What Lies Beneath

“The combination of a high level of longer-term asset maturities and a moderate decline in total deposits underscores the risk that these unrealized losses could become actual losses should banks need to sell securities to meet liquidity needs.”
-Martin Gruenberg, Acting Chairman of DFIX, 2/28/2023

The Fed has been playing bridge over troubled waters throughout the 21^st century… ever since the NAZ Bubble burst in March 2000.

After the Great Financial Crisis and the Real Estate Bubble popped in 2008, interest rates were held artificially low for way too long. This allowed the government debt to expand.

At the same time, it influenced the banking industry to take demand deposits that were virtually free money and buy the long-term debt to capture the spread for profit.

Last year when Powell pronounced, “I’m not even thinking about thinking about raising rates”, this gave the banks “cover” to keep on keeping on with the same ludicrous behavior.

Ludicrous because who ya gonna believe -- Jerry or your lyin’ eyes?

Did the bank not think the aftermath of Covid largesse would necessitate higher rates?
Most sixth graders understood the drill.

The banks aren’t this stupid. Or are they?

What was the raison d’etre for buying whole hog the premise of ZIRP for as far as the eye could see?

On a clear day, you can see Fedever.

As well, Jerry isn’t that stupid. Or is he?

Seems to me something else has been going on under the surface for years.

A derivative debacle that needed to be plugged?

The repo market turmoil in late 2019 that begged for a bailout and presto… Covid?

But now that the Fed has had to save its face and reputation and jack rates up at the Volker-speed over the past 14 months 450 bps, the Emperor’s new clothes don’t fit.

The first shoe to fall in in the banking system. The next shoe will be the Sovereign Debt bomb.

It’s a Pandora’s Cube (Pandora’s Box squared) for the Fed:

1)      They are powerless to stop inflation

2)      They cannot cope with the debt crisis and an endless summer of war in Ukraine

3)      And total fiscal insanity and irresponsibility in the administration.

Enter Mr. Gold giving the Fed the bird.

Bank in the 1980’s I remember a Greenspan quote in Barron’s “If you want to know what the Fed is thinking, watch the price of gold.”

Whatever the Fed was thinking they prolly need valium now after Xi and Putin’s dance card was played this past week.

To wit, if the perception that the U.S. dollar is losing its reserve currency status sinks in, prepare for your flabber to be ghasted by the price of gold and silver.

That’s on the perception.

If it starts to become a partial reality, things get ballistic.

After all the War Cycle is on deck -- as you know the news breaks with the cycles, not the other way around.

2008 was a credit crisis. You can attempt to paper over that.

This is an interest rate crisis.

If banks were stingy and didn’t give interest on accounts commensurate with Treasury Notes at the same time depositors withdrew money and the face value of the banks' long bond holdings went down

You’ve got an interest rate crisis.

When people become afraid of a bank going belly up for the aforesaid reasons, they withdraw deposits at the lightning speed that technology provides, unlike the 1930’s.

That produces a loss as the bank is forced to sell its treasuries for cash.

This banking crisis is far worse than 2008 because this impacts every bank whereas the mortgage backed crisis impacted only those banks that were buying that nonsense.

So something lies under the surface and we are being lied to.

Gold goes up when there is mistrust in government, not just inflation.

The dollar rose by 43% in the Great Depression.

Gold rallied as well.

So forget about convenient correlations.

We have to deal with an age of volatility resulting from the dislocations caused by trying to Central Plan an economy.

Called by any other name that is Communism.

The amount of money in the bond markets is 10X that of equities. This latest banking crisis thanks to the yield curve has sent capital rushing into the short-term, forcing short-term rates to decline.

At the same time, throughout the world money has been shifting from sovereign debt to getting capital off the grid and that includes real estate, precious metals and equities.

Dollar strength underpinned the rise into the last Super Cycle top at the end of the 1920’s.

On the Gann 90-Year Cycl,e we must be mindful that the dollar is being undermined by this banking crisis and that can underpin a deeper turn down in U.S. markets based on international currency flows.

This morning, the market is rallying when the SPX failed to follow through after snapping the hourly trend line at 3960.

Be that as it may, as offered in mid-March, regardless of what the market does going into quarter-end, April sets up for more dramatic declines.