Financial Crisis + Recession = The Last Drop

  • Nothing like a lil’ “global coordinated action”
  • Money printing (in the extreme)
  • Shotgun wedding: Credit Suisse and UBS
  • The real reason the Beltway set loathes TikTok… What’s the deal with crypto?… Fed presidents’ “dead presidents”… And more!

Nothing like a little “global coordinated action” on a Sunday afternoon to make it feel like the spring of 2020… or the fall of 2008. That is, a full-blown financial crisis.

Before Asian markets opened for a new week last night, the Federal Reserve joined forces with five other central banks “to keep cash flowing through the world’s financial systems,” says the BBC.

Adds the Axios website: “The Federal Reserve, along with the European Central Bank, Bank of England, Bank of Canada, Bank of Japan and Swiss National Bank, [acted] to make dollar swap lines more readily available…

“Swap lines, used extensively in the 2008 global financial crisis and again in the early days of the pandemic in 2020, allow overseas central banks to access dollars direct from the Fed, and in turn, make dollar loans to their domestic banks.”

There’s a standing arrangement among these six central banks for swap lines… but until now this liquidity was made available on a weekly basis. Now it will be daily, at least through the end of April.

Oh, if you need further evidence that we’re back in 2020 and 2008 territory…

Kevin Tweet

We mentioned the numbers on Friday, but the chart puts it in even more stark terms: Banks borrowed a record $153 billion from the Fed’s “discount window” during the week ended last Wednesday. Because there’s a stigma attached to borrowing from the discount window, banks don’t do it unless they feel they have no choice.

And even if you saw it on Friday, we’re compelled to once again show you what’s happened to the Fed’s balance sheet. We’re back to 2020 and 2008 levels of money-printing. A single week’s spike in money printing is so extreme, it shows up on this chart going back 20 years…

from space

Also part of the Sunday afternoon scramble yesterday: The shotgun marriage of the zombified Credit Suisse and Switzerland’s biggest bank, UBS.

On Wednesday, Credit Suisse secured a loan from Switzerland’s central bank worth up to $53.7 billion.

It wasn’t enough. Now UBS will acquire CS for the paltry sum of $3.25 billion — less than half of CS’ already minimal market cap at the close on Friday.

The Swiss government was so determined to put an end to the CS drama that it was “poised to change the country’s laws to bypass a shareholder vote,” says the Financial Times.

The mythology of conservative, discreet Swiss banking has been a joke for over 20 years — at least since UBS bought PaineWebber in 2000 so it could have access to the U.S. market. But a rescue scheme that entails “changing the country’s laws” takes it all to a whole new level, no?

And it’s not just the Swiss authorities who’ve beclowned themselves…

wall street silver

Credit Suisse shares closed down another 56% on the Swiss stock exchange today. That’s on top of the 75% drop over the previous year before today.

But if the Credit Suisse drama is approaching its denouement, there was no Sunday-afternoon salvation for U.S. regional banks.

On Saturday, Bloomberg reported that Warren Buffett “has been in touch with senior officials in President Joe Biden’s administration in recent days.”

Buffett famously cut a series of sweetheart deals with big banks during the 2008 crisis — i.e., investing $5 billion in Goldman Sachs in exchange for preferred stock yielding a 10% dividend. (You think Buffett became a gazillionaire just by buying shares of Coca-Cola and IBM for the long haul? C’mon!)

With Berkshire Hathaway sitting on a $128 billion cash pile at the moment… well, it’s little wonder that “people familiar with the matter” would want to plant new rumors in the media. Financial Twitter was abuzz with screenshots of flight-tracker websites following private jets into Omaha.

But Sunday night came… and there was no announcement.

We can only speculate, as did Jim Bianco of Bianco Research: “Are we to assume Warren wanted unlimited deposit guarantees and other considerations that Biden was not ready to give? So Warren wished him luck and is keeping his $128 billion faraway from regional banks?

“They should have never brought up his name unless they were watching him write the check.”

So here we are — a financial crisis underway, coupled with an incoming recession.

Yes, there’s an incoming recession. The timing is uncertain, but the path is not. We’ve had an inverted yield curve since last year — meaning short-term interest rates are higher than long-term rates. That doesn’t happen unless large numbers of people in the know expect a downturn.

You might think a recession and a financial crisis go hand-in-hand. But as we said in January, that’s not always the case. We had recessions in 2001 and in 1990–91 that were not accompanied by a financial crisis. We had financial crises in 1994 and 1998 that were not accompanied by a recession.

But now it looks as if — once again, like 2008 — we’re contending with both. That’s exactly as Paradigm’s Jim Rickards suspected here in this space on Jan. 10. “All it takes to collapse the system,” he said, “is a shock failure leading quickly to panic.”

Moments ago, Jim wrapped up his exclusive online event titled The Last Drop Summit — the event we told you about for much of last week.

Now it’s crunch time: If you missed this briefing, it is essential that you watch the replay before the Federal Reserve makes its next move on interest rates on Wednesday at 2:00 p.m. EDT. Click here for immediate access.

For the moment, Mr. Market is sounding the all-clear — at least until the next out-of-nowhere headline hits.

As we write, the Dow is taking the lead among the major U.S. stock indexes — up over 1%, easily vaulting past 32,000 again. The S&P 500 is up three-quarters of a percent to 3,946. The Nasdaq is the laggard, up less than a quarter percent to 11,654.

The KBW Bank Index? Smokin’ — up nearly 2.7% as we write.

Gold roared toward $2,000 after we went to virtual press on Friday, but now it’s pulled back to $1,971. Silver’s at $22.44.

Crude seems to be pricing in a recession: A barrel of West Texas Intermediate is down to $66.46, the lowest since late 2021. (So much for the China reopening narrative, at least for now.)

Hot money flooded into crypto over the weekend amid all the bank rumors… and most of those gains are holding today. Bitcoin is only $40 away from $28,000 and Ethereum just $25 below $1,800.

A ban on TikTok “would be an entirely un-American, undemocratic and inappropriate response to an unproven risk that the Chinese-owned platform will share users’ data with Beijing for nefarious purposes,” writes journalist Chris Stokel-Walker.

TikTok, as you probably know by now, is a social-media platform dominated by short videos, with a rapt audience of younger people. It’s owned by a Chinese company, ByteDance.

The Beltway class has become obsessed — because, of course, they’ve solved all other problems — with the idea that TikTok “poses a threat to national security because Beijing could use it to influence U.S. public opinion or gain access to Americans’ data for nefarious purposes, such as spying,” says NBC News.

On Thursday of this week, TikTok CEO Shou Zi Chew will testify to the powerful House Energy and Commerce Committee. “Chew’s testimony comes as efforts in Washington to potentially ban TikTok in the U.S. have reached a fever pitch. Biden now supports a bipartisan bill that could do just that, and his administration recently told TikTok that either its Chinese owners sell their stakes in the company or the app could face a U.S. ban.”

“TikTok’s U.S. executives have repeatedly denied that they have been pressed by the Chinese government to share data and say they would refuse to do so if the request ever came,” Stokel-Walker writes in The Washington Post.

“Reporters, including me, have tried for years to prove these executives are not telling the truth but have turned up nothing…

“Of course, even if ByteDance hasn’t handed over data, who’s to say it wouldn’t in the future? But is that any different for any number of social media companies, many of whom have extensive, valuable operations in China? Meta, the company behind Facebook and Instagram, was recently fined for mishandling user data under European Union rules.”

As several prescient observers have pointed out, the real problem the Beltway class has with TikTok is this: It’s the only widely used social media platform — other than (arguably) Twitter since Elon Musk bought it — that’s not totally under the thumb of the U.S. government, taking “guidance” from three-letter agencies about accounts that deserve to be banned.

Now a follow-up to last Thursday’s mailbag, and a reader’s speculation about whether the closing of Signature Bank amounts to an attempted takedown of crypto.

As Reuters reported last week while the FDIC was taking bids for Signature, “Any buyer of Signature must agree to give up all the crypto business at the bank.”

The FDIC went to considerable lengths to deny Reuters’ report — first from a PR flack and then from FDIC chair Martin Gruenberg himself. Nope, no divestment of crypto as a condition of the sale, they insisted.

Now, it’s possible the FDIC issued that denial because it was feeling the heat from Congress — specifically, crypto-friendly Rep. Tom Emmer, the No. 3 Republican in the House of Representatives. Paradigm crypto analyst Chris Campbell spotted the following…

tom tweet

In the end, the winning bidder for Signature is Michigan-based Flagstar Bank — a subsidiary of New York Community Bank since last year.

So what’s the deal with the crypto?

From a report at Cointelegraph: “The takeover deal from Flagstar Bank did not include approximately $4 billion of deposits held by Signature Bank’s digital assets business. Instead, the FDIC confirmed that it would transfer these deposits directly to customers who opened a digital banking account, stating: ‘The FDIC will provide these deposits directly to customers whose accounts are associated with the digital banking business’.”

We’re mighty curious to learn what the logistics will be of “providing these deposits directly to customers.” To be continued…

“I find it particularly disgusting,” a reader writes after our Saturday edition, “that these regional Federal Reserve presidents make more money than the president of the United States, who makes if I am correct $400,000 per year!

“These Fed presidents appear to believe that THEIR jobs are more important that the president of the United States’!

“Given the fairly high percentage of the time that Fed policies are WRONG, I am having a difficult time comprehending what they actually do to justify that salary.

“Indeed, why are there 12 Federal Reserve Banks? If that is so, then it is likely that there are 12 Federal Reserve presidents who make more than the president of the United States.

“I know it feels odd to be chastising the Fed presidents’ salaries given the current vegetable in the White House, but the president of the United States SHOULD make more money than the president of a Federal Reserve bank.

“I see this as another reason that the United States does not need the Federal Reserve Bank.”

The 5: Current figures on the salaries of regional Fed presidents are surprisingly hard to come by.

We know this much, however: They vary. Based on figures from a few years ago, the more-equal-than-others New York Fed president — the only one with a permanent spot on the Fed Board of Governors — collects the most at $466,500. The lowest is St. Louis at $339,700.

And go figure — all of them make substantially more than Fed chair Jerome Powell. He gets the same as Cabinet secretaries — $235,600 this year.

Now you know…

Best regards,

Dave Gonigam




Dave Gonigam
The 5 Min. Forecast

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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