When 'Over' met 'Reaction'

Okay so I know that subject line was a little "click-baity". And though I feel a little bit greasy for it, It is intentional and part of the underlying point of this email. Sorry not sorry. The ease with which information is accessed and spread requires providers to up their intrigue game. Beige doesn't sell ad space. But Ferrari red? Sign me up! Pull on an emotional and reactive thread, and you have yourself a captive audience and one that will spread your message. There probably is a formula that resembles this:

News and information that has never been easier to access

+

Sources competing to pass you this information 

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Sensational, hyperbolic headlines and articles fighting for your eyes and clicks

The by product of this all is a sort of engineered overreaction.

When we started the year, experts and markets predicted a strong likelihood of the Bank of Canada (BoC) cutting interest rates before the end of 2023. Come February, the shift was on. Expectations moved to pricing in a higher probability that the next BoC move would be an increase by July with no cuts in 2023. And then Silicon Valley Bank (SVB) went under. Cue another reaction - and a very strong one at that. By end of day Monday (March 13th), traders and speculators are pricing in two BoC rate cuts by July and once more over the remainder of 2023. I mean what will April bring?!

If you're still not sold on our propensity for overreaction, see the paper comma toilet crisis of 2020. Is there a better example? Literal fights over a product that was a complete afterthought for most of us. The idea of a shortage became a reality not out of fundamental issues - but out of human behaviour. 

Which brings me back to the collapse of SVB. Fundamentally, the bank made some bets with their assets that hindsight renders a huge mistake. And the cost of their mistake was loss of money and probably more critically, loss of confidence. Depositors and investors pulled their funds. And when the bank doesn't have the liquidity to cover these calls the bank goes under. 

And this is where things get interesting. Does the lack of confidence spill over into other regional banks? That could see depositors calling their funds not on the basis of fundamentals or performance but out of fear. The US Government was very quick to address this potential issue and provide support for depositors to ease those concerns. But without that, it's not a huge leap to see how an overreaction could lead to other banks being impacted by a problem that they weren't a party to.

The takeaway from all of this isn't that the banking system is in peril. That's not at all the case. But it does pose an interesting question: was Silicon Valley Bank a sort of canary in the coal mine? Central Banks have been so singularly focused on fighting inflation that perhaps some risks in their periphery were overlooked. And the 16th largest bank in the United States going under has certainly drawn some eyes. It is the unexpected cost of a rate tightening cycle that causes reflection. And our collective focus immediately shifts to the Fed (US Central Bank) and their monetary policy announcement next week. The language they use and the decisions they make will once again, heavily influence the market and expectations.

So what then is the takeaway from all of this? To just calm down? No one in the history of being told to calm down has ever, in fact, calmed down. In my experience, uttering those words makes things worse...but I digress. My point is that news and information are like a big game of poker. There are the cards (facts and data). And there is the opponent (human behaviour). You can't play one and ignore the other as they're both critically important to success. Or so I'm told...

Reactions are important. They're necessary. We have to take in information, assess and filter it so we can make the best decisions. And we're all going to overreact from time to time. It's part of being human with a strong emotional component. There's no shame in it. But ideally, we can minimize them as more often than not, the truth doesn't live at the extremes. It's somewhere in the middle.