“Runnability” is a new word for me but the concept certainly isn’t new for anyone who has studied the history of investing.
https://www.nytimes.com/2025/05/17/business/dealbo…
What Has Changed Since Silicon Valley Bank Collapsed? Not Much.
Two years later, no major legislation or regulation has passed, and the basic problem that caused the crisis persists.
By Peter Coy, The New York Times, May 17, 2025
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The financial system as a whole relies heavily on runnable liabilities — namely, sources of funding, such as uninsured deposits, that can be yanked away abruptly.
As long as banks are financially healthy, runnability is not a big problem. Regulators say the current risk is relatively low…But runnability becomes a source of vulnerability when insolvency threatens…
An interagency plan from 2023 to increase bank capital requirements starting this July 1, which bank lobbyists opposed, is being scaled back and postponed. Last month, Treasury Secretary Scott Bessent said he wanted to “help get banks back into the business of lending” by reducing how much they needed to keep in liquid assets such as Treasuries. And this past week, The Financial Times reported that regulators were preparing to announce within months a reduction in the supplementary leverage ratio, a backstop safety measure adopted in 2014.
The financial system still relies heavily on runnable liabilities…Looking at the financial system as a whole, including nonbanks such as money market mutual funds, the Fed calculates that runnable liabilities equaled about 80 percent of gross domestic product at the end of 2024. That included commercial paper and the securitized lending known as repurchase agreements. …
A bank run occurs when depositors and other creditors of a bank start to worry that their money is unsafe or might become unsafe, and pull it out while they still can… [end quote]
The focus of the N.Y. Times article is the banking system. But all marketable investments are runnable. Pretty much every market crash in history has resulted from overenthusiastic speculators suddenly realizing they have run up prices too far, suddenly change direction like a school of fish and run in the opposite direction. (cf. “Manias, Panics, and Crashes: A History of Financial Crises,” by Robert Z. Aliber , Charles P. Kindleberger, et al.)
https://www.wsj.com/finance/stocks/stock-valuation…
Just How Expensive Are Stocks After All the Ups and Downs? We Check the Math.
A look at different methods for valuing stocks and what that might suggest going forward
By Sam Goldfarb, The Wall Street Journal, May 17, 2025
Key Points
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Stocks appear expensive by typical measures such as price/earnings ratios.
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Measures of relative valuation have helped predict the performance of stocks versus bonds.
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Investors can compare stocks’ earnings yields with yields on U.S. Treasurys
…
P/E Ratios
When the whole S&P 500 is looked at, all three currently show investors paying a high price for every dollar of earnings compared with what they have paid in the past. [Comparing stock prices with a company’s past 12 months of corporate earnings, analysts’ expectations for its next 12 months of earnings or so-called cyclically adjusted earnings: the average annual earnings of the past 10 years, adjusted for inflation.]…
Earnings yield relative to Treasuries
Based on real cyclically adjusted earnings, the S&P 500’s earnings yield is currently around 2.8%, or 1.4 percentage points above the inflation-adjusted 10-year Treasury yield, according to data from the economist Robert Shiller. That gap, sometimes known as the excess CAPE yield, is well below its historical average, suggesting investors are so eager to buy stocks that they are willing to accept a smaller premium for the risk of losses…
As a reasonable guide to future returns, valuations are one tool that investors can use to build portfolios that match their risk tolerance and to make adjustments over time… [end quote]
The Control Panel shows a sharp trend uptick since the so-called “Freedom Day” announcement of high tariffs.
SPX has broken through the 20, 50 and 200-day MA although not yet reached to the February 2025 peak. VIX has plummeted and NASDAQ Bullish Percent is over 80%. Gold has dropped.
The Fear & Greed Index is in Greed. The trade is risk-on as shown by the rise in stock and junk bond prices relative to the 10 year U.S. Treasury.
Treasury yields have risen as their prices dropped. (Investors are shifting from bonds to stocks.) The Treasury yield curve rose over its entire duration over the past week. The 30 year Treasury hit 5% but dropped slightly. The 10YT Real Yield resembles the pre-Greenspan Fed years. Many traders have not seen such high real yields in their lifetimes and might expect interest rates to drop back to the negative real yields of the Covid time. But that’s not likely to happen, barring a financial crisis. As long as the Fed backs away from QE the market will control longer-term yields.
Higher Treasury yields place a high and growing interest burden on the federal deficit. That’s why Moody’s downgraded U.S. Treasury debt from AAA last week. In CBO’s projections, the federal budget deficit is $1.9 trillion this year, and federal debt rises to 118 percent of GDP in 2035. Economic growth slows and inflation declines over the next two years; both remain moderate after 2026. This is not including a recession that might be caused by higher tariffs. Recessions always increase government deficits due to higher unemployment insurance and lower tax revenues.
The options market bets that the Fed is not likely to cut the fed funds rate until September 2025 since the economy remains strong and inflation is above the Fed’s goal. Speculators have over-anticipated the Fed several times since 2022. Barring a recession and/or unexpected progress in lowering inflation the Fed will not cut the fed funds rate regardless of what the market expects. (Or how viciously President Trump insults Fed Chair Powell.)
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2025 was 2.4 percent on May 16. This is a nice, sustainable growth rate.
The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, loosened in the week ending May 9. This has a more direct impact on business borrowing than Treasury yields. Financial conditions tightened around “Freedom Day” but have loosened since.
The political situation is unstable. Nobody knows what will happen to tariffs. Nobody knows how the economy will swing when consumers find bare shelves. It’s easy and fast to cut off imports but slow and difficult to start domestic production. Not to mention the increased prices → higher inflation.
The METAR for next week is sunny. All trends are moving toward higher stock prices and lower bond prices. But the METAR is a short-term forecast. The stock market is in a bubble. Banks are loaded with runnable deposits that could be pulled unexpectedly. [snap fingers] Runnability? It’s happened before.
Wendy
https://stockcharts.com/freecharts/candleglance.ht…
https://stockcharts.com/freecharts/candleglance.ht…
https://stockcharts.com/freecharts/candleglance.ht…
https://www.chicagofed.org/research/data/nfci/curr…
https://www.clevelandfed.org/indicators-and-data/i…