Bank stocks are in a world of hurt and the bleeding has just started. What caused the injuries was the relentless rate hikes by the Fed. Which also put the USD in overdrive for much of 2022 and put pressure on precious and base metals.
Then in September, 2022, the USD came under pressure, which saw it drop dramatically through to the end of January, with a counter trend rally in February. Gold started a bull run from early November through to the end of January, had a tough month in February, but has resumed the bull run in March as the banks have been getting pummelled.
During 2022, the Fed went on a campaign to fight inflation with a relentless series of interest rate hikes. Then things started to break down which could be seen in dropping housing sales, car sales, big ticket items sales and the consumer left with no wage increases and using their credit cards to make ends meet with insanely high interest rates. The Fed ignored all this.
Now the banks, which are the Fed’s favourite child, are breaking. Silicon Valley Bank had to be closed by the FDIC and their customers' deposits bailed out for those above the FDIC’s $250k guarantee. Signature Bank and Silvergate Bank collapsed as well.
The main culprit was the Fed’s interest rate increases. Silicon Valley Bank parked a lot of their depositors money in mortgage backed securities and long dated bonds when interest rates were near zero. With no hedging I might add. Then when interest rates started going up, their holdings went under water and problems piled up. Depositors got wind of the problems and a bank run ensued.
This caused runs at other small banks, with depositors rushing for the exit taking their cash to the big banks. This panic forced the FDIC, Fed and Treasury to hatch a scheme to protect against the bank run getting worse.
On Sunday, they said that all the depositors, whether or not they were protected beyond the FDIC’s $250k depositor guarantee, would be made whole. In addition, banks sitting on big losses on their debt that they took when interest rates were near zero could use their underwater holdings as collateral at par. Yes, you saw that right, at par, no matter how much they were down.
Monday rolled around, and as you can imagine, customers at small banks thought well if those other small banks are having problems I better get my money out and move it to one of the biggest banks. The big banks, aka “Too Big To Fail Banks”, saw billions upon billions rush through their doors. The small bank customers shot first and asked questions later. Can’t really blame them.
The banking stocks got beaten down so badly, at one time on Monday a bunch of them had their stocks halted. Investors could see that many small banks had similar problems and shareholders headed for the exit en masse. The problem got bigger, not only did the customers at the small banks hit the panic button, so did their shareholders.
The next shoe to drop was First Republic Bank, their customers went into bank run mode and rushed for the exit to take their money out and bring it to the big banks. The big banks saw so much money coming in, they hatched a scheme to take the new depositors money and deposit $30 billion of it into First Republic Bank. I promise you, I’m not making this up.
Credit Suisse joined the party and had to be bailed out by the Swiss National Bank. They had been struggling for some time, but the issue in the American banks was the straw that broke the camel's back.
On Sunday, many rejoiced thinking that the moves by the FDIC, Fed and Treasury saved the day. It doesn’t take a rocket surgeon to figure out that the customers, and shareholders of the small banks were going to head for the exits. They aren’t finished, there is no reason for any sane customer or investor to stick with small banks, the dominoes are falling and they can’t get up.
Okay, all caught up? The next important question is where should customers and investors put their money, should they sit with cash in big banks?
For the answer to that, we have to look at the economists at the Fed that caused all these issues with their relentless campaign of rate hikes. They meet on Wednesday. Word on the street is that a half point increase is off the table, and that they will raise a quarter point. I’m not so sure, I think it is much more likely they will stop raising.
Whether or not they raise a quarter point, what will get the big reaction is they will without a doubt say they are monitoring the banking issues. When they do that, the USD will be under serious pressure as the currency traders will know that the interest rate increases that have been bullish for the USD are ending. The prospect of holding cash in the bank that is losing purchasing power due to inflation and dropping because interest rate increases are about to stop doesn’t sound overly attractive.
So what is a good parking spot for cash? I watched “Dr. Doom” Nouriel Roubini being interviewed recently, the guy who used to call gold a “Barbarous Relic” has changed his tune and thinks gold is a great place to park money. He ain’t the only one, many others that you never thought gold is a good investment are seeing it shine.
I’ve said it before, that economics has a way of fixing a lot of stupidity. The out of control money and debt creation that happened when the central banksters abandoned the Gold Standard, so they could take away the golden adults in the room, has come full circle. Do I think we will return to the Gold Standard, no way.
At least not in any official declaration by the central banksters. But, watching their actions is much more important than their words. Since the calamity after the economic meltdown in 2008, central banksters have been buying gold hand over fist. 2022 was a record year for gold buying by central banksters and 2023 is shaping up to be a new record.
The central banksters are showing you their cards, they are worried about the debt and fiat currencies of the world and thinking gold is much less barbarous. The Fed has made the USD the least ugly at the party with their interest rate hikes, but the curtain on that show is about to drop.
It’s time for investors to return to a Golden Standard and protect themselves by owning gold. I wouldn’t stop there, silver is another great spot for protection. Copper, lithium and other commodities that we eat and use in our modern lives look solid as well. The electric car revolution and alternative energy sources are going to need a lot of metals. Time for investors to get serious about a Precious and Base Metals Standard.
The Fed has really painted themselves into a corner that leaves them with a lose-lose decision. The 14 years of near zero interest rates caused runaway inflation. So they jacked up interest rates at an aggressive clip. Which has caused serious damage in sales of housing, cars, high ticket items, and consumers that haven’t seen a raise in forever depending on their credit cards to make ends meet while paying loan shark interest rates.
As I said earlier, the Fed ignored all that evidence that they were overtightening. Even the inverted yield curves didn’t stop them. If they keep up with raising interest rates they will have to throw their baby, the banks, out with the bathwater.
The story gets worse for the Fed. They aren’t much different than Silicon Valley Bank, as they also loaded up their balance sheet with debt during the near zero interest rate era.
What is the poor Fed to do? I think they will have to stop raising interest rates, signal that their next move will be to lower rates, let the economy run hot and live with inflation that makes them uncomfortable. Their only hope now is to try to grow their way out of the problem they created. Will they do all this? God only knows. Will they admit they caused the problem? Not a chance.
This is part one of a two part post. Next up a road map through the forest to the other side of the mess the Fed and other central banksters caused.
All the best,
Allan