Market Commentary: Sense-Making

by Gayl Mileszko

The Cynefin framework was created as a tool to be used in “sense-making”, a term broadly incorporating common sense into decision-making, something that we and all of our policymakers in Washington should certainly do more often. Fifteen years ago, David Snowden and a team at IBM came up with this new framework for looking at problems and assessing situations accurately so as to arrive at solutions and respond appropriately. They began by identifying four types of problems: simple, complicated, complex and chaotic, and moved on from there.

Layers of Problems

Simple problems are the kind we deal with every day. These are the kinds resolved with best practices long proven successful. When hungry, we obviously hunt for food. A child with a cut on his knee gets a Band-Aid. A bank manager officer faced with a loan application from a depositor that is highly overleveraged flatly rejects it. The second type of problem is more complicated, involving an unknown. You hear a funny noise when you are driving your car and bring it into the shop for the mechanics to do a diagnostic check. A complex problem exists when we can only figure out afterward what happened but, in the meantime, have to take some sort of action before all the forces at work are apparent. Let us say that there is a $43 billion run on one bank with 25% of its deposits pulled in less than 24 hours and, after a quick probe, regulators decide to act swiftly to stop likely contagion by announcing a new backstop or guarantee program before the next shoes drop or public opposition forms. The fourth level of problems involves chaos and crisis: a tornado, a terrorist attack on the electrical grid, or simultaneous and widespread runs on community banks — all of which would require an urgent response, sometimes based on advance planning, but quite often requiring the adoption of controversial strategies and tactics.


There are many nuances, but throughout the ages we humans have pretty much faced these same four categories of problems. And, even if we adopt the Cynefin framework to inform our thinking, in the end the solutions all seem to fall into one of three categories. As H.L. Mencken put it, “There is always a well-known solution to every human problem: neat, plausible, and wrong.” Arguments can be made that our current monetary and fiscal policies fit into all three categories so it will likely take many years to work our way through.


The Federal Reserve Vice Chairman for Supervision is squirming before House and Senate banking committees this week as he tries to explain the rapid collapses of Silicon Valley Bank and Signature Bank under the noses of his bank examiners. Fingers point back and forth between inept managers, feeble supervisors and legislators whose reform efforts more than a decade ago failed to account for changing technologies, evolving business models, or risks created by extreme policy moves. Markets are watching the back and forth in the Washington blame game, but it will not be for long as another lengthy Congressional recess is imminent. Investors are still trying to make sense of what happened and scouring for signs of potential bank fail aftershocks in pension funds, commercial offices, regional bank lending practices, and other areas.

Do Your Homework

Financial analysts are dissecting junk rated corporate bonds due to mature soon, checking to see if issuers are able to cover debt service without attempting to refinance at rates that are now three or more times higher. Strategists are looking at the flashing signs of recession appearing in the nation’s money supply which has fallen for seven straight months and the New York Fed’s indicator of the probability of recession which is at its highest level since 1981. And there are plenty of other shiny objects and dark storms drawing the attention of traders. These range from the potential deployment by Russia of tactical nuclear weapons on the northern border of Ukraine, the massive protests underway in Israel and France, and European bank developments.

There Are No Risk-Free Assets

Traders are unsettled by the SVB lesson demonstrating that there are no risk-free assets, not even the world’s safe haven, the most liquid security on the planet, the benchmark for credit quality measured against virtually every sovereign and local bond. Actions taken by two branches of government in the form of massive pandemic stimulus produced high, sticky inflation and excess cash that was dumped into a host of risky ventures. In response, another arm of government raised rates at the fastest pace in decades, from zero to 4.75% in nine successive hikes, toppling U.S. Treasury prices and creating untold unrealized losses in portfolios around the world. The Fed’s new lending facility has wiped away all the reductions it made since the tightening program began and, now the Fed itself is suffering operating losses of about $7 billion a month. Its own massive interest rate exposure appears likely to soon create a negative equity capital position, reportedly for the first time.

Whither Rates?

Investors continue to argue and wager over what the Fed will do at its next meeting on May 3 regardless of the Fed Chair’s statement on March 22 and previously in congressional hearings earlier this month. Futures trading current reflects the expectation that the Fed will pause in May, June and July, then begin 25 basis point cuts in September, December and January. Because there is more than a month until the central bank’s monetary policy committee is scheduled to meet, market volatility has calmed. Stock market volatility as measured by the VIX is down about 6% since the FOMC met. At this writing, with three more trading days left in the month, the Dow is down about 1%, the S&P is flat, the Russell 2000 has lost 8% and the Nasdaq is up 2%. Oil prices are down 5%, gold is up 7%, silver prices have gained 10% and Bitcoin is up 12%.

Bond Markets

Bond market volatility as measured by the MOVE Index has surged 21% in March. Treasury yields are still askew, as they have been since last July. The highest yielding Treasury is still the 6-month at 4.80% followed by the 3-month at 4.64%, and the 12-month at 4.51%. The 2-year yield has dropped 74 basis points to 4.07% this month, the 10-year at 3.56% is down 36 basis points, and the 30-year at 3.76% is lower by 15 basis points. The Treasury auction schedule has been very active; 11 are scheduled for this week alone. The corporate bond primary market was basically shut down for six days due to the bank turmoil and lead up to the FOMC meeting, but the investment grade sector it sprang back to life with $21 billion of sales last week. High yield corporate sales have been frozen for more than three weeks but there is something of a risk-on tone at present and at least one sale is underway this week; it would bring month-to-date issuance to $4.3 billion and the 2023 total to $38.5 billion.

Municipal Bonds

The municipal market has been the beneficiary of many haven trades this month. State and local bonds are typically ranked just below U.S. Treasuries in terms of relative safety and munis tend to outperform during Fed tightening cycles but are also clearly impacting by bank lending practices as well as bank purchasing and sales. Banks on a combined basis own approximately 15% of the $4 trillion of outstanding municipal bonds, or $592 billion. SVB reportedly held $7.4 billion of munis as of December 31, Signature Bank reported $247 million, and First Republic carried $19.4 billion.

Why Munis Often Outperform

There are times when munis outperform their taxable counterparts for technical reasons: demand for tax-exempts exceeding supply especially during heavy redemption periods (months with high maturities, calls, coupons available for reinvestment), fund flows, and after-tax ratios, for example. Right now, as been the case since December, muni yields are also unusually askew and trade flow is off. The 1-year AAA rated municipal general obligation bond benchmark yields 2.49% well above the 11-year at 2.37%, so the short end of the muni yield curve is still inverted as it has been since early December. For borrowers, rates are still extremely favorable: the 10-year muni benchmark yield is 2.29% and the 30-year is at 3.35%. Since the banking crisis events began, the 10 year yield has fallen 32 basis points and the 30-year is down 23 basis points. Mutual bond fund inflows are still positive on a year-to date basis with high yield funds taking in the highest net at $1.17 billion.

Making Sense of Our Habitat

The decision-making framework developed by IBM dubbed “Cynefin” comes from the Welsh word for “habitat” and is intended to help leaders assess the prevailing operating context so that they can make appropriate choices. At HJ Sims we have been working since 1935 to help clients make the decisions that are best for them in the current operative context whether it is perceived as orderly or unorderly. Most contexts these days are complicated if not complex. Investing and financing decisions are being made in an environment of significant uncertainty that has included a pandemic, unprecedented fiscal stimulus and central bank intervention, 40-year high inflation, rapid rate increases, huge swings in mutual fund and ETF flows, turmoil in the normally staid banking sector, and major demographic, policy and regulatory change. In these times it is wise to assemble your team of experts and become an active listener. We welcome and appreciate the opportunity to work with you to make sense of current conditions, help to frame your decision-making, and execute on best solutions.

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