'Are dominoes starting to fall?' BlackRock CEO Fink talks SVB fallout and cost of 'easy money'
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(Kitco News) The fallout from the Silicon Valley Bank collapse is likely to get worse as the Federal Reserve's aggressive pace of rate hikes exposed cracks in the financial system, said BlackRock CEO Laurence Fink.
"Bond markets were down 15% last year, but it still seemed, as they say in those old Western movies, 'quiet, too quiet,'" Fink said in a letter published Wednesday. "Something else had to give as the fastest pace of rate hikes since the 1980s exposed cracks in the financial system."
The chairman of the world's largest asset manager said the U.S. banking sector remains at risk, noting that the Fed will keep raising rates as it keeps focus on sticky inflation, Fink wrote.
"Are the dominoes starting to fall?" said Fink. "It's too early to know how widespread the damage is …This past week we saw the biggest bank failure in more than 15 years as federal regulators seized Silicon Valley Bank. This is a classic asset-liability mismatch."
While the regulators were quick to step in, markets remain very worried, and asset-liability mismatches could be the second domino to fall, he warned.
Fink blamed the policy of "easy money" and warned the Fed is not likely to stop after hiking by nearly 500 basis points since March of last year.
"We don't know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector with more seizures and shutdowns coming," the letter said.
There is also a possibility of liquidity mismatches, which could be the third domino to fall. "Years of lower rates had the effect of driving some asset owners to increase their commitments to illiquid investments – trading lower liquidity for higher returns. There's a risk now of a liquidity mismatch for these asset owners, especially those with leveraged portfolios," Fink said.
Also, high inflation will be the narrative for the next few years as the Fed's tools prove to be "limited." "I believe inflation is more likely to stay closer to 3.5% or 4% in the next few years," Fink pointed out.
And with higher interest rates after the Fed's hikes, governments can't keep up with their usual fiscal spending and the deficit. "The U.S. government spent a record $213 billion on interest payments on its debt in the fourth quarter of 2022, up $63 billion from a year earlier," Fink noted.
Fink's annual addresses are a must-read for many market participants. And this year's letter combined two regular communications into one — a letter to the CEOs and a letter to the money manager's shareholders.