- An unsettling TikTok epilogue
- Zach Scheidt: “Hometown banks are screwed”
- Why small businesses are mobbing big banks
- The Kingdom takes the piss out of Team Biden
- A room with a view (Cali-style)… The War on Cash: Bull’s-eye… GDP is about all we got… And more!
Before we jump into today’s big topic, an unsettling follow-up to one of our burning issues last week…
On Wednesday I expressed astonishment at the disconnect between the Beltway class’ hostility for the Chinese smartphone app TikTok… and the fact that TikTok has accumulated 150 million American users.
To date, the politicians have made zero attempt to persuade those users that they’re undermining “national security” or that they should give up TikTok for the sake of preserving “our democracy.” Most of the chatter in D.C. is about banning TikTok outright — with no acknowledgment that such a move would be profoundly unpopular without a compelling explanation. What gives?
Over the weekend, the answer hit me: No persuasion would be necessary if there were an event so shocking, so scandalous, so horrible… that tens of millions of TikTok users would voluntarily and simultaneously delete the app en masse.
I have no idea what that event would be or how it might come about. But whatever it is, it would be on the scale of Pearl Harbor — something so huge that an American committed to neutrality on Saturday, Dec. 6, 1941, would turn around and line up at the nearest recruiting office on Monday, Dec. 8.
We’ll leave it there for now and move on to more prosaic matters…
“Hometown banks are screwed,” says Paradigm’s value-and-income authority Zach Scheidt.
Last week, Zach explained how the biggest banks are the beneficiaries of the bank crisis that broke out last month. The authorities came to the rescue of customers at Silicon Valley Bank who had more than $250,000 on deposit… but would they do that again with future failures?
Treasury Secretary Janet Yellen hemmed and hawed throughout the week of March 20. Depositors at regional banks, preferring to take no chances, moved their money to the biggest of the big banks — the ones perceived as having a no-limits federal backstop because they’re “too big to fail.”
But wait, you might say — who keeps more than $250,000 on deposit other than the stupid people and companies who did business at Silicon Valley Bank?
“Imagine you own a small business,” says Zach — “let’s say an HVAC repair service with a dozen trucks and 20 licensed repair technicians.
“On any given month, you have to cut payroll checks to your employees, maintain your vehicles and buy up to $250,000 worth of HVAC units, parts and equipment.”
A bank is the most convenient place to stash your cash. And “chances are you keep most of your cash with a local community bank,” Zach goes on. “After all, your kids play baseball with the kids of the bank president. It’s a small town and everyone knows each other.”
But then Silicon Valley Bank happens… and small-town ties notwithstanding, you have to look out for No. 1. What if there’s a full-blown bank run?
“Yes, your deposits are insured by the FDIC up to $250,000, and the Federal Reserve is suggesting that even more will be backstopped. But if your community bank goes under, how much time will it take for you to get your cash? Will you be able to make payroll on Friday?
“And if you don’t have the cash to buy HVAC units, especially in the spring when so many air conditioners need to be replaced, your business could be crippled.”
And so you move your money to Bank of America (BAC) or Citi (C) or JPMorgan Chase (JPM) or Wells Fargo (WFC). No, they’re not as tuned in to the local and specialized issues you face, and that’s a bad thing if you’re seeking credit… but that concern is secondary to your survival.
“Sad as it is to say, I see a lot more trouble ahead for community and regional banks,” Zach concludes. “And the cold hard truth is that this is good news for the handful of large banks operating in the U.S.”
The big banks need deposits right now… so they’re more willing to take on small and medium-sized businesses as customers.
“Using our HVAC example,” says Zach, “you may not be able to afford all of the expensive HVAC units you need to have in stock ahead of the busy season. But with a line of credit from Bank of America, you can borrow money to stock up and prepare your business.
“Of course, Bank of America will charge fees and a relatively high interest rate for that line of credit. That’s especially true now that market interest rates are higher and small businesses have fewer competitive options.” But what’s the alternative?
To be clear, “I hate seeing small banks disappear from our financial landscape,” Zach says. “This crisis takes a big step in that direction, moving most banking functions to larger institutions. On the other hand, as investors, we have to play the hand we’re dealt. And in today’s market, there’s a huge opportunity to buy blue chip bank stocks.
“Prices for these stocks are temporarily depressed as investors scramble to understand where the dominoes are falling. But over the next several weeks, I expect large banks to report strong profits, raise guidance for future quarters and trade sharply higher.”
[Ed. note: As you might know, Zach teamed up last fall with Jim Rickards on a new trading advisory called Insider Intel. Jim and Zach have just spotted an enormously lucrative trade setup in the banking sector — an opportunity directly related to the crisis at SVB.
To learn more about this time-sensitive situation, click here and Jim will lay out the stakes.]
To the markets, where the big story is oil — and what might be a case of the Saudi royal family poking its thumb in the Biden administration’s eye.
Oil ministers from the OPEC+ nations announced a production cut totaling 1.6 million barrels a day, or nearly 2% of global production.
Realistically it won’t amount to that much, seeing as many OPEC+ nations already struggle to meet their production targets.
Still, the announcement comes as something of a shock because it took place before the ministers’ regular meeting.
The scuttlebutt in the Financial Times is that Saudi Arabia’s government was furious when Team Biden announced last week it would take its sweet time refilling the Strategic Petroleum Reserve — which you’ll recall was drained last year to prevent a Democratic wipeout in the midterm elections keep a lid on gasoline prices.
“The White House had previously offered reassurance to Saudi Arabia that it would step in to make purchases for its strategic reserve if prices fell,” explains the FT.
Whatever the case, a barrel of West Texas Intermediate is up 6% on the day at $80.23 — the highest in nearly a month.
➢ Progress report: While we’ve got oil on the brain, this is a good time to update you on the free options trade that Paradigm trading guru Alan Knuckman served up in our Jan. 13 edition: Those May $57.50 call options on Occidental Petroleum (OXY) are nearly back to breakeven after spending a long time in the red. “If OXY just rallies back to the top of its recent range at $75,” Alan said at the time, “the option gains 50%.” OXY is up over 4% to $65.05 so far today. Time and momentum are on the side of this trade.
Elsewhere, stocks are a mixed bag to start the week — the Dow up a half percent, the S&P nearly flat (still holding the line on 4,100) and the Nasdaq down nearly 1%.
Bond yields are backing down, the 10-year Treasury at 3.41%. Gold is up $19 to $1,989, but silver is off a nickel to $24.02. The major cryptos continue to trade near their recent highs, Bitcoin just over $28,000.
The big economic number of the day is recessionary: The March ISM Manufacturing Index clocks in below expectations at 46.3. It’s the fifth straight month of below-50 readings, suggesting the U.S. factory sector has been shrinking since November.
We know California real estate can be a little nutso, but…
From the New York Post: “In Holtville, California — a city of less than 6,000 in the state’s poorest region just 10 miles from the Mexico border — a currently uninhabitable two-parcel property has listed with a self-assured $1 million sticker price.”
For your $1 million, you get nearly five acres and a handful of outbuildings totaling 1,032 square feet with two bedrooms and one bath.
“The listing advertises the acreage as an ‘opportunity to renovate a country home or build on almost five acres,’ defending the shack, built in 1924, as having ‘character’ but allowing that ‘you may choose to build your own or subdivide this lot.’”
The social media response so far has been scathing. Says one wag on Twitter: “VERY open floor plan.”
To the mailbag, and a report from the front lines of the War on Cash…
“I was in Sarasota, Florida, recently at Target. I was in the self-check line, and someone asked how they can pay with cash at the machine. The Target employee said they had to enter their phone number in order to pay with cash!
“Now, why would that be? Fortunately there was no effort to confirm the person’s phone number was correct, so they could put any number in. But they also record every transaction at the self-check line. Facial recognition software, anyone?
“I’d love to get your take and those of your esteemed readership.
“BTW, since the last time I wrote in, my bank stopped giving out $50s at the ATM and is back to just $20s. I think they got tired of people coming into the bank to swap them for $20s.
“I love your work, no buts about it! Keep it up. It’s truly the only objective news I get on a daily basis.”
“I can’t imagine I was the only one expecting the usual end-of-month smackdown for gold and silver by the riggers in central banking,” reads our next entry.
[In the event, gold closed on Friday at $1,969 — which is a record monthly close, if only by about three bucks.]
“I wouldn’t even dignify that crap show by calling it a market, which it seems safe to say it’s not been for some time, since there are how many hundred ‘paper’ contracts for each ounce of the metals? If we truly had a market, I should think it would have reacted strongly to all the rampant currency conjuring since 2008.
“Under the circumstances I easily could see gold at $5,000 per ounce, minimum, in a free market, likely higher, and not only as a result of the currency printing frenzy.
“The national debt is tangible and verifiable, and according to official figures at 130% of the GDP, give or take, but does anyone really believe our GDP is $20 trillion? I sure don’t. I’m thinking in reality it’s considerably less, given the sources and methodology of its calculation, and it wouldn’t surprise me if the actual debt ratio is closer to 200%.
“How can a nation that produces so little, comparatively speaking, and is more service-based than anything have such a high GDP? To me it fails the common-sense and logic tests, but then again, the way things are, those tests were discarded some time ago, huh?”
The 5: We won’t rehash the many problems we have with GDP as a yardstick of “the economy”… although our musings last summer during the ridiculous what-is-a-recession debate are worth another look.
But it’s not completely useless. As a means of comparing the “economic output” of one country versus another, GDP is about all we’ve got.
And debt-to-GDP is a valuable measure as well; anything over 90% is the point of no return. As Jim Rickards explained in his 2019 book Aftermath, “The debt itself causes reduced confidence in growth prospects partly due to fear of higher taxes or inflation, which results in a material decline in growth relative to long-term trends.”
Yup. It was all baked into the cake… even before COVID came along.
Best regards,
Dave Gonigam
The 5 Min. Forecast
