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U.S. banking crisis: Fed ‘reacted very quickly,’ Plurimi Wealth CEO says

Plurimi Wealth CIO Patrick Armstrong joins Yahoo Finance Live to discuss the U.S. banking crisis, Fed policy, investor sentiment, and the outlook for the U.S. banking system.

Video transcript

[MUSIC PLAYING]

- Fear over insurance limits, risk among regional banks, and concerns about the commercial real estate market-- these were all issues that surfaced during the banking crisis of 2008. But as the Fed and other central banks have made clear, the current turmoil will not stop them from further tightening this time around, meaning this isn't a repeat of the past. You can read all about this in today's Morning Brief, written up by Myles Udland. It's up on the Yahoo Finance home page.

But for more on the current banking crisis, we welcome in Patrick Armstrong, the chief investment officer for Plurimi Wealth. Patrick, great to have you here with us this morning.

PATRICK ARMSTRONG: Morning.

- If there is any comparison or contrast between 2008 and now and the Fed's action, what would you prescribe or even label onto what we're seeing now versus then?

PATRICK ARMSTRONG: Well, I think the Fed reacted very quickly, along with the deposit insurance and Janet Yellen. When SVB did collapse over that weekend, they insured all depositors were made whole. They found buyers for the international arms of SVB. And they really tried to limit any contagion possibility. So other small banks, obviously, saw massive outflows. And the larger banks have started to put deposits with the likes of FRC, things like that.

But it's been the Fed's policy that started to create cracks in the financial system, I suppose, as well. It's been a very aggressive tightening cycle. And historically, when you look at Fed tightening cycles, they hike until something breaks or a recession is caused. And this may be the early warning signs of that. But I don't think this is the first of a range of dominoes to fall. I think there are many idiosyncratic things with SVB and with Credit Suisse in Europe.

- That said, are there other things that are going to break within banking? Part of what you do is looking for those vulnerabilities, right, because I know that you have some short positions. So where are you seeing maybe some other pending vulnerabilities?

PATRICK ARMSTRONG: So I'm short Bank of Nova Scotia in Canada. That's a country that's had an incredible property boom. The big cities in Canada have seen property prices outstrip all the other major cities around the world, fueled by low interest rates that all assets grew by. But Canadian property in particular had very strong growth.

And Canadian banks have been seen as a bit of a safe haven because in the financial collapse in 2008, all the Canadian banks really escaped without any exposure to subprime. And Royal Bank of Canada became the biggest bank in the world back in 2008, even. So I think they've got a bit of glow around them of good management. I think there was a bit of good fortune.

But banks around the world you're picking up at fractions of book value. Canadian banks are still trading at multiples of book value. So I think they're too expensive. And they do come with some risks as well.

- And I believe there's a report that you were also short Goldman. Can you confirm if that's so? And why?

PATRICK ARMSTRONG: So I was short Credit Suisse all of last year. I closed my Credit Suisse short in early March and I moved that into Goldman Sachs. And I'm not short Goldman Sachs anymore. So early March, I shorted it. It fell about 15%. And we covered it.

And I was worried about, if you look at the stress tests-- the Fed do stress tests of all the banks-- in the consumer-adverse scenarios, Goldman Sachs, surprisingly, performed very poorly in that stress test. So it's not a bank people think of as large consumer exposure. But in an adverse scenario for the consumer, Goldman Sachs' numbers didn't look as strong as you might expect. So it was trading at a premium multiple and was exposed to a consumer risk that showed up in their own stress tests.

- You do own Citi and BBVA. Is there any exposure that is similar to the banks that have already seen their issues and have either collapsed or have had to have some type of saving come into play, where they might be exposed as well on Citi or BBVA's side?

PATRICK ARMSTRONG: So Citi's had its issues, not as bad as Credit Suisse in terms of management controls. It's transferred $1 billion assets to an account they didn't mean to. They've been fined as well.

So I think they've got some management control and regulatory issues but not to the same extent of Credit Suisse. It's not really impairing their balance sheet. It wasn't as exposed in Archegos, things like that.

So there comes risks with Citibank. It's a big bank, unwieldly. But it is, again, systemically important, trading at a fraction of book value, very low PE. So I don't mind paying those kind of multiples when there is some risk.

It's not suffering outflows. It's been a beneficiary of all the small banks having an outflow of deposits. The big, systemically important banks are getting those deposits. So that's going to cover up any holes as well. When you have deposit outflows, holes are exposed. Large inflows of deposits, you can cover up any holes as well.

- Yeah, really interesting stuff and actionable stuff for investors. Patrick, thank you so much for being with us, Plurimi's Patrick Armstrong.