Looming debt bubble crisis watch

[seanD]

In short, you think the economic and market craziness is bad now, you've seen absolutely NOTHING yet. If the Fed continues tightening, the implosion that is our inevitable destination will be nothing short of breathtaking and horrific. This is why market investors are sure the Fed is going to capitulate at some point because they simply HAVE TO, as the consequences are beyond the scope of imaginable for them not to.

The debate between market investors is when this will happen, hence the reason we're seeing such crazy up and down swings in the markets? It's literally a tug of war between the two sides.

Is the collapse of Silicon Valley Bank the first casualty in the looming debt crisis to come? We shall see, but they definitely won't be the last, unless the Fed reverses course quick...

Silicon Valley Bank collapses after failing to raise capital

The wheels started to come off on Wednesday, when SBV announced it had sold a bunch of securities at a loss and that it would sell $2.25 billion in new shares to shore up its balance sheet. That triggered a panic among key venture capital firms, who reportedly advised companies to withdraw their money from the bank.

The company’s stock cratered on Thursday, dragging other banks down with it. By Friday morning, SBV’s shares were halted and it had abandoned efforts to quickly raise capital or find a buyer. Several other bank stocks were temporarily halted Friday, including First Republic, PacWest Bancorp, and Signature Bank.

The mid-morning timing of the FDIC’s takeover was noteworthy, as the agency typically waits until the market has closed to intervene.

“SVB’s condition deteriorated so quickly that it couldn’t last just five more hours,” wrote Better Markets CEO Dennis M. Kelleher. “That’s because its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable due to a classic bank run.”

Silicon Valley Bank’s decline stems partly from the Federal Reserve’s aggressive interest rate hikes over the past year.

When interest rates were near zero, banks loaded up on long-dated, seemingly low-risk Treasuries. But as the Fed raises interest rates to fight inflation, the value of those assets has fallen, leaving banks sitting on unrealized losses.

Higher rates hit tech especially hard, undercutting the value of tech stocks and making it tough to raise funds, Moody’s chief economist Mark Zandi said. That prompted many tech firms to draw down the deposits they held at SVB to fund their operations.

“Higher rates have also lowered the value of their treasury and other securities which SVB needed to pay depositors,” Zandi said. ” All of this set off the run on their deposits that forced the FDIC to takeover SVB.”

I'll report it here when I find out the exact details. Those dang derivatives.

We are a leading trader of healthcare and technology stocks, concentrated on high-touch trading across equities, derivatives, and convertibles.

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[seanD]

Well, it looks like SVB was a victim of a coordinated bank run, instituted by big fun managers like Peter Thiel. The likely reason this occurred is that they knew SVB was vulnerable. The reason SVB was vulnerable is because it had over invested in long term treasuries, not derivatives as I had initially thought. At the time they bought the treasures, interest rates were low.

Once the Fed started raising interest rates, the securities started losing value. Since they were losing value, SVB would lose a chunk of money in the event they had panic-sell to raise liquidity before the securities could mature.

Low and behold, Peter Thiel and his army of investors warned their clients to take out their money because SVB was too risky. SVB began selling their securities at a loss to try to raise money, but couldn't keep up with the money draining from their system, so they eventually had to cry uncle.

This is a different scenario than what happened in the UK with the pension funds that were made vulnerable with LDI derivatives. But both cases were a result of major investment institutions trying to chase higher yields on assets because of low interest rates, and then paid the price when interest rates began to rise. In the UK, the BoE reversed their tightening and intervened to bail out the pension system.

SVB will undoubtedly cause some problems in the financial sector, but probably not big enough alone that will compel Powell to intervene. However, this is only the tip of the iceberg, as there will be more of these bank failures down the line.

How soon is hard to tell, and it's anyone's guess who will be next. The blowup could occur in either the private debt sector (corporate bonds, derivatives, MBS, etc.) or the public debt sector (federal treasuries, municipal treasuries, etc.).

I'd keep a close eye on Credit Suisse. If that bank is the next domino to fall, that'll have multiple times worse effects on the financial system than SVB.

Btw, the Fed is not done raising rates. So far the federal funds rate is at 4.57%, and the Fed is expected to raise another .25-50% this month to take it well passed 5.00%. It will be interesting to see how they respond to this.

[seanD]

Just to give you an idea how disconnected from reality most of the financial world is, and I could easily link that to this thread, Jim Cramer on Mad Money was touting how safe SVB was in spite of the problems that were already visible, and urging people to buy just a month ago...

Forbes magazine, one of the... if not THE... prestigious financial magazines out there touted it as one of the "best banks" of 2023...

Silicon Valley Bank touts Forbes 'best bank' nod days before becoming largest failure since Great Recession

How does Forbes respond to try and save face? It was all OMB's fault.

Warning Signs At SVB May Have Been Missed Because Of Trump Era Stress Test Relaxations

[Ronson]

How does Forbes respond to try and save face? It was all OMB's fault.

Warning Signs At SVB May Have Been Missed Because Of Trump Era Stress Test Relaxations

It's the new Biden technology that revealed there were several bank closures during Trump's presidency that went undetected at the time.

[seanD]

It's the new Biden technology that revealed there were several bank closures during Trump's presidency that went undetected at the time.

[seanD]

Okay, so here's the banking crisis breakdown so far.

1) US Treasury department will not bail-out failing banks like they did in 2008, but will only bail-out depositors of bank failures moving forward.

U.S. moves to protect all deposits at Silicon Valley Bank in a bid to stem a wider fallout

The obvious intent here is to prevent bank runs. If folks know their deposit money is fully backed by the government (obviously this is targeting depositors higher than $250k), they likely won't panic and start pulling their money out of banks in fear (though what will happen when major banks start failing and how will the treasury department possibly fund all that is an open question).


2) Federal reserve will offer a $25 billion emergency backstop program. It's similar to the repo market, where banks loan cash to other banks in exchange of assets as collateral, only in this case, the Fed is the primary lender.

Federal Reserve Rescue Program

The problem with this multifold:

a) The Fed doesn't have the money. Since their own balance sheet is loaded with massive amounts of low yielding securities that haven't matured yet that have lost value due to higher interests (similar to what happened to SVB), they're actually in the red...



Which means any money they lend they're going to have to print (the definition of inflation).

b) $25 billion is ridiculously optimistic in light of the potential coming crisis. Let's perhaps add maybe a zero or two to that.

c) You can imagine what will happen, and the imbalances this will cause, when they have to print hundreds of billions, possibly trillions to lend.

The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds.

Yeah right.


3) The lingering question is: will the Fed ultimately pivot? Will they abandon fighting inflation and start lowering rates again?

The rumors are that they'll temporarily pause to let the panic pass, but likely continue raising in the near future, though maybe not as aggressively. The folks arguing this are typically the optimistic ones that foolishly believe this crisis has been adverted

The problem is that there are always lag effects in the financial system as a result of the actions the Fed takes. IOW, the full negative effects of Fed tightening have probably yet to happen because it takes time to develop and permeate the system.

And the bigger the problem, the longer it takes to manifest. That SVB and other banks failed so quickly are small fries in the bigger banking scheme and can be seen as outliers, mostly due to panic bank runs.

That said, it's inevitable that more financial institutions will fail (again, keep an eye on Credit Suisse to name just one) just from how high the interest rate is now (4.50-4.75%), much more so if and when the Fed keeps raising it higher.

Complete pivot is only a matter of time.


4) Crisis wildcard: inflation adds a whole new dimension to this crisis equation. What happens if the inflation numbers remain stagnant or WORSE, actually start to climb higher again, which is very possible scenario.

Imagine the crisis scenario we will be faced with when even the most financially ignorant normie out there finally realizes the reality that the Fed either has to allow inflation to run amok, or fight inflation and allow the banking system to collapse. Nothing in between.

[seanD]

Financial shares fall as Credit Suisse becomes latest crisis for the sector

Bank stocks were under pressure on Wednesday as the sharp drop of Credit Suisse rattled a segment of the market that was already reeling from two large bank failures in the past week.

Shares of the Swiss bank fell more than 24% after its biggest backer said it won't provide further financial support. Credit Suisse announced on Tuesday that it had found "material weakness" in its financial reporting process from prior years. Other European banks also slid, including a 9% drop for Deutsche Bank.

[seanD]

- JP Morgan projects that the Fed's $25 billion rescue pledge will be more like $2 TRILLION. Well, of course. $25 billion is an insult.

New Fed Bank Backstop Has Scope to Inject as Much as $2 Trillion


- Credit Suisse gets a $50 billion emergency loan injection from Sweden's central bank. Can a temporary fix of $50 billion sustain a mega bank with more than a trillion in assets and probably far more in off balance sheet liabilities? There has to be a reason their previous Arab lenders cried uncle and bowed out.

https://apnews.com/article/credit-su...307d3560ce502c


- Lagarde, of the ECB, raises interest rates .50 points to bring their interest rate just at 3%. Despite the ongoing systemic crisis, Lagarde has no choice and I love how the article implies that she does, being that the EU inflation rate is still above 8%. It's going to be an amazing sight to behold if and when the banking crisis unravels in the EU and what they do to try and mitigate it.

European Central Bank hikes rates despite market mayhem, pledges support if needed


Just as a reminder, this thing is global; a web of financial debt chaos because most of these western banks and their assets are intricately interconnected and intertwined across continents. So it matters to America what happens in the EU and vice versa. And we've yet to see anything in the derivative market (with the possible exception of Credit Suisse), which makes banks far more vulnerable to high interest rates than the bond market. Regulators insist that the derivative market was corrected in 2008. We'll see how that goes.


For perspective, it took about a year between the collapse of Bear Sterns and Lehman Brothers for the 2008 crisis to come to full fruition. We'll see how slow it takes for this thing to unravel.

[Ronson]

They're just whistling in the dark. The planet is due for a major economic upheaval with these increasingly unsustainable debts.

[Diogenes]

They're just whistling in the dark. The planet is due for a major economic upheaval with these increasingly unsustainable debts.

You mean like a Great Reset?

[Ronson]

You mean like a Great Reset?

I don't know what plans are in the work for the world's "Dark Matter." We need an alien attack, like War Of The Worlds, to scramble their plans.

[Diogenes]

I don't know what plans are in the work for the world's "Dark Matter." We need an alien attack, like War Of The Worlds, to scramble their plans.

Or Jesus to come back, at least to get it over with.

[rogue06]

You mean like a Great Reset?

Will it include that goofy red button?

Lavrov_and_Clinton_reset_relations-1_(cropped).jpg

[seanD]

Just when the Fed was trying to offload their bloated balance sheet of trillions of securities and "normalize" everything, a pesky banking crisis comes along...

[seanD]

Eyes on Deutsche bank as the next potential domino.