As students of risk and volatility, it is moments like this which create a time-hack against our other projects. There are so many rabbit holes to venture down and so many sharp influencers with great content.
We listened to a lot and decided to share our notes.
Key Takeaways
THE TUG-O-WAR CONTINUES: between inflation & deflation.
THE YIELD CURVE NAILED IT: the curve has been inverted for a while. The message — The Fed will break something…and they did.
A COVID RESPONSE: the US banking system is “safe & effective”.
MORAL HAZARD: banks are now taking undue risk (with deposits) knowing they are off the hook.
#SSDD (Same Shit Different Day): privatized gains and socialized losses.
A SYSTEM DOWNGRADE: Moody’s downgraded the entire U.S. banking system outlook to negative from stable.
THE OUROBORUS: customers withdrew their savings from small banks and put it in the big banks, and the big banks put it right back into the smaller banks.
CONTAGION: this story is not contained. We had five fails in almost a week (Silvergate, $SVB, Signature Bank, FRC , and $CS).
TOXIC SECURITIES: the toxic securities this time around – Government Bonds.
WE ARE ALL SVB: The US Government has the same problem SVB had – an asset/liability mismatch and unrealized losses.
INEQUITY RULES THE DAY: #QE to protect the banks and wealthy depositors and higher interest rates to crush the masses and small businesses.
TOTALLY INFLATIONARY: to say that we will not be paying for this is completely disingenuous.
CRONY CAPITALISM: wins again.
OVER 100x LEVERAGE: FDIC coverage of $130B vs $17T in deposits.
A GLOBAL PROBLEM: markets reacted globally. Many countries have the same problems. Interconnectedness at new highs.
THE BULLWHIP: the move in rates was astounding. In three days the 2-year moved over 1%. In 9/11 it was “only” 60 basis points.
NOT A SIGN OF STRENGTH: Credit Suisse, a bank that lost $7.8 billion last year, is being rescued by a bank (SNB) that lost $143 billion last year.
The FED
ONE OF A KIND: they have earned their own section in The SVB Chronicles.
PART OF THE PROBLEM: rule changes – 1. Brought on the purchase of treasuries. 2. Allowed for losses to be unrealized.
THIRD TIME’S A CHARM: this is the third time The Fed has bailed out the banking system in 15-years: 2008 GFC, the REPO crisis in 2019, and now 2023.
CHECKMATE: The Fed has a choice between saving the financial system or the currency.
THEY SUCK AT THEIR JOB: another failure of risk assessment & economic analysis. Think “transitory”, “stress tests”, and “contained”.
REMINDER: they are unelected and they engaged in an insider trading scandal that got memory-holed.
THE ARSONIST: The Fed is trying to solve a problem they created.
THE PIVOT IS HERE: The Fed has decided to rescue the markets at the expense of the currency.
DEFINING THE PROBLEM: the first step to solving a problem is to define it.
Potential Solutions
SOLUTIONS: C&P will always be looking thru the solution lens.
FIAT HEDGES: Bitcoin and precious metals have reacted smartly.
RISK FREE: time to revisit the concept of US Government Bonds being “risk free” and how it impacts valuation models
MULTI-ASSET ALLOCATIONS: see our initial post here.
#thegreatconversion: a hint at another winning strategy.
Hat Tips
@GeorgeGammon
@LukeGromen
@jackmallers
@menlobear
@chrismartenson
@MacleodFinance
@JeffSnider_AIP
@FedGuy12
@PeterSchiff
@NorthmanTrader
Disclaimer: The information contained in this article is for informational purposes only and should not be considered as investment advice. The information presented in this article should not be interpreted as a recommendation to buy, sell or hold any security or investment. Before making any investment decisions, it is important to do your own research and seek advice from a qualified professional. Investing in securities and other financial instruments carries a high level of risk and may not be suitable for all investors.
