December 9, 2023

A residence in Lynch, Kentucky.

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The banking turmoil in March, which led to the failure of several regional U.S. banks, will lead to a credit crunch in “small town America,” said senior strategist David Roche.

The collapse of Silicon Valley Bank and two other small U.S. lenders last month sparked fears of contagion, leading to record outflows of deposits from smaller lenders.

Earnings reports last week showed that billions of dollars in deposits at small and mid-sized banks executed in a panic were redirected to Wall Street giants — JPMorgan, FuGuo bank and Citigroup Report large inflows of funds.

“I think we’ve learned that the big banks are seen as safe havens and deposits are flowing into them (the big banks) from the smaller and regional banks, but we have to remember that a lot of the key in the industry is that the smaller banks account for 50% of the loans. % and above,” Roche, president of Independent Strategy, told CNBC’s “Squawk Box Europe” on Thursday.

“So I think in general the end result will be further tightening of credit policy, lending provisioning and credit tightening to the economy, especially to the real economy — like services, hotels, construction and actually small and medium-sized businesses — we have to remember that these sectors, like small towns in America, account for 35 or 40 percent of output.”

Veteran investor David Roche sees further contraction in credit to 'Little America'

The knock-on effect of the Silicon Valley bank’s collapse was huge, setting off a chain of events that culminated in the collapse of the 167-year-old Credit Suisse institution and its rescue by domestic rival UBS.

Central banks in Europe, the US and the UK acted quickly to ensure they would provide liquidity support to prevent a domino effect and stabilize markets.

Roche, who correctly predicted the development of the 1997 Asian crisis and the 2008 global financial crisis, argued that central banks were “trying to do two things at once” while trying to curb high inflation.

“They’re trying to keep liquidity high so deposit withdrawal issues and other mark-to-market issues with banks don’t create more crises, more systemic risk threats,” he said.

“At the same time, they’re trying to tighten monetary policy, so in a sense every central bank has a schizophrenic personality of doing one thing with their right hand and another thing with their left. “

Expect more problems in the banking sector, but no full-blown crisis, strategists say

He predicted that this would eventually lead to a tightening of credit, with panic spreading to major commercial banks that had accepted fleeing assets and “did not want to be in a systemic crisis” and would be more cautious about lending.

Roche does not expect a full-blown U.S. recession, but he believes credit conditions will tighten. He advised investors to take a conservative approach against this backdrop, park cash in money market funds and take a “neutral to underweight” stance on stocks he said were at the peak of the latest “crest.” “peak”.

“We could go lower from here because we’re not going to get a quick rate cut from the central bank,” he said.

he added 10-Year U.S. Treasury Note ‘Pretty safe’ for now, as are long positions yen and short on Dollar.

Investors take long positions by buying assets that they expect to increase in value over time. A short position is taken when investors sell securities they do not own, with the expectation of buying them later at a lower price.

Roche is sticking to long grains, including soybeans, corn and wheat, despite modest gains in commodities this year.

“Apart from the geopolitical risks that remain, the supply-demand balance for these products is very good over the next five years,” he said.