I’m not a banking insider, and while I have the business education to write about this stuff, I am on the periphery of these industries and have to do intense research to understand a lot of the macro bells and whistles. So I’m going to keep this pretty high level with available news all of you can read, and unpack some of this for you.
What happened to SVB was essentially a bank run. We all know banks do fractional reserve lending in the US, and with this, the notion is that I put in $100,000 in deposits, and the bank can lend out 90% of this.
When the bank lends that money out – it’s based on credit. Perhaps they invest some of it in treasuries or mortgage-backed securities (MBS).
The “bet” if you want to call it that, is that at any given time, I probably would never need my $100,000 full out of the bank. If there were 10 of you, then perhaps the odds would be that if 1 out of 10 needed all of their money, they could get it. However, if it was 2 or 3, you needed things like treasuries to be liquidated to pay out. While many of these “paper” instruments are extremely liquid, the issue is that the rates have continued to climb.
I wrote about a LOT of this coming in June 2021 in my “Pin that Pops the everything bubble” piece. The root issue that some of these banks, many crypto exchanges, insurance companies, etc – don’t hold a ton of cash on the books, they convert it to yield-bearing instruments. This is how Tether was to operate – take your $1, make it worth $1 as a stablecoin – but they would invest your $1 into “paper”. In some respects, many of us felt like it was possible that it was Chinese commercial paper with relation to Evergrande.
Now – if you HOLD this paper, and no one makes a run on your bank, you might be ok. Assume you bought 10y treasuries at 4% and they are trading at 2%. If you have to liquidate paper, you are then taking a realized gain and paying out. The reverse is true if you bought at 2% and it’s now 4% – you have to take the realized loss and pay out. As long as no one is FORCING you to take realized losses, you can keep the plates spinning.
I literally saw a flavor of this chart last week, and glossed over it. I didn’t process it, until this event happened then went back to find it.
So, what this is essentially saying is that a lot of cash that these banks invested in securities went to “money heaven” as Rick Rule likes to say about Penny Dreadful miners. Perhaps the next 6-12 months, rates start coming down, and unrealized losses become unrealized gains.
What happened to SVB appears to have been the bank suffering tremendous losses when attempting to liquidate what it could to satisfy creditor requests. It then failed. It seemed that one of the things they held were mortgage-backed securities.
Today, you can start to get pretty good rates on “safe” instruments. A quick peek at CD rates has them at 4.5-5%.
So what the dilemma here is – and has been – for quite some time, is inflation rates and “expectations”. Many perhaps bought at 1% 10y because Powell and the giant Fed Clown Car all talked “transitory” inflation. People like me knew he was full of shit, but the gaslighting is effective rhetoric to “calm markets”. Had Powell come out and said, “shit…yeah – we monetized $6 trillion in debt, and this cash is sloshing around everywhere, all of you are about to see massive price rises,…..” you could see there would be a lot of fear with that. It’s hard for me at times to take what he says seriously, but I understand WHY he says it. Likewise, as the punch bowl was being taken away as early as late 2021, all of the Fed people sold their stocks. THAT was a signal to me that they indeed recognized the problem and they were about to tighten the shit out of things.
Around the same time, the “reverse repo” came about. I still don’t understand the fine nuances of banking and holding cash, but what the big picture with this is it appears there is $2.4T in a “reverse repo” that banks can easily use for liquidity issues. My GUESS is that with rates destined to go up – the Fed still needed people to buy paper, and with this, my guess is that a lot of this cash is for quick liquidity as opposed to selling treasuries to get the cash.
What is a reverse Repo? From the Fed page here….
“A reverse repurchase agreement (known as reverse repo or RRP) is a transaction in which the New York Fed under the authorization and direction of the Federal Open Market Committee sells a security to an eligible counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future. For these transactions, eligible securities are U.S. Treasury instruments, federal agency debt and the mortgage-backed securities issued or fully guaranteed by federal agencies.
For more information, see https://www.newyorkfed.org/markets/rrp_faq.html“
This appears to be a giant sponge to soak up problems with bank runs. Best guess.
What you then have to wonder is, why $2.4T? Why did this just pop out of nowhere in 2021? To me, it told me they were expecting a LOT of stress on the banks coming up. Remember, all of that 0% stuff had them blowing up the asset bubble a ton. Stonks, real estate, and crypto all went vertical. And, now that is over, and with this, tighter credit is about to pop the bubble.
FTX and exchanges like this were a problem due to how they had a lot of cash put into paper and other kinds of risky instruments to get you yield. This differs from the product I invest in, Kinesis, who has 1:1 token to gold/silver in the vaults. Unlike instruments that buy commercial paper for yield or lend out your metal with lease agreements, the yields are paid for by fees using the system. I wanted to take a quick moment to point out this distinction, as many in the silver community don’t seem to understand the differences with a lot of this stuff today. They see failures with cryptos and banks, and do not understand a lot of the mechanics which caused the failure – nor do they understand the business models of the items. I didn’t want this to be a Kinesis advert here, but I wanted to point out why March isn’t going to be a bad month for Kinesis, at all. Sorry to disappoint the small people of the world with that. But it helps to understand some of this in finer details.
What seemed to happen earlier this week, if what I read was accurate, was the CEO sold out of a lot of stock which may have spooked bigger investors, which then created a chain reaction.
MSN (I believe via MarketWatch) just put out a story with the 20 banks with the biggest unrealized losses at the moment.
The top one is about 45 minutes from me.
This chart didn’t exactly come through clean as the tickers are missing, and it appears the columns then are offset by one, but this gives you a good idea now of some of the distressed banks.
Apparently with SVB, a vast majority of the accounts had over the $250k limit for FDIC insurance. Those below this will be made whole, those over it may get pennies on the dollar down the road.
You’ll hear this word a lot, and why I use dominoes pictures for things like this. Sometimes a bailout can limit the damage. But….what most of you will start seeing is many things like this starting to break. Remember, the tightening started over a year ago, and what you are seeing is a delayed fuse. This is not something the Fed did last week, but a year ago. And this is the Fed Funds rate – which rose at the quickest rate in history.
Now – look at the steep rate of increase. I also wanted you to look at the last time it was this high. They got it to 5%, held it for a bit – and THEN the global financial crisis happened. Rates came plummeting down, as the real estate bubble here was massive. This time around, everyone is calling this the “everything” bubble, as stocks, real estate, bonds – EVERYTHING was inflated. With the possible exception of my precious metals and commodities.
With SVB, you see the usual gaslighting tricks to make you feel the government got your back.
But in reality, other headlines presented a more somber approach.
The big picture, as I understand it, is a lot of silicon valley companies had their cash at the bank for things like payroll. Don’t know precisely, as I don’t have access to customer records – but the supposition here is….
- These companies may not be able to make payroll or service their debts and may go bankrupt. This was $200 billion, not your local mom and pop bank. There will be some big players involved.
- Other regional banks that did business with them might be affected
- Due to the nature of the type of bank run, other banks this week may be vulnerable to this type of event.
- Derivatives can start to get unwound and volatility this week may be high.
- Many may feel “bail outs” are coming, but may we see “bail ins” for the first time?
Right now, this is all over my Twitter, and my friends outside of Twitter – you know – in the real world – have no idea what this is and this is how to make some sense of it.
With Evergrande, there was a lot of contagion within the Chinese real estate sector, but many don’t know the depths of how some of that might be felt yet to come. Tether is the most popular “stablecoin” within the cryptosphere, and with this, you give them $1 in cash, you get a $1 token. It was supposed to be all cash, but later it was revealed cash may have only been a fraction of what they have, perhaps 3%. Additionally – prior research I did I believe had them tied with Hong Kong and the “commercial paper” they had was supposedly linked, in some form, to Chinese real estate. Even if they bought US treasuries at .5%, think about the significant loss in value that has if they have to liquidate them today – and the realized losses. Meaning, the $1 you put in, might ACTUALLY have maybe $.94 behind it. Or, worse, companies that went extinct could have them maybe at $.30 on the dollar. Who knows? They won’t let any third party audits to their financials. Yet people keep forking over money to them. It’s silly at this point, and people that are putting money into things like this just don’t understand what is coming.
How to defeat contagion
This just came across my phone a few minutes ago…
The thing crypto has been doing the last year or so, is during times of volatility, they just shut things down, and don’t let you convert. Traditional banks may slow walk you or like in Lebanon, only allow access to so much of YOUR money daily with capital controls. Many of us that have predicted inflation is REAL – saw that this would REQUIRE much higher interest rates. It was therefore logical to see at some point when the punch bowl was taken away, the VALUE of this commercial paper would be shit, and with this, bank runs could happen.
Likewise – this is also why I have written many times about “bank bail ins”. In the Global Financial Crisis, one of the things that happened was the government had to backstop companies like AIG, and they let banks like Bear Stearns collapse. The government had to backstop things, in order to make things from getting much worse. What came out of that was a lot of legislation to try and protect the taxpayer from high risk activities of banks. It was rumored that at the height of the GFC, some banks had 30:1 leverage on reserve banking, and this was reduced to 10:1. But the big deal was the “bail in”, which essentially made the depositor a shareholder in the company. This would allow banks to use customer deposits to pay their bills rather than the government swoop in to save the day.
By now, some of you might think I just made shit up, so let’s visit this….
You then have investopedia in 2021 saying that bank bail-ins wll be the new bail outs.
The key issue is that for most of us plebes who don’t have millions, we are safe below the $250k threshold. Those of you with means may want to spread across several financial institutions. However – guys like me also saw the value in minimizing the cash we have in our bank accounts. I either…
- Put cash into real estate rentals to get future yield
- Put into trading account to try and grow my wealth, or at the very least, preserve my wealth from my RE holdings in the event of a downtun
- Converted cash to PMs in a layered approach – like vaulting, Kinesis, mining stocks, etc.
Will these banks start to get taxpayer bailouts? Just a few months ago, we saw pension fund bailouts. I think we might see for banks like this that have MOSTLY accounts over $250k, that it is POSSIBLE a bail-in is used here. I do not believe Dodd-Frank has been used here in the US yet, but this is probably the BEST situation for it to be applied.
Likewise, contagion can spread. I can almost see banks wanting to get more cash and front running bond selling this coming week to get liquidity. This pic also came across my screen.
This has Charles Schwab down 20.15% this week? Don’t they also have a trading app?
To me – the “bank run” of old might be defeated by the below measures:
- Reverse repo funds, which may be there at $2.4T for this event that is coming in 2023.
- Selling treasuries/commercial paper to get cash
- Currency controls – limit times when you can take YOUR money out, and limit how MUCH you can take out.
- Bail outs/bail ins
I can see short attacks to hammer them down more, but also of interest is worrying about whispers of “bail outs” that could make these stocks rally and rip the faces off of the shorts.
To me, it is a matter of time before the population sees stocks, bonds, real estate all being smashed – and it is a matter of time before gold catches that safe haven bid and front runs the eventual rate reductions coming. However – I have felt a lot of our numbers lately were “fake”. I didn’t see the jobs numbers as legit. However, my other thesis had to do with commercial real estate dying a horrible death. For me – I am thinking the jobs numbers are possibly legit – for now – but businesses are just now getting out of leases for expensive real estate to cut costs. IF you have a building with 1200 seats in Manhattan, AND you have demonstrated that 97% of your staff can work remotely, AND many of these people have now moved out of the metro area and visit the office a few times a month, why do you need that expensive building? Likewise – you probably have seen turnover the last year, and you may have had an expensive $250,000 resource be replaced by an EXTREMELY strong resource from Bethlehem, PA, that can visit your Manhattan offices once a month. So it is POSSIBLE to me that prior to massive layoffs, we see a DECIMATION in commercial real estate.
To me, companies want to keep their resources for as long as possible now, and are willing to sacrifice expensive commercial real estate or significantly downsize is. Side note – my mom worked for Morgan Stanley full time remote for the last 10 years of her career. She had worked out of Delaware, and they moved her job to Manhattan. She had to go visit the office once every month or two, and she lived 2 hours away, and could take the train from Philly. To me – this is how business will start to cut costs, FIRST. I also believe they will remove expensive urban personnel and replace them with regional or rural personnel that can mostly work remote which cost less per head, AND do not require a seat in a $3,000 sq ft office.
You need to understand that this is about to be a commercial real estate Armageddon. Then, consider ALL of the businesses around these commercial offices – the restaurants and shops that depend on all of that foot traffic that was just coming back. I believe what will happen is that in places like NYC, rents will sharply, sharply fall. That company with 1200 seats may now only want 120. Same with all of the other companies. With rents massively falling, this can allow regional players then to get a NYC-like presence with a lot less capital. But that might be 2024-2026.
To me, my most pressing issue above banking is commercial real estate. Then, consider all of the banks that are holding paper on this, and THEIR unrealized losses – that are about to mount. Then, consider the bail-in that will start to happen. If you are someone with $1m, and see these bank bail-ins happening, aren’t you going to take $750k and put it into silver and gold in vaults? Why would you have more than $250k in a bank?
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