- Regional banks started 2023 with least cash since 2008
- Jim Rickards: A financial crisis in its infancy
- How the Panic of 2008… really started in 2007
- Greg Guenthner: “The [OPEC] jolt oil needed”
- Beer branding: “Shoe Surgeon” performs “sole” surgery.
“The largest U.S. regional banks began this year with less cash on hand than at any time since the 2008 financial crisis,” says a discomfiting article at The Financial Times.
According to FDIC data, 30 banks — each with assets in the region of $50–250 billion — held just 7% cash, on average, in early 2023 (down from 13% cash the year before).
“That was less than half the cash held by the nation’s largest… lenders, such as Citigroup and JPMorgan Chase, which on average had 15% of their assets in cash,” FT says.
“As the [Federal Reserve] set out to fight inflation, it got tough for smaller banks to find profits,” explains Scott Hildenbrand of bank advisory firm Piper Sandler. On a quest for yield, then, banks moved cash into bonds, which generated, at least, some income while at the same time reducing liquidity.
“This risked losses should the bank actually need those funds to repay depositors” — for instance, institutions including now-defunct SVB and Signature Bank — “something that had not been a concern for years,” FT notes, “until it suddenly was.”
“These failures (and rescues) were accompanied by extraordinary regulatory actions,” says Paradigm’s macro expert Jim Rickards.
“The FDIC abandoned its $250,000 deposit insurance limit and effectively guaranteed all the depositors in Silicon Valley Bank and Signature Bank, a guarantee of over $200 billion in deposits.” (For Oprah and Harry, yes, but — are you kidding? — not for thee.)
“The Federal Reserve went further and offered to lend money at par for any government securities tendered as collateral by member banks even if the collateral was worth only 80% or 90% of par.”
Jim notes: “These actions have thrown the U.S. banking system and bank depositors into utter confusion.” The FDIC’s insurance fund? “Depleted,” he says, requiring “higher insurance premiums from solvent banks, the cost of which will ultimately be borne by consumers.”
Plus, the “collateralized loans” the Fed extended to banks “will be financed with newly printed money, which might exceed $1 trillion.”
But the most important question…
“Is the crisis over?” Jim asks. “Has the panic subsided?
“The panic is just getting started,” he answers, per “the history of the two acute financial crises in recent decades: 1998 and 2008.”
In simplest terms, a financial crisis occurs when the values of key financial assets (i.e., stocks, real estate, commodities, etc.) plummet precipitously, followed by a run on banks that lack the liquidity to meet depositors’ demands for cash.
On the other hand: “A recession is part of the business cycle,” says Jim. “It involves some combination of tighter monetary conditions, higher unemployment, business failures, inventory dumping and declines in industrial output and GDP.”
Generally speaking, a recession and financial crisis don’t overlap. “The Asia-Russia-LTCM crisis of 1998 was acute, but there was no recession,” he says.
“What sets the 2008 crisis apart is that it was an existential financial crisis and a severe recession.
“For our purposes, history shines a light on the combined crisis of 2008,” Jim adds. “Is history repeating?
“The evidence that we are in a recession is powerful,” he says. “Low unemployment is almost irrelevant because labor force participation is so low.” Meanwhile…
- “World trade is contracting
- Industrial output is declining
- Wholesale inventories are high (meaning markdowns and lower profit margins)
- Interest rates are still going up
- Inflation is still sapping real wages.
“The recession part of the recession-plus-financial crisis equation is already here,” Jim claims, though “we won’t have confirmation of that until more first half of 2023 data is revealed.
“Much of Europe and Japan are already in recession,” he confirms. “The China ‘reopening’ is a flop. The stock market has been volatile (but the trend is not your friend).
“Treasury and Eurodollar yield curves are steeply inverted, a condition last seen in 2007,” Jim mentions. And the importance of 2007, as it played out in the Panic of 2008, can’t be overstated.
“The 2008 crisis reached the acute stage on Sept. 15 with the bankruptcy filing of Lehman Bros.,” he says. “But that crisis began in the spring of 2007 when HSBC surprised markets with an announcement that mortgage losses had exceeded expectations.”
Throughout the summer of 2007? “The failures of two Bear Stearns high-yield mortgage funds and the closure of a Société Générale money market fund.
“The panic then caused the failures of Bear Stearns (March 2008), Fannie Mae and Freddie Mac (June 2008)… before reaching Lehman Bros.
“The panic continued after Lehman,” Jim says, “before finally subsiding on March 9, 2009.” If you’re keeping count, that’s about 24 months.
“This new crisis is one month old,” Jim points out. “It could have a long way to run.”
And to say that we’re experiencing a bank crisis isn’t entirely accurate, he says. “What’s happening is a Eurodollar crisis caused by a shortage of Treasury bill collateral.” As a consequence of the collateral shortage, banks are shrinking their balance sheets. (It’s an ouroboros: the serpent eating its tail.)
“Why doesn’t the Treasury just issue, say, $2 trillion of new T-bills and let the primary dealers and Fed underwrite them with as much printed money as needed?” Jim questions. “One reason is that neither Jay Powell nor Janet Yellen understands what we just described.” (See “ouroboros.”)
“The other reason is that we’re up against the date when the Treasury runs out of cash and can’t borrow more because of the debt ceiling,” he notes. “Is Congress ready to raise the debt ceiling? Nope. It’s the usual Democrat versus Republican game of chicken, with no resolution in sight.
“So we go from bank runs to a Eurodollar crisis to a Treasury bill shortage to a debt ceiling standoff in no time,” Jim outlines. “Do regulators get it? No, but we can see it coming and prepare accordingly. To preserve wealth,” he says, “step one is to get gold. That will see you through the storm.”
Turning to the market today, the Dow is the only major U.S. stock index in the green: up 40 points to 33,445. Meanwhile, the tech-laden Nasdaq’s stinking up the joint, down 1.35% to 11,960; the S&P 500 sorta splits the difference, down 0.45% to 4,080.
The commodities complex is a mixed bag. Crude’s lost 0.35% to $80.44 for a barrel of West Texas Intermediate. Gold’s ever so slightly in the red, still clocking in at $2,038 per ounce. Silver? Hanging tough above $25.
Here’s an offbeat story from the cryptosphere… Elon being Elon? On Monday, instead of Twitterphiles seeing the traditional blue bird on the platform’s home page, they were greeted by Dogecoin’s mascot.
Courtesy: Twitter
“It’s unclear what prompted the change,” says the New York Post. “However, the dogecoin logo appeared just days after Musk’s lawyers asked a judge to dismiss a $258 billion racketeering lawsuit accusing the billionaire of running a ‘pyramid scheme’ to boost the digital currency’s value.” A real finger in the eye, no doubt.
The upshot of Musk’s mammalian swap at Twitter? Dogecoin popped 30%… The same can’t be said for Bitcoin; at the time of writing, the crypto’s down 1%, resting just under $28K while Ethereum’s up 1.4%, approaching $1,900.
“If you made money trading stocks last year, chances are you booked some of those gains in the energy sector,” says Paradigm’s market analyst Greg Guenthner.
“With nowhere else to turn for gains, XLE became one of the most crowded trades on the market,” he says. “The Energy Select Sector SPDR (XLE) posted a dominant performance during the first half of 2022.
“While growth stocks swooned, XLE gained nearly 70% before topping out in early June when… XLE endured a hard reset, dropping 25% from its highs before bouncing and recovering into the third quarter.
“While the energy sector still managed to finish at the top of the heap in 2022, it was coming under increasing pressure in March,” Greg observes. “Crude was losing crucial support levels, falling below $70 for the first time since late 2021.
“And this time, it was taking energy stocks down with it — XLE dropped nearly 20% in just six weeks and was well below its 200-day moving average. By mid-March, a bigger breakdown was looking inevitable.
“But the cartel had something to say about that…
“In case you missed it, OPEC jolted the oil market over the weekend when it announced a surprise million-barrel cut,” Greg says, with Saudi Arabia alone cutting half that number.
“This news was the jolt oil needed to stave off a major breakdown,” he continues. “When the futures market opened Sunday evening, crude immediately jumped more than 6% to retake $80. Light crude is now up an incredible 25% from its March lows.
“More importantly, the breakdown is broken.
“XLE is now back above its 200-day moving average and the key $82 pivot,” he says. “The stage is now set for a quick move back to $90 and a challenge of those 2022 highs.
“Oil fooled everyone into thinking it was about to fall off a cliff.” In reality? “The energy sector is poised to attack its highs.
“The most impactful market move right now is actually happening in the oil patch,” Greg figures. “And it could have huge implications for energy stocks as we kick off the second quarter.”
We find ourselves today at the intersection of branding and beer — which just might be the epicenter of two of our favorite quirky topics.
To attract a younger demographic, it would seem, Heineken Silver — a brew from the Dutch beermaker — promises a lager that’s “freshness in a can.”
And what could be fresher than a sneaker collab? With a dude who calls himself “The Shoe Surgeon”?
Courtesy: Twitter
“Borrowing the bottle’s signature color palette of green, silver and red accents, the shoes feature a sleek green lenticular upper, a tongue with a removable bottle opener and a sole that will make people feel as if they are ‘Walking on Beer,” gushes a Branding News hack (that was mean). “Literally!”
Self-styled “The Shoe Surgeon” injected an unknown number of CCs into the sneakers’ soles. Our question: Is it enough to help you forget you spent good money on the hideous kicks?
Best regards,
Emily Clancy
The 5 Min. Forecast
