If you asked Torsten Slok a week ago how the economy was going to fare this year, he would have told you he was expecting a no-landing scenario, whereby the Federal Reserve would tame inflation without triggering a downturn.
But all has changed following the collapse of three US banks over a matter of days. The chief economist of Apollo Global Management now says he’s bracing for a hard landing. He joined the What Goes Up podcast to discuss his changing views.
Here are some highlights of the conversation, which have been condensed and edited for clarity. Click here to listen to the full podcast on the Terminal, or subscribe below on Apple Podcasts, Spotify or wherever you listen.
Q: You changed your view of seeing a no-landing scenario to a hard-landing one — tell us about this.
A: The debate up until recently was that, well, why is the economy not slowing down when the Fed is raising rates? Why is it that the consumer is still doing so well? And a very important answer to that was that, well, there was still a lot of savings left across the income distribution, that households still had plenty of savings left after the pandemic. And up until recently, the debate was why is this economy not slowing down? And call that what you want, but that’s what we have called the no landing. And that was the reason why inflation continued to be in the range of 5%, 6%, 7%. That’s why the Fed had to raise rates.
What happened, of course, here with Silicon Valley Bank was that suddenly out of the blue, at least for financial markets, really nobody — and I think that’s safe to say at this point — had seen this coming.
And as a result of that, suddenly we all had to go back to our drawing boards and think about, OK, but what is the importance of the regional banks? What is the importance of the banking sector in terms of credit extension? In data from the Fed, you will see that roughly a third of assets in the US banking sector are in the small banks. And here a small bank is defined as bank number 26 to 8,000. A large bank is number one to 25 ranked by assets. So that means that there’s a long tail of banks. Some of them are fairly big, but the further you get out, the smaller they get. And the key question for markets today is, how important are the small banks that are now facing issues with deposits, with funding costs, facing issues with what that might mean for their credit books, and also facing issues with what does it…
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