I remember pouring over camera reviews on DP Review when I bought my first digital camera, a Canon PowerShot G2, back in 2001.  It had a whopping 4MP sensor, less than that in an iPhone today.  The point being that these moves are usually not surgical in nature, but instead roughly hewn to cut costs quickly to ensure margins and profitability remain intact.  Unfortunately, this is a normal part of the business cycle and while not the first time we’ve been through it, it will likely not be the last either.

In closing, I came across a story this week which made me laugh and shake my head simultaneously.  It seems the U.S. Supreme Court heard a case this week regarding trademark infringement which seems like it would be a dry subject.  However, this case is anything but dry… pun intended.  Jack Daniels, the whiskey brand, argued that the dog toy company VIP Products violated its trademark with a crude squeaky toy that mimicked its iconic product.  The “Bad Spaniels” dog toy at the center of the case is modeled after the Jack Daniels whiskey bottle, but instead of saying “Old No. 7 Tennessee Sour Mash Whiskey,” it features “Old No. 2 on your Tennessee carpet.”  Jack Daniels is arguing that this could confuse customers to associate fine whiskey with dog poop.  For its sake, VIP Products says the toy is a parody and is protected as creative expression.  Regardless, I doubt anyone will confuse this dog toy with the real thing.  Now you know. 

Bruce J. Mason, MBA