Authored by Peter Tchir via Academy Securities,

As I put pen to paper (or fingers to keypad), I can’t help but wonder if this is the hill that I want to die on?

There is so much uncertainty surrounding the banking developments last week. The only things that I know for certain are that SIVB ended the previous week at $284.39 and was halted before market open on Friday at $105.95 (and is supposedly much lower since). SI, not to be confused with SIVB, closed on February 28 at $13.91 and closed on March 10 at $2.53. That is what we know for certain. We also know that KRE, a $2.13 billion market cap S&P Regional Banking ETF, saw daily trading volume spike from an average of 8.7 million sharesto 97 million shares on Friday. In addition, its market cap dropped 16% last week (let’s call this the “mid bank” index). XLF, a “big financial” ETF, fell 8.5% last week on volume that “only” tripled, but it is exposed to financials other than “big banks”.

The prudent thing is to run away and wait for clarity. That is especially true when there is so much misinformation and even “FUD” (the term crypto people like to use when they disagree with someone’s negative crypto view) that it is almost imperative to stay away from this topic. However, I keep thinking of the phrase “The Lord Hates a Coward”, so let’s dive right in.

The Disruptive Economy

Before looking to the banks and the banking system, I feel it is absolutely necessary to highlight our focus on the “Disruptive Economy”. We believe that it played a large role in not just markets, but the broader economy for the past several years. We’ve used a “broad” definition of disruptive that encompassed some big tech, but also (and far more importantly) the entirety of public and private companies and their investors. In addition, we included crypto and crypto related businesses in that mix. That has led to several important conclusions (or at least thoughts) on our side:

• The economy and inflation were far more influenced by the disruptive economy than traditional economists acknowledged. See the Rise & Fall of Inflation Factors or the Circular Error in Disruption section from our 2023 Outlook. If the events of the past few weeks don’t have a circularity to them, I don’t know what does.

• The Disruptive Portfolio and the attitude of many disruptive investors seemed very different from that of “traditional” investors. We are seeing some of that play out here, not just within the institutions, but within their customer bases as well.

• Finally, as we’ve written, discussed, and even said on national TV, our best comparison is that this is like energy in 2015/2016, but the theme of “disruption” is at the epicenter of this problem! In 2015, the closer you were to energy, the more likely you were to get burned (pun intended). Not just by owning the companies themselves, but by owning companies serving those energy businesses (and the overall regions). This includes the local banks! I continue to believe that the closer you are to “disruption”, the chances are higher for further downside (even more than a year later). As you move away from that “epicenter”, the problems are smaller and might not even be felt.

  • There is one encouraging thing that I cannot resist mentioning given this line of thinking. A certain high yield ETF dropped 20% from the middle of 2014 to its low on February 11, 2016 (mostly due to energy and commodity exposure). About a month later, as the tide was already turning, a HY ETF that excluded energy companies was announced. Maybe we haven’t hit rock bottom in this particular episode, but the contrarian in me is attracted to mid banks after the events of this past week.

Now that we’ve set the table with that recap of our views on disruption, we can move on to another table setting section.

Not My First Rodeo

I’ve been on both sides of highly controversial issues. I’m not always bullish, and if anything, I am more often than not bearish. It’s my nature, which is probably why I liked trading credit derivatives on junk bonds and indices.

• I hated the CPDO product (Constant Proportion Default Obligations). It took leverage on something that was BBB and made it AAA. Yes, this is where you put leverage on something and received a better rating compared to owning it outright. Seemed nonsensical, and it was, but the “math” worked. However, the math had a major “flaw” in that it ignored how many companies might see spreads widen dramatically, then lose their IG rating, and not be put back into the relevant indices when (if) they recovered. We proved that portfolios constructed in the past (2000s) would have triggered this product (circa 2006 or so). The product was so wildly profitable. You got to charge people to leverage something that was BBB (and already profitable) and had a customer base of AAA only buyers. Anyways, on a painful call to the big boss’s office I was told to stop fighting something that I was so “obviously” wrong about.

• Roadmap to IG 200 (and the accompanying IG 200 hats). It was controversial, not quite right (only got to 198), and then I overstayed my welcome when I faded the post “JPM saving Bear” rally in CDS far too early (which has also left scars).

• Could a VIX ETF Go Poof in a Day? I once worked with a reporter who was so passionate about a story that he fought the editors and detractors until he got the piece published. That made the follow-on piece One Did Go Poof so sweet!

I’ve also been comfortable taking the bull case. In fact, saying “buy Jefferies” in response to Steph Ruhle’s question (back when she was still on Bloomberg TV) created quite a soundbite for my independent research company. It actually turned out to be quite right (despite all the poorly thoughtout comparisons to MF Global).

More recently, at Academy, we championed credit by touting 2019 as the Year of the Debt Diet, having published a piece questioning the punishment that GE credit spreads were taking just a month or two before that.

Writing that GE piece feels eerily similar to what I’m about to embark on today. I can only hope that the results are as timely and as poignant. I’ve gotten plenty of things wrong, otherwise I’d be writing these missives from some exotic private island, but let’s do this and see where we come out!

Bank Runs!

I hate even writing those two words! It seems incredibly flammable. Like shouting fire in a crowded theater. I’m not even sure who I keep checking for over my shoulder when I write or say “bank runs”. Is it compliance? Is it the regulators? I don’t know, but this is a term that I rarely use because I think that it is shocking and dangerous, but I couldn’t figure out a better way to start the analysis of what is going on because this phrase is coming up with more frequency.

Banks are “strange” beasts. In some ways their business model is so simple (take deposits, lend money, and make the spread in between). But not only is that simplistic, it misses the key ingredient, leverage. You cannot take enough deposits and lend them out “one to one” to make a reasonable return.

VCSH, a 1 to 5-year corporate bond ETF, has a spread of about 110 bps. No one is buying a bank making 1%, so it needs leverage. Maybe the bank could take a lot of duration risk (I don’t know why it would, since banks learned a lot during the S&L crisis). But even with duration risk, banks aren’t an interesting thing without leverage!

So, we will talk about leverage, at least initially.

Banks have capital from several different sources at various levels of the capital structure.

• Equity capital. This is what drives everything. The amount of assets a bank can hold on its books is largely determined by its equity capital (and portfolio quality).

• Subordinated capital. Not as good as equity capital, but it enables the bank to do more than it could with just regular debt, and it is at a lower cost than raising equity.

• Debt.

  • Deposits. Deposits are generally the “holy grail” of the bank balance sheet (post Covid banks were turning away deposits, but that was unique). You pay far less interest on funds on deposit than other forms of borrowing. They are typically viewed as “sticky”. People keep money in a bank account for a lot of reasons, probably the least of which is the interest they are earning. People (and companies) do most of their transactions through banks (and credit cards). The bank account is the “home base” of financial activities and thus tends to be more stable than other forms of debt which are more subject to market vagaries.

  • Bonds. At the risk of annoying some of our banking clients, I think one of the “best” things that came out of the GFC (on the regulatory front) was rules to largely enforce longer-dated borrowing. There is a cost to banks (and everyone) to switch to longerdated funding. It is generally far cheaper to borrow overnight than it is for 30 years (though with our current yield curve, that isn’t as obvious today as it normally is). The problem with that is you need to fund yourself every night. Banks could argue that this should be part of their risk decision, but stricter rules were imposed anyway. Since we saw what happened when bank credit quality gets called into question (ability to borrow can dry up quickly), this was a logical way to protect the system. Yes, it is a cost to banks, but I think that it really promoted a new level of “safety” on the funding side. I disagree with much of Dodd Frank and think that the Volcker Rule could only have been written by someone who had never seen a trading floor, let alone stepped onto one. One of the first things that I learned about the bond business was when I asked why almost every high yield bond was a 10 non-call 5. The answer was outrageously simple. “Because investors need to be compensated for at least 5 years of lending to the company in their current state and the company needs a 5-year window where their business is good enough (or the market is strong enough) that they can re-fi”. So, yes, I like less refinancing risk.

A bank run is when depositors and lenders stop funding the bank, which normally occurs due to credit quality concerns!

When I think of a bank run, I think of a fear that the bank’s assets are not solid and would incur significant losses (if sold today or those losses would be realized over time as borrowers failed to pay the bank back). Accrual accounting, not held for sale, etc. are accounting provisions used to dampen volatility in asset prices on the bank’s balance sheet. There is a difference between a loan going down in price a bit because of rates (or overall market concern) and the likelihood of that loan getting paid off. During the GFC, it was apparent that massive amounts of mortgage debt were impaired and were never coming back. Again, I think that the regulators have done a very good job with CCAR (Comprehensive Capital Analysis and Review). It incorporates many tough scenarios, but what I like most about it is that it is a “random” day, picked after the fact. Bank capital rules were almost exclusively quarterly and annual. There were massive quarter end trades done by banks. There were huge year-end trades done (especially between Asian and North American banks which had different year-ends) and these trades were less sensitive to certain annual measures. CCAR does a lot to capture the risk side of the balance sheet. It is designed so that “we” (collectively) can sleep at night “knowing” that banks are safe and won’t go through another GFC. Some of this may be questioned in light of recent events and disclosures, but I for one suspect that CCAR is serving its purpose, which is one reason why I’m heavily leaning towards this being isolated and not an industrywide issue.

On a cursory glance and from what I’ve read, there were some issues linked to the performance of “safe” (from a credit perspective) long-duration assets. From what I’ve seen so far, I’m surprised by the duration risk that was being run. I’m a big believer in “match funding” as much as possible. That tends to reduce NIM, but also greatly reduces risks, like the ones we seem to be seeing now. Sure, hindsight is 20/20, but that is something that I strongly believe in at all times.

Neither Moody’s nor S&P seemed to see much amiss at SIVB (no material rating action for years, until this past week). It seemed like business as usual, at least from a NRSRO (Nationally Recognized Statistical Ratings Organization) perspective.

I will attempt to demonstrate that this is a unique situation and is linked more to the types of depositors that these banks had than to anything that is reflective of a broad trend across the industry.

We start with deposits at the SIVB entities versus the entire banking system (note: SIVB deposit data is quarterly and last data point was from the end of 2022). You can see a small uptick in bank deposits during Covid relief (small as a percentage, but large in total dollars). SIVB saw their deposit levels more than triple (from $60 billion in March 2020, to a peak of almost $200 billion).

This chart highlights three important things:

1. The deposit growth seems reasonably correlated to value creation in the “disruptive” space (taking the liberty of using ARKK as a representative of that space). It was consistent with the narrative behind this entity.

2. Deposits, in my opinion, started declining because of the industry that this bank caters to, which had been incredibly successfully for decades, but was now burning cash and had less wealth. The initial phases of deposit decline had everything to do with the depositor base and little to do with their portfolio or any other “traditional” trigger.

3. It might also provide some insight into the sort of lending opportunities that were available at the time companies/individuals were making deposits (i.e., disruptive firms).

This chart is “problematic” in some ways as you can see the surge in deposits correspond to a period of time when the 5-year Treasury yield was less than 1%. Since deposit rates in the U.S. stayed positive (with very few exceptions) there was relatively little spread to be earned. Taking in huge deposits at a time when yields were very low can be problematic (and let’s not forget the need to leverage).

At this point, I have to admit that how they managed their portfolios also seemed to be contributing to the problem.

These institutions seemed to do two things that are now, in hindsight, problematic.

• They lent to “disruptive” companies. This is their bread and butter. It is their customer base. It is what made the bank famous. However, I suspect that they had never seen such an influx of money (at a time when valuations were so high and disruptive company growth prospects were unbelievably great). Even with conservative haircuts it may have been difficult to exercise prudence, and without a doubt, other banks and lenders were gunning for their customers! They were the bankers to the “sweet spot” and everyone wanted that business.

• They seemed to have taken on more duration risk than other banks (I could be wrong here and that would be a flaw in my argument). They were basically increasing in size at a rapid pace in an environment where anything liquid was yielding next to nothing. They were getting money stuffed into deposits at one of the least interesting times for a bank to take deposits (at least in terms of locking in good NIM – Net Interest Margin).

That has now contributed to their decline as the asset side is being called into question!

Why I Think Current Cases are “Unique”

The two banks in question, while different, have some similarities that are unique to them.

Let’s get down to the theory here”

• A massive surge (on a percentage basis) in deposits. Bank deposits grew everywhere, but the rate of increase more than tripling in a year is unique. While banks had to absorb new deposits in the wake of Covid and stimulus, these institutions saw disproportionate growth as a percentage (and total amount). Tripling from $1 billion to $3 billion seems like an easier task to manage than going from $60 billion to $180 billion. Relatively unique set of circumstances.

• A highly correlated customer base. Whether Silicon Valley or crypto juggernauts, the customers turned out to be far more correlated than expected. When almost “everything” crypto/disruptive took off, it behaved as one entity (rather than 100s or 1000s of companies and individuals). Potentially there was some geographic concentration, but it is unusual (and unexpected) for such diverse businesses and individuals to be so correlated on the way up and on the way down. Relatively unique set of circumstances.

• Portfolio selection.

  • Lending to customers is quite normal in banking, which is ultimately a relationship business. It is why certain banks were more exposed to energy for example. Banks, especially community banks, tend to have exposure to their “community”. Less so for regionals and even more less so for the global money-center banks. Community in this case was more about “what the people or companies did” rather than physical proximity (though that plays in as well since the two go hand in hand). I assume that there is some exposure to local real estate, which has also come under pressure since the deposits piled up. The exposure to disruptive/crypto is likely far higher here than in other banks.

  • Rate risk. The chase for yield was alive and well as the money was flooding into banks. This seems like a good time to bring back “5 Circles of Bond Investor Hell.” There are only a few things you can do when you need yield, one of which is to increase duration, which was apparently done here. Hoping the market cheapens would have worked great, but it rarely does and there is immense pressure not to sit on cash, so I’d be shocked if many had the fortitude to do that. It seems like SIVB may have extended duration. Taking more risk than normal is probably somewhat common across banks, though I’m not sure rate risk would have been the preferred method. I lean towards giving up liquidity (most don’t use it) or increasing structure (my theory on AAA CLOs being more difficult to bust than getting a perfect March Madness bracket).

5 Circles of Bond Investor Hell

I see the situation as unique because:

• They had exceptional growth in a compressed timeframe.

• Growth occurred during an exceptional dearth of yield.

• Some of their decisions and the nature of their customer base (to whom they lent) may have set them up with a portfolio that was more exposed than others.

• Customers started withdrawing because they needed the money (nothing to do with anything SIVB was doing).

• Those withdrawals triggered selling, which turned positions meant for accrual accounting into realized losses! That combination following a period of explosive growth seemed to be what caught the attention of people.

• Now something that looks more like a “normal” run starts. Losses get exposed. The balance sheet faces more scrutiny. Some clients may get nervous. The cash burn, which started after March 2022, likely continued into Q1 2023 (the last data point was at the end of 2022). This is where we are now and is why everyone is worried about other banks!

I am stuck seeing this as far more unique than systemic, hence the recent selling is overdone!

Some Bad News for All Banks

The banking sector, even if I’m correct, will not get off scot-free.

• Interest rates on deposits will probably have to get “competitive” more rapidly than they normally would. People covered by the FDIC limits will care less as there is no credit risk to the institution, but recent focus on higher yields across the board will make many consider keeping enough “working capital” at the bank, while owning money market funds or other higher yielding assets (including Certificates of Deposit at many banks). Personally I think that should be SOP and is how I think about my deposits – and no, I’m not trying to get banks to hate me! Those above the FDIC limits are exposed as senior unsecured creditors if a bank fails. The returns paid to senior unsecured creditors are much better than those paid on deposits, but the services provided by banks (anything from LOCs to simple check cashing and enabling payroll and business activities to function seamlessly) have immense value. I could see some banks increasing their payment rates on deposits which would eat into NIM, but that would be a valuation issue, not a credit issue. Bank P/E multiples being too high already don’t keep me up at night. I suspect little of the NIM gets a great multiple in any case, as investors have been expecting banks to slowly raise the amount they pay on deposits.

• Closer scrutiny to bank portfolios. People far smarter than me (with better tools at their fingertips) are looking at what exposures banks have on their books. Making that analysis more complex will be the fact that many of the exposures (and certainly all of the hedges) will be in derivative books that I think are opaque at best. I would not want to be in charge of a bank that faces the headline “XYZ loaded up on duration during ZIRP” in the coming days. That is the sort of headline that can trigger people taking out deposits. If I believed a lot of banks really extended duration during ZIRP, I would be scared to death right now about recommending banks, but:

  • Asset growth was not that far above normal for most banks.

  • Private debt, credit risk, and structured risk all seem more natural for banks, all of which have been weathering this market better than sovereign debt (assuming the rate risk is taken out, which it should be in my vision of bank risk management).

I am fully aware of these two risks, but think that:

• Most banks are well prepared to deal with both issues and will not face any sort of a run. I am saying this, fully knowing how that “bank run” sentiment can spread like wildfire. You cannot believe how nervous I’ve been writing this report (which is maybe why it is longer than usual) because I do understand how afraid people are and how quickly even a false allegation can trigger negative momentum.

• Valuations (after the recent shellacking) offer upside in a tricky market environment – both on the equity and credit side of the equation.

The Non-FDIC Insured Depositors

I saw a stat that SIVB has only about 3% of its deposits fully covered by the FDIC (very low compared to most banks). Presumably this is a bank for rich individuals and corporations.

This is the group that is in limbo and I don’t fully understand the next steps.

If you have $100,000,000 on deposit to meet your obligations, how much of that can you access?

In theory, as I understand this:

• The assets of the bank are worth X.

• The FDIC depositors (and maybe some other senior stuff) are worth Y.

• Z is the amount of deposits above the FDIC limits and other senior unsecured debt.

• If X – Y > Z then there is equity value. I’m not sure I’d write that off yet, but that is just me musing about the subject. I don’t have an opinion and am not basing my overall bank recommendation on it, but it seems to have been left for dead rather quickly (even by panic standards).

• If X – Y < Z then Z will be impaired and not receive 100 cents on the dollar.

  • Lehman claims, which were classified as unsecured debt because they filed before investment banks became banks under emergency GFC policy, settled at about 20% of par (though they ultimately recovered 100% plus accrued). It isn’t completely irrelevant (it wasn’t a bank), but it also gives us the sense of how complex this can be with financial instruments.

Some things in favor of SIVB’s valuations:

• It seems that much of their portfolio is liquid, making it easier to monetize and start establishing minimal values (and presumably immediate availability) for the unsecured creditors.

• Their customer base is still a who’s who of the valley and disruptive space and many other banks and financial service companies will want to establish relationships which will help the valuation and/or any necessary sale of these assets.

• So far it is isolated. If their situation is unique (as I obviously believe it is) then the market has a large, but digestible set of assets to absorb. If this is just the tip of the iceberg, then we are in some serious trouble as there will be more forced selling and huge pools of fixed income “in for the bid”. During the GFC, almost every bank owned too much of the same thing and needed to sell. Remember AIG FP and their super senior protection on corporate credit? That part of their portfolio never sniffed a loss as corporate credit failure was extremely well contained even in the GFC (however, the mortgage super senior was a mess). Overall, recovery rates tend to be higher during good economic times because there are fewer distressed sellers. So far this is a unique case, and that helps maximize value.

Understanding how much access to above FDIC limit deposits companies (and individuals) will have by Monday is crucial for the disruptive companies – more so than for other banks! Access (to at least a portion) is necessary for many to function. I fully expect there to be some contingencies allowing some % access, though I could be wrong.

White Knight Dream?

I would not be shocked to see a “white knight” investor appear for the entire entity (possibly by Monday) because it makes a lot of the mess regarding the unsecured depositors go away (or at least more manageable).

In the early stages of the financial crisis, we saw various entities get absorbed with a nod (if not a gentle push) from the regulators, when only months before these transactions would have faced regulatory opposition.

The “easiest” and least painful way to value the assets might be via an acquisition by one large institution. I see two hurdles/questions facing that “dream”:

• Will SIVB accept a valuation or will they want to work their way out, quite possibly, attempting to generate cash for equity holders and not just depositors?

• Will banks, the natural buyer, be worried about their own deposit base too much to attempt an ambitious purchase, even with a nod from the regulators?

I’m convinced that the Fed learned one massive lesson from the GFC (we saw Europe do a semi-decent job with their own debt crisis) – DON’T LET CONFIDENCE IN THE BANKING SECTOR FAIL!!!!

Nothing else really matters. Financial institutions can write “living wills” until the cows come home, but if we get to that point, all bets are off.

If this is isolated (or even if it isn’t), regulators are supposed to be ring-fencing it in because the last thing they need is for “bank run” to become the word of the week. That is hard to walk back, so getting out in front of it is crucial.

Given how quickly they responded after Covid lockdowns (at warp speed relative to the almost plodding behavior back in 2007 and early 2008), there is hope.

I bet there will be a lot of green dots on Bloomberg terminals on Sunday night – I remember being there when $2 dollars/share came across as the price for Bear Stearns (and physically tapping my screen with my finger, thinking the 2 was a typo).

One thing many forget (or don’t know) about the JPM purchase of Bear was that it was accompanied by an immediate and non-contingent guarantee of Bear’s derivative book. Even if the equity deal didn’t consummate, the derivative book was JPM’s. No one ever really explained how that would work, and there wasn’t much (if any) formal guarantee language.

I Like Mid Banks, I Cannot Lie

I also like big banks and small banks and am more scared of admitting that than I am of singing the original lyrics from this song – so yes, I’ve dragged myself to this hill and am going to stand my ground on it!

I did not have bank failure Sundays on my 2023 bingo card (but it does bring back memories)!

Pope Francis told journalist Elisabetta Pique of the Argentine newspaper La Nacion, “Gender ideology, today, is one of the most dangerous ideological colonization” and argued its ‘woke’ proponents are “naive” if they “believe that it is the path of progress.” 

“Gender ideology, at this time, is one of the most dangerous ideological colonizations. It goes beyond the sexual. Why is it dangerous? Because it dilutes differences, and the richness of men and women and of all humanity is the tension of differences,” Francis said in the March 10 interview. 

Despite being celebrated as a progressive religious figure, Francis has consistently adhered to orthodox teachings regarding celibacy and sexuality. He has attributed the global push for transgenderism to people who “do not distinguish what is respect for sexual diversity or diverse sexual preferences from what is already an anthropology of gender, which is extremely dangerous because it eliminates differences, and that erases humanity, the richness of humanity, both personal, cultural, and social, the diversities and the tensions between differences.”

Francis reiterated his opposition over the last ten years. In 2016, he said:

“Today children — children — are taught in school that everyone can choose his or her sex. Why are they teaching this? Because the books are provided by the people and institutions that give you money. These forms of ideological colonization are also supported by influential countries. And this is terrible!”

During a January interview, Francis emphasized that homosexual relationships shouldn’t be considered a crime and condemned laws that unjustly penalize homosexuality. Still, he maintains his opposition to toxic transgenderism. 

Several years ago, the Congregation for Catholic Education released a document on gender ideology, explaining it’s “nothing more than a confused concept of freedom in the realm of feelings and wants.” According to the paper, these theories aim to “annihilate the concept of nature.” 

Notably, we find ourselves in agreement with the Pope. And to expand on this woke agenda, it’s nothing more than to destroy the family unit, so the confused have no choice but to be supported by the state. In reality, the family is a crucial support system for individuals and communities and plays a vital role in protecting its members.

From “everyday joes” to the corporate CFOs, men, women, and others, are frantically battling a prisoner’s dilemma about their banking relationship this weekend: “I’m fine if they don’t draw their money, and they’re fine if I don’t draw mine…”

But, given the lines outside banks and less than reassuring sentiment from Washington, we suspect it is too late and the that dilemma is over – now it’s every man, woman, and child for themselves. As The FT report on one CFOs decision-tree:

“I got a text from another friend – he was definitely moving his money to JPMorgan. It was happening,” the finance chief said.

“The social contract that we might have collectively had was too fragile. I called our CEO and we wired 97 per cent of our deposits to HSBC by midday on Thursday.”

And as explained below, the new normal ‘bank run’ is instant, huge, and devastating.

Given that there are many ‘bad’ (read: biased and/or uninformed) takes on the situation at SVB, Bianco Research’s founder and President, Jim Bianco, tried to clarify in a brief Twitter thread: (emphasis ours)

This is not a solvency crisis like 2008.

Bad loans or poor investments were not made. Money was not lost. So, everyone is going to get their money back. (And please no takes about no interest rate hedging. Asset/liability mismatches are how banking works.)

[ZH: We agree broadly but do worry, as we detailed on Thursday, about the CRE/office exposure overhang on small banks and how higher rates will actually translate to actual loan losses, not just HTM “temporary” losses.]

Instead this is an old fashion 1930s liquidity crisis.

Too many depositors demanded cash at once (as in right now) and SVB (and SI) could not convert loans and securities (and crypto) to cash that quickly. So, everyone is getting their money back from SVB (and SI), just not at 8AM Monday. And, yes this is a big problem as this is working capital for a lot of companies. They have payrolls to meet and vendors to pay next week. And if they don’t pay bills and employees, they in turn don’t pay their bills and this can quickly cascade into a major economic problem.

The important question is why so many demanded their money back at once.

And I’m not referring to the last two days. I’m asking about the days/weeks leading up to this last two days forcing SVB to sell securities and realize a $1.8B loss, necessitating a capital raise. Why were depositors withdrawing in big enough amounts before Thursday/Friday?

First, welcome to the world of mobile banking.

Gone are the frictions of standing in line with tellers instructed to count money slowly. (Media images of lines Friday were largely gawkers)

Question: How did $42 billion get withdrawn Friday alone without thousands in line?

Answer: your phone!

This is not the Bailey Savings and Loan anymore.

This should scare the hell of bankers and regulators worldwide.

The entire $17 trillion deposit base is now on a hair trigger expecting instant liquidity.

Add in social media and millions get a message, like Peter Thiel telling Founders companies to pull out, or Senator Warren gloating that SI went under, and pick up their phone open a Chase account and Venmo-ed their life savings into it in 10 minutes.

[ZH: Once SI died, Warren’s dancing on its grave started the dominos falling…]

Instant liquidity (not solvency) crisis with everyone still in bed.

Banking will never be the same.

The second, and I did a long thread on this on Friday… banks are over-reserved, after 14 years of QE, and are still paying 0.50% on accounts when T-bills are yielding 5.00%. They don’t need to compete for deposits.

2/14

Over the past year, banks kept rates on checking/saving accounts extremely low compared to MM funds. The avg yield on a MM (blue) reached as high as 4.43% recently, while bank rates (orange) remained at just 0.48%. The gap was almost 4% (red). pic.twitter.com/96PwaEpsrx

— Jim Bianco biancoresearch.eth (@biancoresearch) March 10, 2023

Initially as rates passed 2%, 3% and 4%, the public did not notice. So bankers thought deposits were well anchored at their bank and not moving regardless of the interest rate paid.

But at 5% the public finally noticed, and millions reached for the phone at once and transferred to a money market account or Treasury direct to buy T-bills. Banks were squeezed to convert loans and securities to cash instantly so depositors could leave for better rates.

Add in the bleed out from tech firms struggling, and Senator Warrens tweeting with glee about SI going out of business, and depositors at SVB got the message and picked up their phones and acted.

This is why I have been tweeting that this has to stop now.

The Fed is meeting Monday at 11:30. Too late!

They need to meet today (Sunday) at 11:30.

What needs to be done?

Two things.

1. The FDIC needs to raise the deposit insurance ceiling to unlimited as they did this in 2008. Besides $250k is a made up number anyway. So make up a bigger number.

2. Banks need to get their deposit base to stop figuring out how to buy a 4.5% money market fund. They need to raise the interest rates they pay 3.00% – 3.50%, from 0.50%, immediately. Yes, this will kill bank profitability so expect Bank Execs to balk at doing this.

This way the public gets the message that you money is safe, no matter the bank, or the amount, and the rate paid on your money is at least competitive with other alternatives.

Otherwise, if they do nothing and wait for the Fed to START a meeting at 11:30 Monday, hundreds of billions of deposits will have moved by phone and it will be far worse.

As the countdown to the reopening of futures trading gets louder by the second amid episodic observations of bank runs around the US, news flow is starting to accelerate fast so this will be a placeholder post with updates until we get major news.

4:30pm ET Update:  It’s getting to the point where every new “proposal” or “idea” being thrown about is worse than the previous one (or maybe this is just how the clueless LGBTQ equity-focused Fed is doing trial balloons on a Sunday afternoon. Shortly after the WaPo reported that the Fed is “seriously considering safeguarding all uninsured deposits at Silicon Valley Bank”, BBG is out with a report that the Federal Reserve is also “considering easing the terms of banks’ access to its discount window, giving firms a way to turn assets that have lost value into cash without the kind of losses that toppled SVB Financial Group.”

Such a move would increase the ability of banks to keep up with demands from depositors to withdraw, without having to book losses by selling bonds and other assets that have deteriorated in value amid interest-rate increases — the dynamic that caused SVB to collapse on Friday.

The report goes on to note that as many had expected, some banks began drawing on the discount window Friday, seeking to shore up liquidity after authorities seized SVB’s Silicon Valley Bank, which is precisely why it is bizarre that this is even news: after all, the Discount Window has always been opened, and the fact that banks hate to use it has nothing to do with “ease of access” and all to do with the stigma of being associated with the discount window. Just recall how banks that were revealed to have used the discount window around Lehman’s failure saw accelerating bank runs.

Or maybe the Fed’s thinking goes that while it would be too late to save SIVB, other banks would somehow boost confidence of their depositors by yelling from the rooftops: “Hey, look at us, we are well capitalized: we just borrowed $X billion from the Fed’s Discount Window.”

Needless to say, the mere rumor that regional bank XYZ has been forced to access this “last ditch” funding facility will result in all its depositors fleeing, which is why we once again ask: after “fixing” Ukraine’s Burisma, is that polymath genius Hunter Biden now in charge of US bank bailout policy?

“Hey, let’s stuff all the regional banks into the stigmatizing facility that accelerated the global financial crisis” – Hunter Biden https://t.co/HM2PBiztDG

— zerohedge (@zerohedge) March 12, 2023

* * *

3:00pm ET Update: In a reversal of what Janet Yellen said just hours ago, WaPo reports that federal authorities are “seriously considering safeguarding all uninsured deposits at Silicon Valley Bank” – and by extension any other bank on the verge of failure – and are weighing an extraordinary intervention to prevent what they fear would be a panic in the U.S. financial system. Translation: bailout of all depositors, not just those guaranteed by the the FDIC (<$250K).

Officials at the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation discussed the idea this weekend, the people said, with only hours to go before financial markets opened in Asia. White House officials have also studied the idea, per two separate people familiar with those discussions. The plan would be among the potential policy responses if the government is unable to find a buyer for the failed bank.

While selling SVB to a healthy institution remains the preferred solution – as most bank failures are resolved that way and enable depositors to avoid losing any money – there have been several reports that no big bank has stepped up as of yet, leaving the government/Fed  as the only option.

As reported earlier, the FDIC began an auction process for SVB on Saturday and hoped to identify a winning bidder Sunday afternoon, with final bids due at 2 p.m. ET.

Some more from the WaPo report:

Although the FDIC insures bank deposits up to $250,000, a provision in federal banking law may give them the authority to protect the uninsured deposits as well if they conclude that failing to do so would pose a systemic risk to the broader financial system, the people said. In that event, uninsured deposits could be backstopped by an insurance fund, paid into regularly by U.S. banks.

Before that happens, the systemic risk verdict must be endorsed by a two-thirds vote of the Fed’s Board of Governors and the FDIC board along with Treasury Secretary Janet Yellen. No final decision has been made, but the deliberations reflect concern over the collateral damage from SVB’s collapse and authorities’ struggle to respond amid limits on their powers implemented following the 2008 financial bailouts.

“We’ve been hearing from those depositors and other concerned people this weekend. So let me say that I’ve been working all weekend with our banking regulators to design appropriate policies to address this situation,” Yellen said on the CBS program “Face the Nation.”

But more importantly, the WaPo report contradicts what Yellen said just a few hours earlier, namely that “during the financial crisis, there were investors and owners of systemic large banks that were bailed out . . . and the reforms that have been put in place means we are not going to do that again,”

This suggests that in just a few short hours, officials and regulators peaked behind the scenes and realized just how bad a potential bad crisis could be and have made a 1800 degree U turn.

The result: any erroneous higherer for longerer narrative spewed by some self-appointed experts has just blown up, and what is about to be unleashed is another vast liquidity wave, something that bitcoin clearly is starting to anticipate.

* * *

1:15pm ET Update: In a throwback to the legendary “Lehman Sunday”, when dozens of credit traders did an ad hoc CDS trading and novation session on the Sunday ahead of the bank’s Chapter 11 filing to minimize the chaos and fallout from the coming bankruptcy, Bloomberg reports that the FDIC kicked off an auction process late Saturday for Silicon Valley Bank, with final bids due by Sunday afternoon.

The FDIC is reportedly aiming for “a swift deal” but a winner may not be known until late Sunday.  Bloomberg also reported that the regulator is racing to sell assets and make a portion of clients’ uninsured deposits available as soon as Monday; the open questions are i) whether there will be a haircut and ii) how big it will be. A table from JPM’s Michael Cemablest below shows historical haircuts on uninsured depositors in previous bank crises.

We get a slightly more positive vibe from a Reuters report according to which “authorities are preparing “material action” on Sunday to shore up deposits in Silicon Valley Bank and stem any broader financial fallout from its sudden collapse.”

Details of the announcement expected on Sunday were not immediately available. One source said the Federal Reserve had acted to keep banks operating during the COVID-19 pandemic, and could take similar action now.

“This will be a material action, not just words,” one source said. Earlier, U.S. Treasury Secretary Janet Yellen said that she was working with banking regulators to respond after SVB became the largest bank to fail since the 2008 financial crisis.

As fears deepened of a broader fallout across the U.S. regional banking sector and beyond, Yellen said she was working to protect depositors but ruled out a bailout.

“We want to make sure that the troubles that exist at one bank don’t create contagion to others that are sound,” Yellen told the CBS News Sunday Morning show. “During the financial crisis, there were investors and owners of systemic large banks that were bailed out … and the reforms that have been put in place means we are not going to do that again,” Yellen added.

Meanwhile, more than 3,500 CEOs and founders representing some 220,000 workers signed a petition started by Y Combinator appealing directly to Yellen and others to backstop depositors, warning that more than 100,000 jobs could be at risk.

Reuters also reports that the FDIC was trying to find another bank willing to merge with SVB:

“Some industry executives said such a deal would be sizeable for any bank and would likely require regulators to give special guarantees and make other allowances.”

That said, the longer we wait without some resolution the more likely it is that SVB’s unsecured depositors will get pennies on the dollar, according to the following (unconfirmed) reporting from Chalie Gasparino: “Bankers increasingly pessimistic a single buyer will emerge for SVB, laying out options for clients w money in there: 1-ride it out. 2-sell deposits for around 70-80 cents on dollar to other financial players; borrow against deposits jpmorgan at 50 cents on dollar.”

BREAKING: Bankers increasingly pessimistic a single buyer will emerge for SVB, laying out options for clients w money in there: 1-ride it out. 2-sell deposits for around 70-80 cents on dollar to other financial players; borrow against deposits @jpmorgan at 50 cents on dollar

— Charles Gasparino (@CGasparino) March 12, 2023

The FDIC previously said the agency has said it will make 100% of protected deposits available on Monday, when Silicon Valley Bank branches reopen.

There was also news for those whose money remains frozen at SIVB. BBG notes that tech lender Liquidity Group is planning to offer about $3 billion in emergency loans to start-up clients hit by the collapse of Silicon Valley Bank.

Liquidity has about $1.2 billion ready in cash to make available in the coming weeks, Chief Executive Officer and co-founder Ron Daniel said in an interview on Sunday. The group is also in discussions with its funding partners, including Japan’s Mitsubishi UFJ Financial Group Inc. and Apollo Global Management Inc., to offer an additional $2 billion in loans, he said.

“By helping the companies to survive now, I’m hoping some of them would succeed and come back to us in the future,” Daniel said. “We’re nurturing our future clients.” A typical loan will be a one-year facility of $1 million to $10 million, or as much as 30% of the balances held with SVB, Daniel said. The priority is to help companies meet payroll expenses.

The fate of other SVB-linked entities appears to be somewhat rosier. Bloomberg reports that Royal Group, an investment firm controlled by a top Abu Dhabi royal, is considering a possible takeover of the UK arm of Silicon Valley Bank following its collapse last week, according to people familiar with the matter. The conglomerate, chaired by United Arab Emirates National Security Adviser Sheikh Tahnoon bin Zayed Al Nahyan, is discussing a potential buy-out through one of its subsidiaries.

Authored by Mark Jeftovic via BombThrower.com,

Inflation is much more than a monetary phenomenon; it rips at the very core of social cohesion.

Secular high inflation is one of the worst possible experiences a population can face.

We are now heading for what looks like global high inflation across all currencies, with multiple episodes of hyperinflation. It will be unprecedented.

The Four Phases of Hyperinflation

Hyperinflations are generally defined as periods in which the monthly inflation rate exceeds 50%. In this 2018 paper, the IMF breaks hyperinflationary episodes out into four phases which comprise two stages:

Phase One: is “the rise”. The IMF also calls this “the extraordinary acceleration phase” which is the lead-up to the hyperinflation. IMF actually terms it “the path toward hyperinflation”, but given that they define that as an annual inflation rate of greater than 50% but under 500%, an uncredentialed, non-economist observer might describe that as already being hyperinflation.

“The average duration of the first phase is 8-9 years with an annual average inflation of 125 percent”

Phase Two: is the actual hyperinflation proper.

Wheelbarrows of money, burning banknotes in the oven (or more tragically, sticking your head in there).

In one well storied example from Weimar Germany, an emigre fighting to retrieve his savings from a German bank was finally paid out – via a cheque mailed to him in America. The stamp on the envelope cost more than the value on the cheque made out to him.

Over the eighteen 20th century hyperinflations covered in the IMF paper, the average inflation rate here, according to the IMF study was 2,912% and the median duration was four years – this “explosive” phase is usually over in about two years.

Venezuela, isn’t in the graph because their hyperinflation took place in the 2000’s. It is noted therein, that the inflation rate there hit 488,865%.

As we’ve covered in the premium letter, Venezuela has undergone three currency devaluations over the 14 years, knocking about half a dozen zeros off their banknotes each time (via the July 2021 issue of TCC):

Venezuela is launching their Digital Bolivar CBDC in tandem with a currency redenomination that took effect Oct 1st. They knocked six zeros off of their banknotes in an effort to get in front of the hyperinflation which has ravaged the economy for years. This is the third currency redenomination for Venezuela in 13 years. In 2018 they knocked five zeros off the currency and in 2008 they took away three zeroes. Maybe this is another indicator of hyperinflation? When the time between redenominations shrinks while the number of zeroes removed increases….

(The prior two devaluations also coincided with the launching of a Central Bank Digital Currency).

Phases Three and Four are the second stage of a hyper inflationary event: “disinflation” – where the annual inflation rate plummets to somewhere between 50% and 500% and lasts another six years on average – and finally the “stabilization” phase, where inflation remains under 50% per year for at least three years.

The case for a “Phase Zero” of Hyperinflation:

I would argue that there is a Phase Zero: where the future inflationary path becomes baked in by unsustainable debt. While policy makers are still able to talk with a straight face as if there is an alternative, the path to inflation is assured. 

We’ve been in Phase Zero for over 50 years, since the Nixon shock of 1971. We are at the edges of the Phase Zero to One transition now.

Back in the 1940s during WWII, public debt to GDP quickly jumped from 40% to over 100%.

But, this actually understates the scale of what happened. Debt went from $43 billion to $258 billion, which was a 500% increase in five years. pic.twitter.com/6rA4bglkBp

— Lyn Alden (@LynAldenContact) February 25, 2023

Phase zero could probably be defined as the moment a currency becomes fiat. We notice from Lyn Alden’s chart, of US debt-to-GDP above, that after the World War II spending binge, the ratio actually declined. Over the Leave-It-To-Beaver and Hippies era, it came down to below the level it was before the war. Then came the Nixon Shock in the early 70’s, when the last vestiges of gold convertibility were suspended (“temporarily”).

Since then, the global monetary system has been irrevocably committed to an inflationary path.  In this James Lavish Twitter thread, various participants look at how the interest due on America’s debt has entered the territory where it is cannibalizing the budget expenditures.

When you have to borrow more, at higher interest rates, this is what happens. It’s really simple. And scary. pic.twitter.com/zA3eyVfBdq

— James Lavish (@jameslavish) February 20, 2023

Seen in this light, it’s no surprise that central banks around the world are already backing off the interest rate hikes (Canada has already said they’re on hold, and the only thing the US is meaningfully tapering is the size of the rate hikes).

[ Insert: In previous editions of the letter it was always reiterated that the Fed will continue hiking “until something breaks” in the credit markets / banking system. Given the startling and rapid collapse of the Silicon Valley Bank over the past couple days, we may be getting there ]

If the Fed slows down hikes, they have to normalize higher inflation.

The folks over at Zerohedge once predicted that when it becomes clear that the Fed can’t control money supply, they would start dropping “leaks” that the hallowed “target inflation rate” would be raised. 

Right now that’s 2%, pretty well across all civilized nations. That’s the golden rate at which governments can embezzle wealth from the economy and the peasants will let them get away with it.

But to get inflation down to that level, according to this Obama-era advisor, that would mean in excess of 6% unemployment for two years. The Fed wants “demand destruction” (which means people lose their jobs or their business) – but not too much demand destruction. 

Apparently 6% for 2 years is too much, so the level of embezzlement will have to be raised. It’s not like we’re talking hyper-inflationary numbers, yet – right? 

But raising a target inflation rate from 2% to 3% is a 50% hike in the rate of theft. 

Fear not, the corporate press is always there with a solution. In this case it’s the Wall Street Journal suggesting you could skip breakfast

“Several breakfast staples saw sharp price increases due to a perfect storm of bad weather and disease outbreaks—and continued effects from Russia’s invasion of Ukraine.”

This reminds me of the infamous Bloomberg piece on how to make ends meet on a measly $300,000 / year… advice included that you get rid of your car, switch from eating meat to lentils… and euthanizing your dog.

This all jives with our core premise that the ESG movement is so widely endorsed by “woke” capitalists because it provides cover for the reality that we are in an unsustainable debt bubble and monetary expansion – and that the rabble has to ratchet down their living standards to cope. 

We can look at weaker economies to see what the future looks like: Lebanon just did a currency devaluation – reducing the official exchange rate by 90%, overnight. This came after a spat of bank robberies, where citizens were sticking up banks to get their own money out.

Now they’re burning them down.

In Lebanon people are burning down financial institutions and politicians’ homes to reclaim their own money which has been frozen by the banks.

Keep in mind with CBDC the financial establishment has the ability to freeze your money with a push on a button….. pic.twitter.com/kNIn8Z1Gbh

— Richard (@ricwe123) February 19, 2023

On January 31st, Lebanese citizens went to bed thinking the official exchange rate on the Lebanese pound was around 1500 to 1 USD, (whether or not they could actually get at their money, that was the rate). 

When they awoke the next morning, the official exchange rate had been set to 15,000 Lebanese pounds to 1 USD. The black market rate was even worse, coming in around 64,000. 

In Bitcoin terms, the collapse was even more pronounced:

The fiat system is collapsing, weaker currencies first – but anything not backed by something tangible is headed for the dumpster of history. 

In prior high inflation or hyperinflationary events, people could always seek refuge in other currencies or adopt some kind of “notgeld” (emergency money). But in this chapter, it’s every currency, across all political affiliations, and jeopardizing every incumbent power structure.

(Which is why it seems like the world is sleepwalking into another world war, if we’re not already in the early innings of one.)

It may seem like being on alert for hyperinflation here in the West is bonkers, but we’re already seeing massive fissures in the financial system opening up from normalizing interest rates to %4.57, well below even the official rate of inflation – and that hallowed “Fed Taper” still hasn’t even gotten going yet…

It probably never will.

Banking crises are here (we’ve had two in under a week, if you count the Elizabeth Warren-led rat-fucking of Silvergate), and former Treasury Secretary Larry Summers went on Bloomberg to say this “won’t be a source of systemic risk”. It remains to be seen if that utterance gets filed next to “sub-prime is contained”. 

If we squeak through this crisis, we buy some time but only forestall the inevitable destruction the global financial system, which explains the incessant drive toward CBDCs, but that could all be too late, given the rate of collapse.

This morning I woke up to see USDC had de-pegged to as low as 0.82, and while it looks like it will probably re-peg in due course (I sent a note about that to my premium list earlier today), it reinforces my core tenet that volatility aside, the only thing I really trust to be around for the foreseeable future, (and that I can move in an instant during a financial collapse) …is Bitcoin.

*  *  *

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Friday morning’s seizure of Silicon Valley Bank by the Federal Deposit Insurance Corporation (FDIC) underscores the banking sector’s vulnerability, exposing the Federal Reserve’s lack of foresight in combating inflation through aggressive interest rate hikes that have caused regional banks to crumble. As venture capitalists and others with inside knowledge panicked and withdrew a staggering $42 billion in deposits before SVB’s collapse, an old-fashioned bank run reminiscent of the one in the classic 1946 film “It’s a Wonderful Life” has ensued, involving ordinary people.

Let’s go down memory lane and revisit the bank run scene from the movie. 

The velocity at which elite investors and depositors removed $42 billion from SVB on Thursday is truly impressive, causing the most significant US bank failure since the financial crisis just one day later. Unfortunately, small banking clients had insufficient time to withdraw their funds, leaving their unsecured deposits likely lost, and the FDIC only provides protection for deposits of up to $250,000. 

This is what a digital era bank run looks like https://t.co/s7Ex17Dk84

— Ben Schreckinger (@SchreckReports) March 12, 2023

On Saturday, just like the bank run scene from It’s a Wonderful Life, images and videos surfaced on social media of people lined up outside SVB branches and other SVB-exposed banks, trying to panic-withdraw as much money as they could. 

Shades of 1930’s. This is my bank in Wellesley this morning. Boston Private Bank, recently acquired by Silicon Valley Bank. Ruh, roh. pic.twitter.com/MAD46ozShx

— Lawrence Lepard, “fix the money, fix the world” (@LawrenceLepard) March 10, 2023

Bankrun in the US #SVB pic.twitter.com/HbMmR2dLge

— marc friedrich (@marcfriedrich7) March 11, 2023

I’ve never seen a bank run in Brentwood Los Angeles in over 40 years — this is at first republic bank branch. People standing in rain pic.twitter.com/k31PqqpyO3

— pjb.eth (@Dr_PhillipB) March 11, 2023

On Sunday, Treasury Secretary Janet Yellen said banking regulators are working to resolve failed SVB with a focus on depositors but didn’t elaborate on details. 

Yellen told CBS’s “Face the Nation” that despite SVB’s collapse, the US banking system remains safe, well-capitalized, and resilient. She said officials are “working to address this situation in a timely way.”

Meanwhile, as Jason Calacanis writes, this might be the beginning.

ON MONDAY 100,000 AMERICANS WILL BE LINED UP AT THEIR REGIONAL BANK DEMANDING THEIR MONEY — MOST WILL NOT GET IT

THIS WENT FROM SILICON VALLEY INSIDERS ON THURSDAY TO THE MIDDLE CLASS ON SATURDAY — MAIN STREET FINDS OUT MONDAY

— @jason (@Jason) March 12, 2023

The question we posted yesterday to premium subs: “Was Silicon Valley Bank Really Unique, And Who Is Next.” 

And while all US banks parked some part of their money in Treasuries and other bonds that dropped in value last year thanks to the Fed’s fastest rate hiking campaign since Volcker, SVB took it to an entirely new level: as Bloomberg notes, SIVB’s investment portfolio swelled to 57% of its total assets. As the chart below shows, no other competitor among 74 major US banks had more than 42%.

As fear spreads this weekend, even more people will likely be lining up in front of these regional banks on Monday morning. 

… and Monday it is. 

From a source I trust: @SVB_Financial depositors will get ~50% on Mon/Tues and the balance based on realized value over the next 3-6 months. If this proves true, I expect there will be bank runs beginning Monday am at a large number of non-SIB banks. No company will take even a… https://t.co/2BoqtCDKJt

— Bill Ackman (@BillAckman) March 11, 2023

Authored by Charles Hugh Smith via OfTwoMinds blog,

The next Bull Market will start when everyone has given up on the stock market as the means to “get rich quick” or even “get rich slowly.”

Here’s the chart of the month: a weekly chart of the S&P 500 (SPX) showing the giant wedge going back to January 2022 has broken decisively down.

Any questions? Wow, so many have raised their hands, we’ll try to answer as many as we can in our allotted time.

Isn’t there a “bull flag,” i.e. a technical pattern that projects a continuation of the Bull mover higher?

No.

Isn’t there a “Bullish breakout” that projects a continuation of the Bull move higher?

No.

Isn’t the economy going to avoid a recession due to a strong job market, i.e. “no landing”?

No.

Isn’t the economy going to have a “soft landing” due to the strong job market?

Maybe “soft” for some but “hard” for others. “Recession” is somebody else losing their job and/or losing their shirt in the stock market / bank failure / crypto meltdown, etc., a “depression” is losing your job and/or losing your shirt in the market / bank failure, etc.

Won’t the Federal Reserve “pivot” to lowering interest rates and restarting stimulus (QE) because Silicon Valley Bank failed?

No.

Won’t the Fed “pivot” once a recession becomes undeniable?

No.

Won’t the strong job market inoculate the economy and market from bad things?

No. Neither full employment nor high unemployment can unwind 23 years of financial distortion, corruption and moral hazard.

What’s the new hot sector that will power the next speculative frenzy that will push the market to breathtaking new highs?

Digital currencies backed by bat guano or quatloos issued by the Central Bank of Mars.

When will the next Bull Market start?

Overlay the past 40 years of the stock market’s rise to dominance on this chart of the 1950s to the 1980s.

We are at the point equivalent to Q4 1972.

The next Bull Market will start when everyone has given up on the stock market as the means to “get rich quick” or even “get rich slowly.”

*  *  *

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century.  Read the first chapter for free (PDF)

Become a $1/month patron of my work via patreon.com.

While Silicon Valley Bank careened toward its spectacular collapse, the bank’s head of risk management for Europe, Africa and the Middle East devoted a chunk of her time to various LGBTQ+ programs. 

Meanwhile, SVB went without a chief risk officer (CRO) from April 2022 to January 2023, the Daily Mail reports, as the bank apparently had little urgency to replace Laura Izurieta before finally tapping Kim Olson earlier this year.  

On the other hand, a few months before that long CRO vacancy began, SVB boasted, “We have a Chief Diversity, Equity and Inclusion Officer, an executive-led DEI Steering Committee and Employee Resource Groups with executive sponsors focused on these objectives.”  

As SVB’s CRO office stood vacant in Santa Clara, Jay Ersapah — a self-described “queer person of color from a working-class background” — was splitting her time between risk management and an assortment of woke programs, as she co-chaired SVB’s “European LGBTQIA+ Employee Resource Group.”  

For example, at the same time she was responsible for managing risks associated with SVB’s European, African and Middle Eastern portfolios, Ersapah oversaw a month-long Pride campaign.

According to her bio on a professional networking site, Ersapah also “was instrumental in initiating the [SVB’s] first ever global ‘safe space catch-up,’ supporting employees in sharing their experiences of coming out” as something other than heterosexual.  

Ersapah, whose job history on LinkedIn lists roles at Citi, Barclays and Deloitte, also devoted some of her SVB time to writing articles promoting “Lesbian Visibility Day” and “Trans Awareness Week,” the Daily Mail reports.

“I feel privileged to help spread awareness of lived queer experiences, partner with charitable organizations, and above all create a sense of community for our LGBTQ+ employees and allies,” Ersapah said in SVB materials.  

Embracing a broader woke agenda that eschews underwriting purely based on business fundamentals, a 16-page, January 2022 DEI brochure touted an SVB program “focused on increasing representation and funding for women, Black and Latinx founders, investors and professionals in the innovation economy.”  

Surveying SVB’s wreckage in a Saturday Fox Business News interview, Home Depot co-founder Bernie Marcus decried DEI’s destructive influence:

“I think that the system, that the administration has pushed many of these banks into [being] more concerned about global warming than they do about shareholder return. And these banks are badly run because everybody is focused on diversity and all of the woke issues and not concentrating on the one thing they should, which is shareholder returns.” 

…

“I feel bad for all of these people that lost all their money in this woke bank. You know, it was more distressing to hear that the bank officials sold off their stock before this happened. It’s depressing to me. Who knows whether the Justice Department would go after them? They’re a woke company, so I guess not. And they’ll probably get away with it.”

“The phrase ‘you can’t be what you can’t see’ resonates with me,” the multi-tasking Ersapah said in another of SVB’s multiple DEI brochures. Unfortunately, devoting so much attention to leftist DEI programming helped blind Ersapah and SVB to the bank’s impending doom.  

Authored by James Howard Kunstler via DailyReckoning.com,

If you think about it at all, can you come up with any good reasons why our country has involved itself in the Ukraine war?

To defend democracy, many say?

An emptier platitude does not exist in the vast slippery lexicon of spin.

To thwart Russia’s imperial overreach?

You apparently have no clue about Ukraine’s history, ancient or modern.

To incite an overthrow of the wicked Putin by his own people?

The Russian president is more popular there now than even John F. Kennedy was here in 1962.

Oh, I know, I’m just parroting Russian propaganda by saying that. Isn’t that what they always say when you confront them with an uncomfortable truth about the war in Ukraine?

Meanwhile, Western “intelligence” sources and their mainstream media mouthpieces have been saying for about a year now that Russia was running out of ammunition. Well, they still have plenty of it, as the Ukrainians can painfully attest.

It’s actually the Ukrainians who are running out of ammo, which is why the U.S. and its NATO allies are looking under the couch cushions for any spare ammo they can find to send them.

Two Reasons, Both Bad

There actually are no good reasons for what we are doing in Ukraine, only bad reasons.

Mainly, stoking the war there diverts Americans’ attention from our own problems, which is to say the titanic failures of America’s political establishment.

The USA is falling apart from a combination of mismanagement, malice and negligence.

Our economy is a tottering scaffold of Ponzi schemes. Our institutions are wrecked. The government lies about everything it does. The news industry ratifies all the lying. Our schoolchildren can’t read or add up a column of numbers. Our food is slow-acting poison. Our medical-pharma matrix has just completed the systematic murder and maiming of millions. Our culture has been reduced to a drag queen twerk-fest. Our once-beautiful New World landscape is a demolition derby.

Name something that hasn’t been debauched, perverted, degenerated or flat-out destroyed.

And so the “Joe Biden” show is busy ginning up nuclear war hysteria because that’s all it has left for manipulating public emotion. The COVID-19 derangement lost its mojo in 2022 and the population has only just begun to grok the all-causes death disaster underway courtesy of Pfizer and Moderna (and the CDC with the FDA).

Do It for the Children

Did you notice, by the way, that the CDC just added those unapproved, still-experimental shots to the childhood vaccine schedule, considered official “guidance” that is followed by virtually every school system in America. Rochelle Walensky did that despite massive evidence that the “vaccines” damage children’s hearts, nervous systems, reproductive systems and immune systems.

Do you know why Ms. Walensky did that? Because adding the mRNA shots to the childhood schedule supposedly confers permanent immunity from legal liability for the drug companies, even after the current emergency use authorization (EUA) runs out.

The catch to that cozy arrangement is if there is any fraud committed on the public in the release and administration of those products, the companies lose their immunity and can be sued until there is nothing left of them but the paper clips. Plus, the executives may be liable for criminal prosecution. Hard time.

One Brook Jackson, a technician involved in the sketchy Pfizer drug trials, and who directly witnessed the procedural violations as they occurred, is currently suing Pfizer under the False Claims Act (31 U.S. Code § 3729) saying that the company defrauded the government.

Pfizer’s lawyers have asked the judge to dismiss the case on the grounds, they said in court, that “We did not defraud the government. We delivered the fraud that the government ordered.”  So now millions of schoolchildren in this land will be subject to compulsory harmful mRNA shots in order to cover the Pharma companies’ multibillion-dollar rear ends. Doesn’t that sum up our national predicament nicely? Way to go, Rochelle. Don’t think nobody noticed.

Something to Ponder

It’s also worth pondering whether we are neck-deep in the Ukraine morass because Volodymyr Zelensky is blackmailing “Joe Biden” over the mysterious Biden family business operations that took place there directly following the U.S.-orchestrated Maidan revolution that overthrew Ukraine President Viktor Yanukovych in 2014.

Remember “The Big Guy’s” earnest efforts to get rid of the Ukrainian state prosecutor who was looking into the affairs of the Burisma gas company that invited Hunter Biden and his associate Devon Archer onto the board of directors?

Of all people in Western Civ… these two Americans… with no knowledge of or experience in the natgas industry. Weird, a little bit. Do you suppose Mr. Zelenskyy still has the prosecutor’s files in his possession?

I’m just throwing that out there. I have no idea, but it’s good to think outside the proverbial box. The mainstream media certainly don’t.

Complete Media Silence

Then, of course, there is the bizarre matter of the Nord Stream pipelines caper, lately disclosed by the scrupulous reporter Seymour Hersh as a U.S. naval operation. We blew them up. Four EU member nations (also U.S. NATO allies) held a combined half-ownership in the pipelines (the other half held by Russia).

European industry and households depended on a steady supply of that reasonably priced gas to continue modern life there. Both President “Joe Biden” and Under Secretary of State for Political Affairs Victoria Nuland promised the news media (and the American public) that the pipeline would “be no more” if a Russian military operation crossed into the Donbas.

Well, sonofagun, the pipelines were “no more” as of last September. Of course, the mainstream media have completely ignored this story. If that doesn’t tell you about the state of modern journalism, I don’t know what will.

Was that an injury to Russia? Well, yes, though Russia has found workarounds for selling its natgas elsewhere than northern Europe. Do you realize, though, that it was every bit as much an act of war against our supposed allies?

None of the NATO countries with a stake in the North Streams have made a peep so far about the shocking disclosure. Which may lead a casual observer to ask whether Western Civ has gone plumb insane. Maybe so, in which case perhaps it deserves to suffer.

After a while — not such a long while, either — modern life will be but a memory in northern Europe.

No More NATO?

Somehow the specter of unintended consequences looms over all this mischief. My guess is we just haven’t seen them yet… and when we do, they will be ferocious. For starters, NATO will be another thing that is no more.

And our country will have to go about our blustering war-hawkery without any back-up or convenient staging areas for fomenting more shenanigans in a faraway region where we have no real national interest, just a certain zeal for creating unnecessary trouble and hardship in a world that already has more than it requires.

Remember what his old boss, Barack Obama, said about the former veep: “You can never overstate Joe’s ability to f*** things up.” What a prophet that man is!

Under “Joe Biden,” the USA has been slip-sliding sideways and backwards into a realm of darkness unimaginable a few years ago. And he’s had plenty of help from establishment Republicans, so this isn’t an entirely partisan affair.

But now, something is heaving through the public sensibility, as spring marches north in America. It feels like a sharp change in attitude, a refusal to continue acting like a reality-optional society. It’s crackling through the air like a rumor of liberation in a hostage crisis.

Can you hear it?

With just hours left until futures open for trading late on Sunday afternoon, the situation remains extremely fluid and for now it appears that regulators, central bankers and treasury officials (we won’t mention the White House where the most competent financial advisor is Hunter Biden) still don’t have a clear idea of how they will coordinate or respond.

Take Janet Yellen, who said on Sunday morning that the US government was working closely with banking regulators to help depositors at Silicon Valley Bank but dismissed the idea of a bailout.

Speaking with CBS on Sunday, the treasury secretary sought to assure US customers of the failed tech lender that policies were being discussed to stem the fallout from the sudden collapse this week. The Federal Deposit Insurance Corporate (FDIC) took control of the bank on Friday morning.

“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out . . . and the reforms that have been put in place means we are not going to do that again,” Yellen said (oh but you will, you just don’t know it yet).

“But we are concerned about depositors, and we’re focused on trying to meet their needs.”

It wasn’t clear which depositors she meant: as we first pointed out on Friday, out of SIVB’s $173 billion of customer deposits at the end of 2022, $152 billion were uninsured (i.e., over the $250,000 FDIC insurance threshold) and only $4.8 billion were fully insured. As we also noted last week, a further look at SIVB funding (pie charts) shows unusually high reliance on corporate/VC funding; only the small red private bank slice looks like traditional retail deposits to us.

As a result, as JPM’s Michael Cembalest says “It’s fair to ask about the underwriting discipline of VC firms that put most of their liquidity in a single bank with this kind of risk profile. At the end of 2022, SIVB only offered 0.60% more on deposits than its peers as compensation for the risks illustrated below; in 2021 this premium was 0.04%”.

Meanwhile, late last night, Bloomberg reported that the FDIC and the Fed are “weighing creating a fund that would allow regulators to backstop more deposits at banks that run into trouble following Silicon Valley Bank’s collapse.”

According to the report which cites people familiar with the matter, “regulators discussed the new special vehicle in conversations with banking executives.” And here the punchline:

The hope is that setting up such a vehicle would reassure depositors and help contain any panic, said the people. They asked not to be identified because the talks weren’t public.

Well, needless to say, any time one mentions “hope” as a wise macroprudential policy, alarms go off, because the entire banking system suddenly becomes reduced to a game of chicken as follows: Fed/regulators won’t backstop deposits today and won’t admit a bank crisis is emerging, but if a bank crisis emerges and there is a flight of deposits on Monday morning, they will move.

But then it will be far too late as once a bank run has started it is virtually impossible to stop it under controlled circumstances and is why the number one prerogative for regulators is to avoid just this kind of outcome, which is catastrophic for a fractional reserve system that is entirely based on confidence, and where available “demand money” is merely a fraction of the $18 trillion in deposits, far more than the $2.2 trillion in circulating currency.

Furthermore, a quick look at historical unsecured depositor impairment numbers show that losses imposed on uninsured depositors range between 6% and 65%: huge numbers in today’s context even assuming that banks are mostly solvent (which they likely won’t be once the commercial real estate crisis hurricane hits).

Meanwhile, as Jason Calacanis writes, this is just the beginning.

ON MONDAY 100,000 AMERICANS WILL BE LINED UP AT THEIR REGIONAL BANK DEMANDING THEIR MONEY — MOST WILL NOT GET IT

THIS WENT FROM SILICON VALLEY INSIDERS ON THURSDAY TO THE MIDDLE CLASS ON SATURDAY — MAIN STREET FINDS OUT MONDAY

— @jason (@Jason) March 12, 2023

And while he may be conflicted – he certainly has some material losses as a result of the SVB failure – one look at what is already taking place at some smaller, vulnerable banks such as this First Republic Branch in Brentwood should be sufficient to see what comes tomorrow if the Fed makes the wrong decision today.

I’ve never seen a bank run in Brentwood Los Angeles in over 40 years — this is at first republic bank branch. People standing in rain pic.twitter.com/k31PqqpyO3

— pjb.eth (@Dr_PhillipB) March 11, 2023

The flipside to all this is that the longer the Fed waits to assure depositors – even uninsured depositors – that they are safe, the more firepower (bailout funds, TARP 2.0, rate cuts, QE) it will have to deploy much sooner than anyone previously expected as the crisis spirals out of control.