Here is a look at the ongoing panic that seems to be taking place everywhere all at once.
At The Crack Of Dawn
March 13 (King World News) – Art Cashin, Head of Floor Operations at UBS: Saturday, at the crack of dawn, I got a call from my very bright older son (actually both boys are bright; I guess they favor the mother) anyway he noted that funds sequestered in the government takeover to SVB seemed to be causing several so-called stable coins in the cryptocurrency world to fail to hold their mandated $1 level. In was very reminiscent of the reserve fund – a money fund had to break the buck because of its holding in Lehman preferred stocks as Lehman came into question and then, when they broke the buck, everything happened, and the Lehman collapse was followed by a great deal of pain that the financial market suffered.
Was the breaking of the buck in the cryptocurrencies a sign of new a Lehman moment? Well, it is not necessarily worldwide, but it certainly hints there may be further trouble ahead in the cryptocurrencies, which presents some systemic risk, which raises the question – Will the Fed have to stop or even reverse if there is evidence systemic risk is going around.
To repeat – I have been worrying aloud for weeks about a possible black swan after the Fed caused the collapse in growth of the money supply. The biggest such collapse since the early 1930’s. So, we will have to watch very carefully as the event proceeds. Again, the media types were all running around calling SVB “idiosyncratic”, meaning of and to itself.
Well, the problems may have been borderline idiosyncratic, but the consequences are not necessarily so. I suspect that those people think that “sui generis” might mean an extra- large portion of some Chinese food. People step over their vocabulary all the time.
Phones WereOver the weekend the phones were ringing off the hook and by early Sunday morning there was a bit of a consensus. I expressed it in this very poorly punctuated e-mail to some friends;
FYI. The speculation and nervousness about the outcome of the seizure of SVB has only intensified as the weekend has progressed.
The Fed has called a previously unscheduled closed door meeting for Monday at 11:30. Obvious speculation that it concerns SVB and the possible fallout, and if there’s any systemic risk. There’s unconfirmed speculation that the FDIC. They use a special purpose instrument to perhaps “lend” money to uninsured depositors to free up billions in frozen cash.
There’s also speculation that some hedge funds are using a brag sheet from SVB’s website. That said, the things like several of our customers are among the top 10% of this or the top 15% of that or the top 10% of that. And by triangulating that, they hope to identify some of the major depositors.
And by looking at the assets speculate that there may be much as 50% was uninsured. As I say, that’s pure speculation and no corroboration can be found.. The feeling is that the Fed, even before Monday while working with the Treasury, may try to strong arm a major money center bank to step in and take over. The key fear being not only the spill out of potentially frozen funds at SVB, but the massive run on all the smaller regional banks in a kind of sympathy panic.
It will be interesting to see if that works, if the rather bad experience, JP Morgan had after being forced to take over Bear Stearns and then to be sued later for the Bear Stearns activity prior to their takeover. Nevertheless, the fallout looks large enough that the Fed and Treasury are probably moving, some way to get it absorbed and allow the deposits not to be frozen, which could deadly spill over into everything else.
If so, we may know as early as tonight. We’ll keep our eyes peeled. Warm regards, Arthur.
And as we watch the dawn come up this Monday morning, it looks like much of that speculation was spot on, although it looks like the FDIC will outright guarantee rather than lend to the uninsured. I guess the idea of so many billions being frozen and inhibiting payrolls and the like must have scared the heck out of the Fed and the Treasury.
Let’s start with the simplest assumption, you can forget about any 50 basis point hike, and there’s a temptation to say you can forget about any hikes. But the feds gotta walk a tightrope here because if they in fact don’t make any hike if they walk away from the tightening process. That will raise a lot of questions, but that’s weeks away and as Scarlett O’Hara would say, I’ll worry about that tomorrow.
Over the weekend and overnight, global equity markets
Overnight markets continue to trade uncertainly and quite nervously. While there appears to have been no fraud in this case, but rather just banking ineptitude. Several of the self-styled pundits on the media are claiming that it was caused by the loosening of regulation. Things like the Dodd Frank rule, perhaps they should look a little deeper and notice that the recently seized Signature Bank had none other than Barney Frank on its board of directors. As they say, you can’t make this stuff up.
Anyway, Global markets are to some degree of wonder to behold most they’re trading nervously and negatively, with the exception of mainland China and Hong Kong, which are both trading quite a bit higher, and one wonders if that’s because they believe that their banking system is more solid.
Over here in the United States, it looks like the flight to safety is continuing. In the uncertainty of the morning, the bond yields are lower, but so are stocks. Although the Dow is off the worst of the morning as dawn hits Central Park. The overall look will come out later as people from the President on down will be speaking and fingers will be pointed.
Bitcoin is having a bit of a rally as the belief is that with Signature and other banks getting federal aid. That there may be a bit of an unspoken federal support for the crypto currencies. I think it’s a little too early to tell that, but Bitcoin is bouncing nonetheless.
And then we’ll go
At any rate, you can’t get hurt sticking with the current drill. Stay close to the newsticker, very close. Keep your seatbelt tightly fastened. Stay nimble and alert. And most of all, try to stay safe.
Arthur
Crisis Averted For Now But Is The $250,000 Cap Fully Done With?
Peter Boockvar: Another crisis averted as the Federal Reserve AGAIN shows up in their fire truck after setting the house ablaze with years of cheap money followed by one year of a vertical rise in interest rates. Putting aside the moral hazard/bailout debate, thankfully many small and medium sized businesses will live to fight another business day and their employees can get paid. And hopefully we can calm the depositors for now at all other small/medium sized banks. But, the analysis can’t stop there as to what this means for small/medium sized banks and the US economy is even more unclear.
Firstly, have we just implicitly done away with the $250k insured deposit cap? If so, fine if that’s the new government approach to the banking sector. If there is nothing explicit though, and it remains maybe implicit, maybe not, sort of an FDIC grey area, I would think that would result in the further shifting of deposits from small banks to larger ones as why take the chance with a small bank and the insurance cap is still in place. SVB was high profile but what about the hundreds/thousands of banks that have just a few branches? There are more than 4,000 commercial banking institutions in the US by the way according to the FDIC. Are their uninsured depositors forever protected or not? Maybe as a result we’ll start to see a wave of small/medium sized bank mergers.
Secondly, as part of the need of banks to work in this grey area, we could be on the cusp of a notable rise in the interest rates banks pay on savings and checking accounts in order to stem the deposit bleed. It will be great for the holders of such accounts but a big crimp in bank profitability could come from the shrinking of loan margins and has the potential consequence of a credit crunch where loans don’t flow so easily. This at the same time bank lending standards have already been notably tightening. Something to watch.
I’ll finish with this, it’s certainly a new economic and investing world, when after the two bear markets/recessions before covid were the crash of tech stocks and home prices, it’s now the ownership of risk free (in terms of the guarantee of getting principal back upon maturity) assets like Treasuries and agency MBS that does the damage and all because duration bites.
As for the Fed, oops, they did it again (sorry Britney). The fed funds futures are pricing in a 60% chance of even a 25 bps rate hike next week after getting as high as 68% chance for two after Powell last spoke. The 2 yr yield is lower by 81 bps in the last 3 days. It will be really interesting to hear not just what Powell has to say next week but his colleagues that have remained uber hawkish thinking that there was no problem taking the fed funds rate up 500 bps in one year after 15 years of near zero at the same time conducting QT. Either way, the monetary tightening process in order to combat high inflation is now driving on black ice and what happens at the same time if inflation remains sticky and persistent?
I’ll use this as another opportunity, for the umpteenth time, that gold will now really be a beneficiary of what has transpired, especially because the Fed is just about done hiking rates. The price this morning stands at a 5 week high.
UPDATED CHART: Gold Has Now Surged Over $50 To $1,918
King World News will be continuing to update today as events unfold. In the meantime…
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