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Cathie Wood thinks a credit crunch is underway, and it’s going to get much worse from here. The Ark Invest chief told TD Wealth on Wednesday that customer deposits are still leaving regional banks and going into Treasury funds, limiting the ability for banks to potentially produce loans in the future. “[Treasury funds] can’t be loaned out. They can’t encourage business activity,” Wood said. So, “we have a feeling that we’ve started in the early stages of a credit crunch that is going to be much more serious than I think most are expecting.” Wood cited the downward trajectory of the SPDR S & P Regional Banking ETF ( KRE ) as a basis to forecast a continued deposit outflows from regional banks. The ETF has declined roughly 14% in the past five days alone. It’s also down about 17% over the past month. Regional banks have taken a beating recently since the collapse of the Silicon Valley Bank and Signature Bank, which stoked worries over the health of the U.S. banking system. Recently, First Republic was taken over by JPMorgan Chase. Because of these losses, Wood said the Federal Reserve will be forced to cut benchmark interest rates to stop the bleeding. “[The KRE] has broken down, which tells us deposits will continue to outflow until the Fed reverses its position — until the Fed pivots,” Wood said. The Fed hiked rates by 25 basis points Wednesday, even as tighter monetary policy appears to have exacerbated the banking issues. DoubleLine Capital CEO Jeffrey Gundlach echoed Wood’s sentiment Wednesday, telling CNBC’s “Closing Bell” that the Fed will indeed need to pivot in order to truly end the regional banking crisis. On Thursday, European Central Bank chief Christine Lagarde said tighter credit conditions would similarly weaken further bank lending.
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