Duration Mismatch

Are these banking crises leading us into a recession? The market doesn’t seem to think so, but the markets also didn’t see SVB coming, with Moody’s ranking it as one of the best banks in America and Forbes featuring it in a glory piece.

I can take this issue and unpack in so many different ways, but we’re simple folks, not Wall Street suits… you and I have street smarts and detect bullshit by its smell… people like Janet Yellen think that going to Ukraine is a good use of her time, when she should have been asking her staff for data on which banks have insane (literally outrageous) duration mismatches.

I found it funny that the program is called Bank Term Funding Program (BTFP), but it can also be an acronym for Buy The FED Pivot.

What stinks to me are two things:

1. When one deposits his money in a bank, what gives the management the right to leverage this liability on their books and capitalize on it?

I thought we had that solved fifteen years ago, when other greedy punks used the same method to nearly send us back to the cave era.

2. How is it that unrealized losses on the books of banks aren’t marked-to-market?

If a bank bought Treasuries and is down on paper 23% or 45% or 60%, why are there financials showing the asset at 100% of its value (the purchase price)?

This makes no sense.

When thinking about what actually happened with SVB, the tragedy is that no one had any concerns over their books, before management suddenly came out and said they needed to raise capital.
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If the tech sector wasn’t so fragile, SVB would have probably just raised the capital and its depositors wouldn’t have rushed for the exits, but the panic was pandemonium.

Other banks aren’t out of the woods either; many of them are sitting on billions in bonds that will mature years from now, and are de-facto worth 20%, 30% and even 50% less than when they were purchased, if the public rushes to withdraw.

The last time we were here was in December 2018 (seems like yesterday).

Back then, the markets rejected rate hikes for different reasons, but it’s worse this time, because it’s not Wall Street that says enough is enough, but rather the plumbing of the financial markets, the very institutions that are responsible for keeping your money safe.

Net Unrealized Losses are the “on paper” losses that banks will have to endure, if they’re forced out of the positions they have in interest-rate-sensitive assets, which are down due to the hikes.

The markets are left to debate a couple of things:

1. Is the FED going to pivot one week from now and pause hikes?
2. Is this going to lead to a recession?

While the markets debate these matters, gold has already decided one thing: HIGHER FOR LONGER is not that simple.

The FED projections already price cuts in 2023!

In one week from now, Jerome will have to answer very tough questions after the rate decision, which I believe will be 0.25%, not 0.50%, and when he does, we’ll know if gold is about to soar in the face of cuts.

Best Regards,

Lior Gantz
President, WealthResearchGroup.com