THE HARDEST LANDING

Bulls are locked in for a no bailout hard landing. They are systematically unaware of systemic risk, because this time their beloved bailout gurus ARE the systemic risk. Which means bulls are now trapped by idiots...

Yes, again. 

The Fed just pulled the trigger on another quarter point rate hike and said that another rate hike in May is likely. They are now expanding their balance sheet to create liquidity for failing banks which is creating more inflation via monetary expansion. And, at the same time, they are pushing the middle class into insolvency with rate hikes. The net effect of this hyper-moronic policy is that financial conditions are STILL too loose, as we see in the chart below. So, they really gave themselves no choice.  

In addition, during today's press release, Powell asserted that Silicon Valley bank collapse was an "outlier". So he is ignoring all of the dominoes falling, exactly as the Fed did in September 2008 when Lehman failed:

"On the morning after Lehman Brothers filed for bankruptcy in 2008, most Federal Reserve officials still believed that the American economy would keep growing despite the metastasizing financial crisis"

The Fed’s policy-making committee voted unanimously against bolstering the economy by cutting interest rates, and several officials praised what they described as the decision to let Lehman fail"

As we know, Treasury Secretary Janet Yellen was there in that exact same  FOMC meeting back in September 2008.

Today, in her testimony to Congress, after weeks of vacillation  she said that there is no plan to implement blanket FDIC insurance:

"U.S. Treasury Secretary Janet Yellen said on Wednesday that the Federal Deposit Insurance Corporation (FDIC) was not considering providing "blanket insurance" for banking deposits following the collapse of two prominent U.S. banks this month"

This is what Janet Yellen said yesterday:

"The treasury secretary, Janet Yellen, pledged to protect depositors at smaller US lenders on Tuesday from “contagion” after bank runs led to customers pulling billions in funds"

In comments after the speech, Yellen said the current situation was different from 2008, which she described as “a solvency crisis”, while “what we are seeing is contagious bank runs”

Let's unpack this: We are seeing a contagious bank run and pledging to protect small banks by not protecting uninsured deposits which is half the deposit base. 

No surprise, having just got double teamed by dumb and dumber, regional banks gave back most of their "gains" from this week's limp dick rally.

On Twitter I showed this chart indicating that only mega caps have been holding up the market since the bank collapse:

Look up, and look down. 

Now, bulls are going to find out what it's like to go through a financial meltdown WITHOUT any bailout insurance. 

Hint: It's not as much fun. 

In summary, I have said for months that this right shoulder would unleash biblical criminality. So far, it has shown its potential. However, in the analogy of making popcorn, all we are seeing so far are the first few kernels flying across the kitchen. 

Soon, the popping will explode in every direction. And, the bowl is far too small for what is coming.

Believe it, or not. 

THIRD WORLD BAILOUT

This is the quality of bailout you would expect in the Third World:  Rate hikes to curtail inflation as everything collapses in real-time...

Biden went to great pains last week to assure everyone that these latest bank bailouts were for depositors not for investors. Shareholders in several banks (SVB, Signature, Silvergate) were wiped out last week. This past weekend, with the Credit Suisse/UBS forced merger it was bondholders who got totally wiped out while stock investors got ~.50 on the dollar. Which is very unusual and probably illegal. I am guessing that regulators didn't want the public to see a fourth bank stock going to ZERO given that retail investors usually trade company stocks not company bonds. 

On the topic of depositor protections, consider that by this point in 2008 Congress had already taken steps to insure ALL deposits at ALL banks. Which is how they stemmed the bank run in that era. Last week, Goldman Sachs had this to say about universal deposit insurance passing Congress:

"Increasing deposit insurance without accompanying regulatory changes looks politically difficult, but an agreement on regulatory changes would substantially slow approval"

Elizabeth Warren just introduced a bill to rollback the 2018 Dodd-Frank rollback. Essentially closing the barn door now that the horses are out. To reimpose Dodd-Frank on small banks would immediately expose regional banks to ~$600 billion of unrealized losses due to the restoration of mark to market rules. Meaning it would precipitate the final collapse of the banking sector. Which seems like a bad idea at this point in time. 

Whether that bill passes or not, we now learn that another 190 banks are already teetering on the edge of collapse due to a combination of insolvent assets and high levels of uninsured deposits. The two main factors that catalyzed the Silicon Valley collapse. 

Close To 190 Banks Could Face Silicon Valley Bank's Fate

"On the heels of Silicon Valley Bank’s collapse earlier this month, 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds, a new study has found"

“The recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs”

A run on these banks could pose potential risk to even insured depositors — those with $250,000 or less in the bank — as the FDIC’s deposit insurance fund starts incurring losses"

The FDIC deposit insurance fund ("DIF") has ~$128 billion insuring ~$18 trillion in deposits. Yes, you read that right. Roughly half of those deposits are uninsured. So without a Congressional backstop, this all gets ugly really fast. And in the meantime while that's not happening, CFOs are moving unprecedented amounts of money out of banks into money markets and t-bills. There are $9 trillion of uninsured deposits.

Next, from a fiscal perspective, consider that in March 2020 Congress enacted the largest fiscal bailout package in U.S. history. Whereas this year, the GOP is plotting to push Biden over the fiscal cliff as early as June by vowing not raise the debt ceiling until he reigns in spending.

Which is what they did to Obama in mid-2011. Which dropped the S&P 500 a cool -20%.

On the monetary side of things, by this point in March 2020, the Fed was cutting rates by .5%. Last week the ECB raised rates by .5% and this week the Fed is expected to raise rates by .25%. Again, the opposite of accommodative policy. Many bulls have been encouraged by the fact that the Fed balance sheet is now increasing once again. This was due to the global liquidity facility that central banks put in place last week. Nevertheless, it's a fraction of what took place in March 2020:

In other words, everything taking place now is the opposite of a bailout. Which is clear indication of societal bailout fatigue and the growing conviction of letting losses fall where they may. Which sounds great. However, what NONE of these people understand is that they have now put the entire system at risk with this late stage experimentation in REAL capitalism. Long overdue, but arriving at a time when the financial system is ready to collapse.  

Why? Because as Warren Buffett always says, what the wise man does at the beginning, the fool does at the end. 

GLOBAL BANK RUN aka. BTFP

A combination of factors have coalesced to make global banks uninvestable post-pandemic:

- Lack of regulation

- Bad investments

- Deposit exodus/higher interest rates

- Lack of depositor protection

- Lack of investor protection

The FDIC knew all along that a stealth bank run has been taking place for the past year. The first year of deposit outflows since 1948. Meaning by far the largest outflows in U.S. history:

"After years of earning next to nothing, depositors are discovering a trove of higher-yielding options like Treasury bills and money market funds as the Federal Reserve ratchets up benchmark interest rates. The shift has been so pronounced that commercial bank deposits fell last year for the first time since 1948 as net withdrawals hit $278 billion, according to Federal Deposit Insurance Corp. data"

The lenders getting hit hardest by rising funding costs are community and smaller regional banks"

Over this past week, the bank deposit outflow has become a torrent. Right after my last blog post when I said that no one knows what domino will fall next, Credit Suisse imploded the very next day. 

It was another "Black Swan event".

In this article, the former head of the FDIC confirms what I said in my earlier post about the "Minsky Moment" and depositor exodus due to uncertain protections:

March 15th, 2023:

FDIC May Need To Guarantee All Bank Deposits

"The Federal Deposit Insurance Corp may need to seek temporary guarantees for all uninsured U.S. bank deposits to stem a drain of funds from small and regional U.S. lenders following deposit bailouts for failed banks SVB Financial and Signature Bank, former FDIC chair Sheila Bair said on Wednesday"

Bair told Reuters that the "one-off" deposit guarantees for Silicon Valley Bank and Signature have left depositors elsewhere fearing for safety and fleeing to larger institutions"

The main issue, as I wrote in my Minsky blog post is that wealthy investors and companies with deposits > $250k don't know if they will get bailed out when the next bank fails. The FDIC fund has very limited funds that will be depleted by the blanket bailout of SVG and Signature. And, in order to guarantee ALL bank deposits without limit, the FDIC would need a vote from Congress. Which is very likely NOT forthcoming. 

Which is why the exodus has begun:

What we are witnessing now is the liquidation of regional stocks as a viable asset class:

This is the weekly volume as of Thursday close:

This BTFP stock market rally is a short-covering rally similar to the TARP rally in October 2008. When that rally ended, the market exploded lower. 

Today, the ECB tightened .5% which means they gave no allowance for the bank collapse taking place in real time. Which, guarantees the Fed will hike at least 1/4 pt next week as they move in lockstep.

Whereas the stock market is highly complacent, the bond market is seeing 2008 level distress. Note the disconnect between the Treasury Move index and the VIX:

The collapse in bond yields has caused a massive rotation to Tech stocks under the belief that they are a safe haven from global turmoil. Of course, nothing could be further from the truth. Investors are going out of the pan into the fire.

What today's Tech gamblers need to learn is that once a bubble bursts, it doesn't become a bubble again for a very long time. It took the Nasdaq 17 years to recover its Y2K high.  

For all of the various reasons that have led us to this lethal juncture, central banks are now doing now the EXACT opposite of what they did in 2008. They are tightening into a burgeoning credit crisis. 

Which means we have entered the most lethal financial crisis since 1930. 

In summary, the serial deregulation of criminality is coming to a final hard landing. 

When that happens, even the biggest dunce will understand the lessons learned in 1930 that stood for 70 years until the Idiocracy decided they were smarter than everyone who came before them. 

BETWEEN A ROCK AND A HARD PLACE

What we are witnessing in real-time is Lehman 2.0. Unfortunately, stock gamblers are always the last to know...

The right shoulder has now been amply confirmed as being the locus of global collapse. The dominoes are falling. A week ago, few people had ever heard of Silvergate Bank, Silicon Valley Bank (SVB), and Signature Bank - aka. the "Si" banks. Now they're all collapsed. The second (SVB) and third (Signature) largest bank failures in U.S. history in less than one week.

Recall that March 2021 was the peak for the pandemic IPO junk bubble. Two years later, the Silicon Valley bank collapsed.  Coincidence? No. Then, March 2022 was the first leg down of the Crypto collapse. One year later TWO Crypto banks collapsed. Coincidence? No. The Crypto "DeFi" movement has totally imploded and now it's imploding the traditional banking system. 

Who knows what will be the next domino to fall, no one saw these ones coming. 

Or did they?

Notwithstanding Fed members jettisoning stock in junk banks days ahead of collapse, most pundits are calling these bank failures a Black Swan event, meaning none of them saw it coming. And yet this bank collapse was totally predictable in the context of central banks tightening into an incipient credit crisis - which itself was the direct result of the super stimulus global central banks used during the pandemic. 

Central banks caused this crisis from over-easing to over-tightening.  

 

Today, was CPI day and while it's slowly coming down, it's still at 6%. The Fed is now boxed in between banks failing and a CPI that will sky-rocket if they stop hiking rates. In other words, the Minsky Moment has already started and it's unstoppable. 

Here we see the Fed took their foot off the gas in 2007 due to the housing bubble, and the CPI sky-rocketed from 1.5% to 5.5%. Of course, the same thing happened to Volcker back in 1980 when he prematurely stopped tightening. He was very quickly forced to restart tightening when the economy was in recession.

Imagine if the CPI rebounded back to 9%. That's the bull case right now. A cessation of tightening followed by a shock restart later this year. 

In summary, we are one week away from the Fed making an even bigger monetary policy error. And no surprise the market is rallying due to their first bailout.

The BTFP rally. What else?

THE MINSKY MOMENT

Latest update: March 12th, 10:00pm EDT

The Minsky Financial Instability Hypothesis:

"If an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values"

FDIC Q42022 Banking Profile:

What follows is a summary of the current crisis and my best guess as to what happens next.

This past week, the FDIC warned THIS exact scenario could happen as a result of the fact that U.S. banks are sitting on RECORD unrealized losses:

"On Monday, the chairman of the Federal Deposit Insurance Corporation (FDIC)—the agency that backstops depositors—addressed risks U.S. lenders faced three years after the outbreak of the pandemic. Chief among them was the potential for a bank run."

Gruenberg warned these unrealized losses “weaken a bank’s ability to meet unexpected liquidity needs,” and cautioned that mapping out a strategy to fund themselves profitably would prove a “complex and challenging task”.

Indeed.

See chart above of unrealized losses. Among the various causes of this crisis, chief among the immediate risks is that these banks are sitting on gargantuan unrealized losses while still passing regular FDIC-conducted audits. In other words, the FDIC itself is to blame for this fiasco. Clearly the magnitude of potential losses dwarfs any prior period INCLUDING 2008. 

All that was required to bring down Silicon Valley Bank was a small deposit flight which was taking place anyways as their base of bankrupt Tech firms was steadily going out of business. That left them forced to raise capital and sell bonds at a loss, thus revealing the chasmic hole in their balance sheet which had been there all along. It's the exact same thing that happened to Bernie Madoff in November 2008, he ran out of cash to pay redemptions. 

Which gets us to what happens next?

Clearly the lessons of 2008 have long since been forgotten. Back then companies having deposits larger than the FDIC limit were forced to move these large deposits to multiple different banks in order to maintain FDIC insurance which at the time was $100k limit. Now, it's a $250k limit. 

Therefore, any responsible and albeit amnesiac CFO this coming week will be scrambling to move their millions out of individual banks and diversifying their bank accounts. Compounding this crisis is the fact that average rates on money market funds are ~4% higher than bank deposit rates. Yes, you read that right. So moving money out of banks to broker accounts is a no-brainer from a Treasury standpoint. Personally, I recommend t-bill accounts over money market funds. DO NOT assume as Ackman says below that there is any such thing as a "Systematically Important Bank" that could prevent its own depositors with deposits > $250k from taking massive haircuts. That's asinine. 

Bill Ackman summarizes what I just said:

In other words, within the next 48 hours, the government must raise the FDIC insured deposit limit from $250k to infinity. Something that would require an act of Congress.

While that's not happening, the cries for bailout will get louder by the minute.

"Voices from tech and finance are increasingly calling for the federal government to push another bank to take over the failed Silicon Valley Bank to protect uninsured deposits. Their main concern is that a failure to protect deposits over $250,000 could cause a loss of faith in other mid-sized banks"

"Observers are calling out the irony as some VCs with notoriously libertarian free-market attitudes are are now calling for a bailout"

[Update: Sunday March 12th, 10:10pm]

Ok, so we now know they got their bailout which comes in the form of an asset exchange program. Banks can use their "illiquid" aka. underwater assets for a short-term loan from the Fed. This way they can ensure ample liquidity in the event of a bank run without having to sell down their assets and otherwise expose their true capital deficit. 

However, the Fed just promised to make ALL depositors at SVB/Signature whole even beyond the $250k FDIC insurance limit. To do this, they will tap the FDIC Deposit Insurance Fund which has ~1% of assets relative to the U.S. deposit base. Yes, you read that right. Which means sure they will bailout everyone this time, but can they bailout every regional bank and ALL of their depositors? Of course not. Ex-Congress, the FDIC just unilaterally raised the $250k limit for those depositors who are part of the very first banking dominoes to fall. I have no doubt that's not actually legal. Basically throwing everyone else under the bus to bailout companies with millions of deposits.  

"The DIF currently has over $100 billion in it, a sum the Treasury official said was “more than fully sufficient” to cover SVB and Signature depositors"

CFOs, get busy...

FOMC: Fear Of Missing Crash

We are witnessing the largest monetary/economic policy disaster in world history taking place in real-time. And not one media pundit is bright enough to question it...

Go back three years to the start of the pandemic. Global central banks panicked in unison and expanded monetary policy the most in history. However, what they DIDN'T do is lower interest rates. Only the Fed lowered interest rates a mere 1.5%. The ECB was already at 0%. Japan 0%. BOE 0% etc. So instead they used their balance sheets to inflate asset markets in order to create the virtual simulation of prosperity using Quantitative Easing. 

Sadly, in the meantime, the middle class got trapped in the asset bubble. They bought Bitcoins, junk IPOs, over-priced cars, and of course over-priced homes. Everything is over-valued. And of course they borrowed record amounts of money to buy record amounts of over-valued assets.

Now, on the other side of the pandemic, these central banks are keeping their balance sheets and asset prices near all time highs while raising the cost of borrowing far beyond what it was pre-pandemic. 

Anyone can clearly see that inflation is 100% correlated to the balance sheet and has nothing to do with interest rates. Interest rates are now a staggering 3x higher than they were in the months prior to the pandemic. 

What's all the more shocking is that there isn't one media pundit or "expert" who is questioning this strategy. They are all largely onboard with the idea of ever-larger interest rate hikes. 

The middle class is now trapped by this moronic policy error. Soon their asset values will collapse and they will be underwater on every liability while job losses sky-rocket. The net effect of this colossal policy error will of course be global mass deleveraging and a middle class that is dead on arrival. The Fed won't be able to use their magic powers to bring them back from mass bankruptcy. Global central banks will be caught in a global liquidity trap. Meaning interest rates will collapse but no one will be able to borrow. Under those conditions, no bank will be deemed "too big to fail" this time around. 

Not only will corporate profits collapse, but real yields will sky-rocket, the combination of which will leave stocks bidless.

Which gets us back to the Casino. 

With today's Senate testimony, Powell just put large-scale rate hikes back on the table. Recall that the entire global RISK ON rally since October was premised upon the idea that the Fed would soon be done raising rates. They "stepped down" from .75% in November, to .5% in December and .25% in January. The theory was no more rate hikes by summer. 

As of today, Fed futures now see a .70% probability of a .5% rate hike two weeks from now. 

In other words, the entire premise for this four month global rally was 100% false. Which means that investors are incorrectly positioned for what comes next. We've seen this movie three times - 2015, 2018, and now. However, we've never seen it wherein the Fed accelerates rate hikes after global markets implode. 

Soon, Powell will be juggling ten pies while falling down stairs as everyone realizes too late that this was a colossal policy error with no way out. 

His credibility will be destroyed along with the Fed and all of the other global central banks. And then people will finally realize they can't trust the Wall Street captured financial media either. 

Something the sheeple should have figured out the last time THIS happened:

In summary, this entire global rally since October was a MASSIVE bull trap predicated upon a 100% false narrative.

And most people are not getting out intact.

The exits are already closing:

SYSTEM TEST 3.0

What all bulls need to learn the hard way is that in Ponzi markets there is no strength in numbers...

A head and shoulders top is now clearly visible in Semiconductor stocks, Internet stocks, and the World ex-U.S.

As we see via semiconductors below, the left shoulder which took place in Q1 2021 marked the Gamestop pump and dump and the top for Emerging Markets, IPOs, SPACs and Ark ETFs. During that selloff the hedge fund Archegos exploded.

The head took place in late Q4 2021 and marked the top for all of the major U.S. averages. That was the beginning of the global bear market. As we see below, the first leg back down to the neckline saw the largest breadth collapse in Nasdaq history (bottom pane). And the bear market low saw the FTX explosion.  

Which brings us to the right shoulder. What I call "System Test 3.0".

The high yield spread which is a proxy for risk appetite is highly compressed as it was pre-pandemic crash.

The left shoulder for internets goes back to March 2020.  

The left shoulder for the World ex-U.S. is the same as it is for the Internets above. March 2020.

My Geometric index equal weights the largest cap Tech stocks in the market. On the left shoulder these stocks were consistently above the 200 dma. On the right shoulder, they are consistently below the 200 dma. They have become consistently more overbought on Momentum (MACD) all the way down.  

These are basic facts that bulls are ignoring. 

The Adani crisis started on the right shoulder and is only the very beginning of meltdown for Indian markets. 

Bitcoin became extreme overbought on the left shoulder, now it's imploding again on the right shoulder.

Bulls never gave an explanation as to why markets rallied into the pandemic lockdown. 

This time, they will have even less explanation as to why markets rallied into a global depression.

In summary, only someone with zero commonsense could trust these markets. Hence, they are largely unquestioned.