The Economy

BTW. ... Regional banks have been selling off hard in the wake of Jay Powell being "hawkish" in front of Congress and Silvergate going belly up.

Idiot central banks addicted the world to free money for a decade and a half, created trillions of dollars of malinvestment. ... and now think they can undo it without a shitstorm. If they keep trying to normalize interest rates because the inflation they stoked is eating people up, it's akin to the tide going out and you are going to find out who has been swimming naked.

This could be the early stages of banks failing. The CEO of Sillicon Valley Bank (and you can just imagine what that bank might be exposed to) told people on a conference call a little while ago that the bank has “ample liquidity to support our clients with one exception: if everyone is telling each other SVB is in trouble, that would be a challenge."

It's always an ominous thing when a bank is publicly having to tell people it has "ample liquidity," but how often have those assurances meant the exact opposite?

The KRE regional banking index is down more than 7 percent on the day.

 

That is not only a silly meme, it's ridiculously historically inaccurate.

The level of poverty worldwide, just in the last several decades, has dropped significantly.

If you look at any century in history going back to the beginning of the prior century, you had always 80 percent of the world living in extreme poverty. Today well fewer than half the world lives in poverty.

Even just looking at poverty rates in the U.S., they have not only dropped dramatically over the history of the country, and in the last decade alone using the arbitrary measure the government uses, poverty rates have dropped by about 25 percent.

 

Who could have seen this coming?

Banks Lose Billions in Value After Tech Lender SVB Stumbles

If they let ever interest rates trade at an actual market rate, there is going to be a credit event that makes 2008 look quaint. It won't happen. But at best we are now looking at something akin to the 1980s S&L crisis, and the fact that they will step in save banks is going to come at a later cost. ... they create failure, then don't allow failure, and it creates more failure down the line, all the while putting an anchor on our economy that has ramfications that the people who languish don't understand.

This is what quantitative easing did. ... The U.S. was running huge debts. The central bank was monetizing all of that debt by buying treasury bonds with money it conjured out of thin air. Think about that. ... When you combine the central bank and our government's treasury into a single entity -- our government -- we have spent more than a decade borrowing money and buying the debt that created with money we created out of thin air. Charles Ponzi would find that immoral.

That ran the price of those bonds up, and drove yields down (what the central bank was trying to achieve). It's a sugar high that comes with all kinds of insidious long-term effects. First, it allows our government to keep spending when the market would have served as the bartender that cut off the drunk long ago. Second, everyone who normally relies on safe, risk-free yield (such as U.S. treasury notes and bonds) was being robbed of yield by that policy, and it drove more and more speculative and risky behavior to try to earn the returns people were losing. It funds malinvestment because the cost of money is distorted -- it created FTX and tech companies with no earnings with insane valuations. That means there is now trillions of dollars of debt out there that was made available for way too low cost that went to things that never should have attracted capital. And because this has gone on so long, and every time there has been the hint of the cascade of debt defaults that is the end game in all of this, they stepped in to do MORE bond buying with money created out of thin air to prop it all up (no failure allowed), the level of malinvestment they have spurred is going to be epic if they allow the chickens come home to roost.

The pandemic brought out their worst instincts, because the Fed 1) put it's policy of monetizing debt on steroids (they blew the money supply through the roof, creating trillions of dollars out of thin air to monetize debt with), and 2) Fiscally, our government started helicopter dropping much of that money, not just to businesses that weren't operating, but to the population at large. That created way too much money chasing too few goods and services (they spurred massive demand), which has given us runaway consumer price inflation. Prior to that, all of the money they were creating (the monetary inflation) was concentrating more in the speculative bubbles they were blowing. So nobody cared (nobody cares until the bubbles pop and there is a devastating financial crisis on the back end). But now? They can't ignore the consumer price inflation they let out of the genie's bottle, because it brings out people with pitchforks; they can't afford their car payments and grocery bills.

As a result, they have very gingerly been trying to deal with the "inflation" by 1) raising their short-term interest rate, and 2) letting some of the bonds they bought (they built a $9 trillion balance sheet) roll off their balance sheet without buying new bonds. It's too little and way too late, but that is even beside the point now.

They don't put it this way (which would be honest), but if quantitative easing blew bubbles, even just a halting attempt to undo it is really "quantitative tightening," and it is the equivalent of letting air out of a balloon. In the case of banks like SVB -- and there are going to be other banks -- they hold huge portfolios of the treasury notes and bonds (and who knows what riskier bonds) whose values were driven higher by the artificial buying of the Fed (with money it was creating out of thin air). They bought those bonds at insanely artificially high prices -- the Fed was driving the prices of bonds into the stratosphere wiht QE.

With interest rates now rising because the Fed is being forced to deal with "inflation," the actual market value of the bonds those banks own has taken a huge hit. People are just waking up to that fact, because they haven't been forced to mark those bonds to market (due to regulations), which would cause panic. If they had to go to market with their holdings in order to raise cash (which SVB started to do). ... You will find that there are fractional reserve banks out there that are insolvent. If they simply want to hold the bonds they own until maturity. ... yields on what they own are locked in much lower than the rates they now have to pay for deposits. And if they try to raise money, the cost of any new funding is much higher than the yields on their portfolios.

Last week, the yield on a 2-year note got over 5 percent. It's notable for a bunch of reasons. First, the yield curve is inverted. The Fed by raising rates on the short end has made that happen. Markets are betting that there is going to be an accident and the Fed will do what it always does and go back to suppressing rates in the name of a crisis, so yields on 10 year and 30 year bonds are below 4 percent. So the perversion they have created is that you earn more to lend for a short amount of time than if you lend for a long period of time. Secondly, banks now can't compete wiht the yield on things like 6 month notes and 2 year notes. So people are pulling their money from banks because it can be the difference between earning 4.5 percent and 2 percent. That is what is putting pressure on SVB. Normally, they'd raise yields on deposits to be competitive. ... but because of the Fed's stupidity, they have a huge portfolio of bonds that earn way less than the yield they need to pay out to be competitive. And their bank is at risk.

This is why I have been trying to tell people how backed against a wall the Federal Reserve is and how serious it is. They are selling a fantasy (that they can't believe) of being able to thread some needle that doesn't exist. There are only bad choices as the consequence of their stupidity (that was done for a series of sugar highs, creating a worse payback down the road). They can let a financial crisis happen that is going to devastate the world, or they can try to put the cost on all of us via a hidden tax -- inflation. Which is what central banks create with their "money printing."

I suspect they are going to do what they always do and take the cowardly path and let inflation rage now (i.e. pivot, and lower rates again). They have no choice by their way of usual thinking. If they keep doing what they are doing -- not doing enough to completely deflate the bubbles they created and not doing enough to tame inflation -- it will be like death by a thousand cuts via stagflation. If they deal with inflation, it is going to be MUCH worse than 2008. So get used to inflation killing you, and more likely stagflation because if they don't bring real rates negative (it takes bigger interventions and bigger distortions to prop it all up as the debt levels they spur get bigger).