SVB, CS, SNB (Saudis), SNB (Swiss), BTFP, ECB, & A Deposit-Reacharound…

Credit Suisse counterparty risk exploded and is completely ignoring the SNB bailout…

Source: Bloomberg

Still not worried, then how’s this – USA sovereign risk just hit a new record high…

Source: Bloomberg

Simply put: Shit’s breaking …and here is every policymaker everywhere all at once…

…and where do we end up.

US regional banks are down hard-er (as Fed transparency of the massive borrowings last week from their bailout facilities definitely spooked more than a few US investors)…

Source: Bloomberg

European bank stocks collapsed, erasing YTD gains and banking sector credit risk soared to 5-month highs…

Source: Bloomberg

And CS stock price continues to tank to record-er lows…

And First Republic Bank tumbled back down to recent lows, despite billions in handouts from the big banks…

All things considered – the committee to save the world has failed for now as safe-haven flows flooded bonds, bitcoin, and bullion…

A mixed picture for stocks on the week withe Nasdaq the big outperformer while Small Caps were weakest. The Dow ended the week in red and the S&P slipped lower today but ended green…

That huge outperformance of mega-cap tech over small caps is practically unprecedented. As Goldman notes,

1/ over the last 10 sessions, the gs basket of mega cap tech stocks is up 6.2%

2/ over the last 10 sessions, the russell 2000 is down 9.8%

3/ this 16% spread is the second highest of all time (one data point in Mar2020)…

…there has been a clear shift to tech stocks, and an even more clear shift to the ultra high market capitalization names

The S&P was unable to hold above its 200DMA…

Energy and Financials were the week’s ugliest horses in the glue factory while Technology (and Utilities!?) were the biggest gainers…

Source: Bloomberg

Office REITS were monkeyhammered this week…

Source: Bloomberg

VIX has broken up into a new higher-vol regime for now…

All Treasury yields were lower on the week with the short-end massively outperforming…

Source: Bloomberg

The last 7 days in 2Y UST yields (these are just the close-to-close moves) have been unbelievable (and ended below 4.00%): -20bps, -28bps, -61bps, +27bps, -36bps, +27bps, and -30bps

Source: Bloomberg

The UST yield curve steepened dramatically this week, bringing the case for recession even more imminent…

Source: Bloomberg

European sovereign yields plunged this week too…

Source: Bloomberg

The dollar ended the week lower, after a roller-coaster midweek…

Source: Bloomberg

Crypto had a big week as QE is back on the table with Bitcoin dramatically outperforming…

Source: Bloomberg

Bitcoin topped $27,000 today for the first time since June 2022…

Source: Bloomberg

Gold soared this week, back above $1950, to its highest since April 2022…

Silver outperformed Gold on the week but crude, copper, and NatGas all tumbled…

Source: Bloomberg

WTI puked to a $65 handle – its lowest since Jan 2022…

Finally, rate-change expectations have swung violently dovishly and hawkishly all week, but all dramatically more dovish than before SVB’s failure…

Source: Bloomberg

What difference a week makes…

Source: Bloomberg

The terminal rate now appears to be in May (just one rate-hike) and by year-end, rates are expected to be 76bps lower (i.e. more than 4x25bps rate-cuts after May).

The market wants moar free money…

It would appear, if Powell is watching the market, that he is done for now (and that explains why bitcoin and gold are soaring).

In the past week, DoubleLine CEO and founder Jeffrey Gundlach has had a lot to say as the US banking system collapse and bailout enjoins Europe’s banking crisis leaving central banks’ inflation-fighting plans in question.

The ECB was clear – hiking 50bps and FTW! – but what will The Fed do?

The market has dovishly adjusted to the banking crisis overhang… (pricing in a peak in rate in May with just one 25bps hike and then cuts for the rest of the year)

…and the new ‘bond king’ suggests that Powell hikes continue to keep up its inflation-fighting efforts, due to credibility concerns.

“This is really throwing a wrench in [Fed Chair] Jay Powell’s game plan,” Gundlach said.

“I wouldn’t do it myself. But what do you do in the context of all this messaging that has happened over the past six months, and then something happens that you think you’ve solved.”

Ironically adding that, The Fed is doing this with one hand at the same time as enabling inflationary policy with the BTFP on the other:

“I think that the inflationary policy is back in play with the Federal Reserve … putting money into the system through this lending program.” Gundlach said.

But, in a Twitter Spaces audio chat Thursday with Jennifer Ablan, editor-in-chief of Pensions & Investments, Gundlach warns of an imminent recession – within the next four months – as the yield-curve suddenly steepens…

“In all the past recessions going back for decades, the yield curve starts de-inverting a few months before the recession,” adding that “I think it’s within four months at the most. Almost every indicator is flipped into high probability. The only one that hasn’t is the unemployment rate.”

But,, the DoubleLine founder pointed out that at 3.6%, the unemployment rate just crossed back above its 12-month moving average…

Which, historically has been “a reliable indicator you’re on the doorstep” of recession.

Gundlach called Silicon Valley Bank’s failure “a rate policy collision with stupid accounting rules” for banks, but warned of The Fed’s reaction was inflationary and antithetical to their inflation-fighting stance.

“By bailing out depositors at SVB, that’s essentially a quantitative easing” by the Fed, he said.

“Making those depositors whole is about the same as a month or two of reversing quantitative tightening.”

The stock market is currently in a bear market, he said, and he would sell into any rallies.

Gundlach predicts the S&P 500 index will trade down to 3,200 and reminded investors that “the goal for 2023 is survival, and losing as little money as possible.”

What worries the bond king the most may surprise some – spreading geopolitical conflicts:

“I think expanding wars worries me the most.”

But he was clear on the biggest financial risk:

“The Fed is broke. The Fed’s balance sheet is negative $1.1 trillion. There’s nothing they can do to fight any problems except for printing money.

They have nothing left. The Fed used to send money to Treasury. Now Treasury sends money to the Fed.

We’re at this point in time where we don’t have any road left to kick the can on our mismanagement of finances and monetary policy.”

His suggestion – buy gold.

If government spending continues, he predicts “the dollar will collapse under the weight of the deficit.”

“I think gold is a good long-term hold, gold and other real assets with true value, such as land, gold and collectibles.”

Authored by Jonathan Turley,

We have been discussing the scorched earth campaign by the new legal team Hunter Biden as well as a type of legion of Doom of Democratic activists. That included seeking criminal investigations of critics while threatening a wide array of journalists and potential witnesses with civil lawsuits. Today, Biden moved against John Paul Mac Isaac, the repairman who revealed the laptop and its contents. The lawsuit, in my view, has serious flaws, but reflects the new “dark Biden” stage of this saga. The effort to go on offense against key figures and witnesses could well backfire for the Hunter Biden and his family.

In the 42-page filing below in the United Stats District Court for the District of Delaware that includes six privacy-related counts.

Previously, the new Biden team stumbled out of the gate first seemingly (and belatedly) admitted that the laptop is authentic and then backtracking. In an earlier column on the letters sent by Hunter Biden’s lawyer Abbe Lowell calling for criminal investigations, the removal of tax exempt status, and other measures targeting critics and media. It also appeared to confirm that the laptop is indeed Hunter’s. However, the next day, Lowell told NBC “These letters do not confirm Mac Isaac’s or others’ versions of a so-called laptop.” It is a curious position when asking for criminal investigations like asking police to look for people who may or may not have stolen a car that may or may not be yours.

In the new filing, the team continues to equivocate on ownership and even refuses to admit that Hunter Biden left the computer at the shop. Ironically, Hunter Biden hits Issac for conflicting accounts on how the computer can into his possession. In a filing alleging the loss of privacy and ownership of these files, Hunter Biden legal team still plays coy on the computer’s authenticity. At the top of the countersuit they state:

It is still not clear what Biden is trying to suggest. Putting aside someone representing themselves as Hunter Biden, the other possibility is that someone stole the laptop of the son of the Vice President and then took the risk of bringing it into a shop for repair (while using the victim’s name).

The biggest problem facing Biden is that he abandoned the laptop unless he continues to maintain the possible evil twin or deranged thief theories. The filing, however, offers a new claim to get over this hurdle.

The standard agreement of the shop states “[e]quipment left with the Mac Shop after 90 days of notification of completed service will be treated as abandoned and you agree to hold the Mac Shop harmless for any damage or loss of property.”

Notably, Biden does not deny that he signed that agreement, but he refuses to say that he did. Instead, he claims that the provision is void under a Delaware law setting a period of a year to obtain lawful ownership over abandoned property. 25 Del. C. § 4001. However, the provision states that a person loses ownership claims if he “failed to otherwise assert or declare the ownership rights to the tangible personal property for a period of 1 year.”

The filing focuses on Issac disclosing the contents before the year period but ignores that Biden has not claimed ownership for multiple years. However, the counterclaim maintains that Issac did not even wait the 90 days to access and share some of the material.

It is a curious line of argument for a court, which is faced with an individual who continues to question his ownership of the computer while asserting ownership rights. He also questions whether Issac was premature to claim the property when he still equivocates over whether this is his property over two years after the disclosures.

If Hunter Biden abandoned this property, it is hard to see how he maintains privacy interests in files that he never sought to protect and still does not fulling admit are his.

For example, he raised the common tort of intrusion in his private affairs, but he may have effectively released that information into the public domain through his abandonment.

He also raises the common law torts of disclosure of embarrassing private facts. However, that tort has an exception for newsworthiness:

§ 652D Publicity Given to Private Life
One who gives publicity to a matter concerning the private life of another is subject to liability to the other for invasion of his privacy, if the matter publicized is of a kind that
(a)  would be highly offensive to a reasonable person, and
(b)  is not of legitimate concern to the public.

In the end, Biden could be seeking greater discovery on the involvement of political figures like Rudy Giuliani. However, discovery also presents a risk for Hunter Biden, who has yet to be fully examined under oath over his own actions and contacts in the matter. The refusal to admit ownership (or prior conduct) may be due to Hunter Biden remaining under criminal investigation in Delaware on matters potentially related to files found on the laptop. The Justice Department seized the laptop over a year ago.

Biden is asking a court to carry considerable water to allow him to advance such arguments while continuing to question the ownership of the computer or whether he signed the underlying agreement. Indeed, it is curious (if he did not sign the agreement) that there has not been an allegation of fraud or forgery raised by the team. Instead, the legal team attacks the agreement as possibly taking advantage of Hunter Biden, who is an attorney, by noting “the boilerplate terms of the Repair Authorization form used by Mac Isaac were contained in small-print font at the bottom of the page, well below the signature line.”

The question is whether this conflicted set of claims is “well below” the tolerance level of the federal court.

The US Virgin Islands hit back against JPMorgan’s claim earlier this month that CEO Jamie Dimon had no clue that Jeffrey Epstein was breaking the law.

“Jamie Dimon knew in 2008 that his billionaire client was a sex trafficker,” argued US Virgin Islands attorney Mimi Liu during a late Thursday hearing in front of Manhattan US District Judge Jed Rakoff, referring to the year Epstein was first criminally charged with sex crimes, CNBC reports.

“If Staley is a rogue employee, why isn’t Jamie Dimon?” Liu said during the hearing to discuss the bank’s efforts to have the USVI lawsuit against the bank dismissed.

“Staley knew, Dimon knew, JPMorgan Chase knew,” Liu continued, noting that there were several cash transfers and wire transfers made by the prolific pedophile (Epstein), including several hundreds of thousands of dollars paid to several women which should have been flagged as suspicious.

“They broke every rule to facilitate his sex trafficking in exchange for Epstein’s wealth, connections and referrals,” said Liu, adding “This case was not just Jes Staley … there will be numerous documents that go far beyond his office to the executive suite.”

A lawyer for JPMorgan disputed those arguments, “in particular the point about Jamie Dimon having any specific knowledge.”

Dimon is not a named defendant in the suit against the bank.

A spokeswoman for the bank declined to comment Friday to CNBC about the hearing.

But the spokeswoman, Patricia Wexler, did say that “Jamie Dimon has no recollection of reviewing the Epstein accounts.” -CNBC

Staley, a former JPMorgan exec and former Barclays CEO – who exchanged hundreds of emails with Epstein (including about ‘Disney princesses‘), has denied knowledge of Epstein’s illegal conduct.

In a 2008 internal JPMorgan email, an unidentified employee suggested: “I would count Epstein’s assets as a probable outflow for ’08 ($120mm or so?) as I can’t imagine it will stay (pending Dimon review),” according to a previous filing by the USVI.

Two years prior, JPMorgan’s Global Corporate Security Division flagged several newspaper articles “that detail the indictment of Jeffrey Epstein in Florida on felony charges of soliciting underage prostitutes.”

The Virgin Islands claims that Epstein’s 15-year relationship with the bank facilitated the transportation of young women to various properties for sexual abuse.

The suit was filed three years after Epstein, who was a former friend of ex-Presidents Donald Trump and Bill Clinton, died by suicide in a Manhattan jail while awaiting trial on federal child sex trafficking charges.

JPMorgan has said Dimon was not involved in decisions related to Epstein’s account at the bank.

Last week, the bank sued Staley, its former chief of investment banking, alleging that he is legally responsible for lawsuits from the Virgin Islands and Epstein’s victims related to Epstein’s relationship with JPMorgan. The suit seeks to claw back more than $80 million in compensation Staley received. -CNBC

In their suit against Staley, a lawyer for JPMorgan said “all roads go to Mr. Staley,” adding “He will be at the center of this case whether there is one or two.”

Authored by Naveen Athrappully via The Epoch Times (emphasis ours),

Authorities from the Bay Area in San Francisco have decided to ban the use of natural gas-fired water heaters and furnaces, citing pollution and health concerns.

The Bay Area’s Air District Board of Directors made amendments to certain regulations to eliminate nitrogen oxide (NOx) emissions from residential and commercial natural gas furnaces and water heaters by mandating that new appliances comply with zero-emission standards.

“The rule amendments would apply only to new appliances and do not mandate the immediate change out of existing appliances, nor will they apply to appliances used for cooking, such as gas stoves,” according to a March 15 press release.

According to new amendments, only “zero NOx” water heaters can be sold or installed in the Bay Area beginning in 2027. Two years later in 2029, only zero NOx furnaces will be allowed to be sold or installed in the region. And in 2031, new commercial water heaters in the Bay Area will have to meet zero NOx standards.

NOx emissions are said to contribute to particulate matter and have been linked to wheezing, breathing difficulties, coughing, asthma, and susceptibility to respiratory infections, the Bay Area’s Air District Board of Directors said. Exposure to particulate matter has been linked with asthma, heart attack, neurological disease, lung cancer, and premature death, the board said.

Air District claims that the new amendments will improve air quality, prevent an estimated 85 premature deaths and dozens of asthma cases in the Bay Area annually, and save up to $890 million per year in health impacts resulting from air pollution exposure.

“The 1.8 million water heaters and furnaces in the Bay Area significantly impact our air quality, resulting in dozens of early deaths and a wide range of health impacts, particularly in communities of color,” Philip Fine, executive officer of the Air District, said in the news release. “This groundbreaking regulation will phase out the most polluting appliances in homes and businesses to protect Bay Area residents from the harmful air pollution they cause.”

Though gas stoves have been exempted from the Bay Area ban, federal agencies have indicated that they are considering tougher restrictions on these appliances.

In February, Richard Trumka Jr., commissioner for the Consumer Product Safety Commission (CPSC), stated that the federal government could ban natural gas stoves.

The Biden administration denied that such a move was under consideration, but CPSC later announced it was soliciting information regarding the safety of such stoves, which could be the initial step toward restrictions. The Department of Energy has also proposed energy efficiency standards for residential stoves, which some believe could hit gas stoves harder than their electric counterparts.

Read more here…

Never let a crisis go to waste…

Having bailed out all his billionaire donors’ deposits at SVB, President Biden (or some White House aide) has issued a statement demanding tougher penalties for executives of failed banks.

What more perfect target than ‘rich bankers’ for some vilification and placation to his base…

Statement from the President on Holding Senior Bank Executives Accountable (emphasis ours)

This week, we took decisive action to stabilize the banking system without putting taxpayer dollars at risk. That action was necessary to protect jobs and small businesses, and no losses will be borne by the taxpayers.

Our banking system is more resilient and stable today because of the actions we took.

On Monday morning, I told the American people and American businesses that they should feel confident that their deposits will be there if and when they need them. That continues to be the case.

I also said that I’m firmly committed to accountability for those responsible for this mess. No one is above the law – and strengthening accountability is an important deterrent to prevent mismanagement in the future. The law limits the administration’s authority to hold executives responsible.

When banks fail due to mismanagement and excessive risk taking, it should be easier for regulators to claw back compensation from executives, to impose civil penalties, and to ban executives from working in the banking industry again.

Congress must act to impose tougher penalties for senior bank executives whose mismanagement contributed to their institutions failing.

We are sure Liz Warren will love this.

The “NATO membership train is moving” – as one Friday headline out of Europe states enthusiastically, after President Recep Tayyip Erdoğan announced Turkey will ratify Finland’s NATO membership application prior to the Turkish elections in May.

Erdogan said in a Friday press briefing while standing alongside Finnish President Sauli Niinisto the he’s asked Turkey’s parliament to approve ratification. However, it also became clear that Sweden’s bid will not be approved.

JUST IN: Turkey to greenlight Finland’s NATO membership bid. “We have decided to initiate the ratification process in our parliament”, Turkish President Erdogan said after meeting his Finnish counterpart Niinisto in Ankara. Ratification expected soon, before TR elections in May. pic.twitter.com/kEFbu2VE66

— Julia Hahn (@juliahahntv) March 17, 2023

“We have decided to start the protocol of Finland’s accession to NATO in our parliament,” Erdogan said following a meeting with his Finnish counterpart.

Concerning Sweden, Erdogan commented that his country submitted a list of 120 “terrorists” to Stockholm, but complained that not a single one of them has been extradited.

Sweden’s membership bid is expected to continue to stall, after deteriorating relations with Turkey in the wake of the Quran-burning incident by a far-right activist. Turkey has also demanded Swedish authorities crackdown on Kurdish political groups and operatives while alleging that Stockholm has hosted “terrorists” on its soil.

Finland is at the same time building a 200km fence along its border with Russia to boost security, also after reporting that Russian men fled into Sweden by the droves in order to escape conscription. The fence will reportedly be 10 feet high and topped with barbed wire.

Authored by Znne Zhang and Olivia Li via The Epoch Times (emphasis ours),

At its 2023 Investor Day presentation in Texas, Tesla revealed its plans to produce its next generation EV motor without any rare earth minerals. As a global leader in the electric vehicle market, Tesla’s plan for zero rare earth permanent magnet motors, if successful, could have a significant impact on the rare earth market—particularly China’s rare earth monopoly.

“As the world transitions to clean energy, the demand for rare earths is really increasing dramatically, and not only will it be a little harder to meet that demand, but mining rare earths has environmental and health risks,” said Colin Campbell, VP of Powertrain Engineering at Tesla.

“We have designed our next drive unit, which uses a permanent magnet motor, to not use any rare earth materials at all,” he announced.

Currently, Tesla’s Model Y uses three types of rare earth materials: approximately 500 grams of one, and 10 grams of two others. But in Tesla’s next generation permanent magnet motor, zero rare earths will be used, according to Campbell’s presentation.

Campbell did not specify which materials would be used to replace the rare earth components.

Tesla also stated that from 2017 to 2022, its use of rare earth materials in the Tesla Model 3 had decreased by 25 percent due to improved efficiency in its powertrain system.

Shortly after Tesla’s announcement to remove rare earths from its EVs motors, China’s largest rare earth supplier, Northern Rare Earth (600111.SHA), saw its stock price drop by nearly 10 percent as of March 10. The stock prices of two other major rare earth suppliers, China Rare Earth (0769.HKG) and Shenghe Resources (600392.SHA), also fell by 5.9 percent and 10 percent, respectively.

Compared with the traditional excitation generators, permanent magnet motors—especially rare earth permanent magnet motors—have higher magnetic energy product and coercive force: the ability to resist demagnetization. This makes them reliable and highly efficient. The energy conversion efficiency of rare earth permanent magnet motors typically reaches 90 percent, with the best achieving over 98 percent.

However, the supply of rare earths has been highly monopolized by the Chinese Communist Party (CCP). According to data released this year by the United States Geological Survey (USGS), in 2022, China’s rare earth reserves accounted for 34 percent of the world’s known reserves, and its rare earth production accounts for 70 percent of global production. As a result, the supply and price of rare earths in the global market are largely under the control of the CCP.

In addition, the supply of rare earths may not keep pace with the rapid expansion of the global EV market, especially Neodymium-Iron-Boron (NdFeB) permanent magnets, a key component in advanced electric motors.

In the wake of heightened tensions between the United States and China, minimizing or eliminating the use of rare earth elements without affecting product performance would be beneficial to supply chain stability.

Zero Rare Earth Technology May Have Wide Impact

In 2022, Tesla delivered more than 1.31 million EVs, accounting for 18.2 percent of the global EV market and ranking first in the world. Since 2018, Tesla has taken over more than 60 percent market share of the American EV market. In Europe, Tesla’s Model Y and Model 3 were the two most popular EVs in 2022.

This dominant position gives Tesla tremendous influence in the EV industry.

According to rare earth consulting firm Adamas Intelligence, EV motors account for 12 percent of global consumption of NdFeB magnets, of which Tesla accounts for 15 percent to 20 percent.

If Tesla succeeds in removing rare earths from its motors, Adamas estimates that the global market for NdFeB will lose only 2 to 3 percent of demand in the short term. However, in the long term, it is estimated to lose 3 to 4 percent at most, assuming Tesla can maintain its leadership position in the EV market.

But this analysis did not take into account that other EV companies will likely follow suit if Tesla is successful, as this innovation has cost-saving potential and helps to rid industry reliance on the vulnerable and costly rare earth supply chain.

In addition to new energy vehicles, rare earth permanent magnet motors are also used in several other areas, including wind turbines, traditional automotive motors, home appliances that use frequency conversion technology (air conditioners, refrigerators, washing machines, etc.), industrial robots, and energy-saving elevators. Therefore, the development of zero rare earth permanent magnet motor technology may have broader implications, potentially affecting demand for rare earths from China.

CCP’s Secret Weapon

The CCP sees rare earths as a political bargaining chip.

In 2010, after China escalated its sovereignty dispute with Japan over the Diaoyu Islands, the CCP began restricting the export of all 17 rare earth materials to Japan as a means of coercion. This move alerted Western countries to the risks of relying on Chinese supply chains.

The CCP has been establishing a so-called rare earth strategic reserve system since 2011, treating rare earths as strategic resources, and collecting and stockpiling large amounts of rare earth raw materials.

At the same time, through a quota system that controls the total volume of rare earth mining and smelting in China, the CCP has concentrated rare earth production in the hands of a few government-controlled rare earth groups, further strengthening its control over global rare earth supply and prices.

Beijing began seriously considering rare earth export restriction to the United States in May 2019, amid the escalation of U.S.-China trade war.

“Since the United States announced its decision to include Huawei on its ‘Entity List’, speculation has been rife that China may restrict or even stop its exports of rare earths to the United States,” the CCP’s mouthpiece Global Times warned in a May 2019 article. “We believe that if the White House continues to intensify its pressure on China, it may only be a matter of time before China wields rare earths as a weapon.”

Around the same time, People’s Daily also issued a harsh warning, saying that the United States “should not underestimate China’s ability to counteract.”

The Conference Board’s Leading Economic Indicators (LEI) continued its decline in February, dropping 0.3% MoM (vs -0.3% exp).

• The biggest positive contributor to the leading index was building permits at +0.39

• The biggest negative contributor was average consumer expectations at -0.24

This is the 11th straight monthly decline in the LEI (and 12th month of 14) –  the longest streak of declines since ‘Lehman’ (22 straight months of declines from June 2007 to April 2008)

“The LEI for the US fell again in February, marking its eleventh consecutive monthly decline,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.

“Negative or flat contributions from eight of the index’s ten components more than offset improving stock prices and a better-than-expected reading for residential building permits.

While the rate of month-over-month declines in the LEI have moderated in recent months, the leading economic index still points to risk of recession in the US economy.

The most recent financial turmoil in the US banking sector is not reflected in the LEI data but could have a negative impact on the outlook if it persists.

Overall, The Conference Board forecasts rising interest rates paired with declining consumer spending will most likely push the US economy into recession in the near term.”

Despite ‘soft landing’ hype, the LEI is showing no signs at all of ‘recovering’, hitting its lowest since Jan 2021…

And on a year-over-year basis, the LEI is down 6.60% (worse than the 6.03% YoY in January) – but still close to its biggest YoY drop since 2008 (Lehman) outside of the COVID lockdown-enforced collapse…

Not a good sign for GDP.

The trajectory of the US LEI continues to signal a recession over the next 12 months

Is this the cleanest view of The Fed’s tightening impact on the US economy?

By Peter Tchir of Academy Securities

This is, broadly speaking, a follow-up to yesterday’s Liquency & Solvidity piece, where we took a hard close look at what the U.S., Europe and Switzerland have done so far in response to pressures on banks.

No surprise here, but while banks borrowed a record $152 billion from the discount window, they “only” borrowed $11.9 billion from the new Bank Term Lending Program (BTLP).

I expect BTLP to get little use, because it is a bit like the Hotel California, you can check out any time you like, but you can never leave.

Using that facility means that you are replacing low cost deposits for roughly market priced funding. A strain on NIM that erodes capital – not ideal. It also means that you have long dated, low dollar price bonds, presumably long enough and in big enough size, that this method of funding is preferable to others. Not a winning combination. The discount window, is temporary and a true “stop gap” measure, so it makes sense banks use that, rather than the new BTLP.

I could be wrong on BTLP, but if I see that increase, I would be selling bank shares, because that really is a facility of last resort, as it is currently designed, and I believe users will experience a Hotel California type of existence.

Which brings us to deposits.

A consortium of banks are going to deposit $30 billion with FRC. This is interesting on many levels, and there are a lot of details that I don’t know, but here are the quick takes:

• FRC, from various reports, didn’t have many assets eligible for BTLP, which is maybe why they needed an alternative source? So it doesn’t prove my point that BTLP takedown will be low, but it doesn’t refute it either.

• We don’t know the rate FRC is paying on the deposits. If it is a rate typical of deposits, then it might demonstrate how unappealing it is for banks to have to replace deposits with high cost funds. IF it is a rate that low, then the banks providing the deposits are foregoing significant interest (in addition to in theory taking credit risk, as the point was made that these are “unsecured” deposits). If it is a market rate, then that has some different implications.

• We don’t know if this provides money to buy new assets, or merely covers deposits that have been removed from FRC. New deposits, at low rates, letting them buy more assets to generate NIM would help generate equity capital for the bank and be interesting.

Lots we don’t know about the deposits and the details will be important to determining the impact. The deposits, in any case, are a new and interesting twist to this period of banking weakness and are a step towards the “private solution” that I think will be needed to really get us over the hump.

Fed Balance Sheet, FOMC and TINA

The Fed balance sheet has grown, significantly, even with QT continuing.

Rate hike probabilities for the FOMC have dropped from a split between 25 & 50, to a split between 0 and 25. I’m leaning towards zero, but a lot can change between now and then (let’s be honest, with current headlines and low liquidity, things can change between the time I hit send and the time you receive this in your inbox!).

There is some discussion that the Fed could suspend the current balance sheet reduction activity (or maybe it is just me musing on it). I doubt this happens, but they could mention it as a tool, during the press conference, which would be “risk-on”.

So, is it back to TINA (There Is No Alternative)?

• Yes, the balance sheet has grown, but using the discount window has nothing like the impact large scale asset purchases had.

• Yes, the Fed is close to being done hiking, but rates are nowhere near zero, so are not the headwind they were.

I think the TINA case is weak at best. Any balance sheet growth is likely to be temporary. There are legitimate concerns that financial conditions will tighten. While the SVB depositors were saved, I’m seeing little evidence of a rush to fund and to spend money (the drumbeat of tech layoffs continues).

This is still a trader’s market and it is time to be cautious on risk broadly after the strength of yesterday.