Bank Runs are Back in Style
I know, Silicon Valley Bank (SVB)… that’s what everyone wants to talk about. How did the 18th–largest bank in the United States crumble in 48 hours with no early warning, and what are the contagion risks?
It’s an important issue, just like Evergrande was, but most likely, it will be a case of a sacrificial lamb that actually stops the FED from being too hawkish.
You can imagine that over the weekend, Jerome Powell isn’t riding his bike (his favorite pastime) or getting much sleep… he is making sure with his staff and perhaps with Janet Yellen that other banks aren’t about to see the same thing happen to them.
Silicon Valley Bank managed their capital poorly, and between the FDIC insurance and other receivership proceedings, the damage is unfortunate, but not catastrophic.
Most corporations that had deposits with SVB work with several other banks, so while this drama takes the front-page news section this weekend, I think we better talk about what happened in the Middle East.
Before we do, though, I want to address gold’s incredible surge on Friday, which occurred because of the diminished likelihood that the FED remains aggressive, and bond traders (get this) have now priced a cut later this year!
SVB, while in itself not anything close to Lehman Brothers, does signal that the FED is toying with the limits of what the economy can handle.
But SVB is only the 3rd most important event of this past Friday (it was a busy day).
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Before the market opened, jobs numbers came out and they were (you guessed it) very strong.
In FED language, they were too strong. How does a bank solve labor shortages? Have you ever asked yourself how raising interest rates causes more people to rejoin the workforce or how it can reform immigration of talent? IT CAN’T.
Raising interest rates can slow the economy down, so companies have to freeze hiring or lay off employees, but is it just me or is that the stupidest solution to this problem you’ve ever heard of?
John Maynard Keynes was probably drunk on whiskey, sitting next to Winston Churchill, when he said to himself that any time inflation runs wild, the central bank ought to choke the economy, destroy equity wealth, force CEOs to downsize, so that misery can be evenly spread.
You see the problem, though; the FED is literally causing banks to collapse, but the jobs market is still as strong as ever.
Courtesy: Zerohedge.com, Bloomberg
The market consensus is so tilted to the thesis that the FED will continue raising rates that the short position on bonds (a bet that yields will rise) is the biggest in history.
If SVB and the ultra-resilient jobs market that forces an aggressive FED (even as systemic risk is causing bank runs) aren’t the two most important events of Friday, then what is?
Saudi Arabia and Iran have agreed to resume ties, brokered by China.
When I shared this with my dad over lunch yesterday, he asked me what the big deal is, and this was my reply: China has now positioned itself as a global tool for peace and progress in the Middle East and has worked with Saudi Arabia, the strongest U.S. ally of the past 50 years.
This is, for lack of a better word, war.
China is telling Biden that they’re taking his place, and I hope you understand that means China’s way of seeing things will trickle into other countries, which, until now, helped to serve the American way of life.
This is a catastrophe in the making for the dollar.
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