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Good Friday Morning! I hope you’re all well, especially those of y’all up north. The National Weather Service in Boise, Idaho, said they had 11 straight days of snow and were poised to tie the record of 12 days. There are avalanche watches out due to the accumulation. All that pales compared to the astonishing pictures out of California, where they’re beating all-time records on snow. According to estimates, the Southern Sierra snowpack is at 209% of its April 1st average.
The weather shift is all part of a more significant shift from a La Niña weather pattern to an El Niño one. NOAA officially declared La Niña over this week, and right now, we’re at average temps for that area of the Pacific. But that will change by the end of the year, “An El Niño tends to lead to wetter conditions than usual across the southern U.S. and warmer, drier conditions in the northern U.S. Stronger El Niños can amplify those effects, leading to destructive flooding in some areas and severe drought in others. Strong El Niños have recently been observed from 1997 into early 1998 and from 2015 into early 2016.”
But enough about the weather. This week, I’m going to dive into why markets are rattled by banks this week. There are growing concerns that cracks are showing in the security of the banking sector. All of the pressure comes from the Federal Reserve. We’ll get into that below – links to follow.
Where you can find me this week
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[03/06/2023] Trump vs. DeSantis enters the shadow presidential contest stage – Conservative Institute
[03/11/2023] TikTok shells out cash to Biden-linked lobbyists to save itself – Conservative Institute
Banks start showing cracks.
We’ll get a deluge of economic data in the next two weeks before the Federal Reserve decides on interest rate hikes. I’m writing on Thursday, but we’ll get the next jobs report early Friday morning. Next week we’ll get reports on everything from spending to inflation reports across a wide range of data points. Then, the Federal Reserve meets March 21-22.
All the new reports and data points are critical for determining what happens next. In January, I noted that there had been a distinct shift in both how the Federal Reserve talked and the consensus on inflation. Everyone believed in a “soft landing” or even a “no landing” scenario. Inflation was easing, and things looked good, according to the reports from Q4 of 2022. I cautiously wrote that we appeared to be in a “transition period.”
That’s all gone. Every beneficial report people relied on got revised through February and Mar. 1. Those revisions showed increasing inflation, not decreasing. The shift caused a sudden and dramatic turn in markets, and Democratic economists started sounding alarm bells.
No matter what the Friday jobs report says, layoffs are increasing. In January, the Wall Street Journal dubbed what we’re witnessing as the “Richcession.” White-collar workers are the ones getting an axe first in layoffs, while blue-collar workers thrive. We’ve seen this play out across the crypto and tech job markets, along with impacts on the financial sector (including banks). This week, General Motors joined that fray:
General Motors will offer voluntary buyouts to a “majority” of its 58,000 U.S. white-collar employees, as it aims to cut $2 billion in structural costs over the next two years, according to a letter sent to workers Thursday from CEO Mary Barra.
The “Voluntary Separation Program,” or VSP, will be offered to all U.S. salaried employees who have spent five or more years at the company as of Jun. 30. Outside of the U.S., the automaker will offer buyouts to executives with at least two years of time at the company.
Barra, in the letter Thursday, said the program is “designed to accelerate attrition in the U.S.,” assisting the company in potentially avoiding “involuntary actions” in the future. The buyout offer comes after the Detroit automaker said last week it would terminate about 500 salaried positions globally.
I wonder if I’ll get to witness the second bailout of G.M. in the last 15 years. The current jobs market can absorb more layoffs in the corporate sector. Also, these white-collar workers can shift into blue-collar jobs if needed. There are plenty of openings still.
But aside from the economic data, there’s been one major shift in the economy. U.S. markets are getting scared about banks. The concern is that banks may be showing weaknesses this week as the Federal Reserve prepares to raise rates even more.
First, we had one bank failure this week. Silvergate Capital announced it was shutting down and liquidating its bank, which was one of the top crypto banks in America. At its peak, Silvergate had a market cap of $8.5 billion and a per-share price of $222. That share price has lost 99% of its value, and Silvergate is preparing to zero out entirely. The crypto winter continues as that sector continues to get wiped out.
Second, another bank, Silicon Valley Bank is trending in the same direction. But while Silvergate was overwhelmingly focused on crypto, Silicon Valley is a primary provider of loans to startups in the tech space. Throughout 2022, Silicon Valley lost two-thirds of its value, and after Thursday’s trading session, it plummeted another 60%. The selling intensified after hours.
It could survive, or it could go under. But people are legitimately concerned it will collapse. Billionaire investor Bill Ackman is so concerned about this trajectory that he’s already floating the possibility of a bailout for Silicone Valley Bank on Twitter, suggesting that a contagion threat is real: “The risk of failure and deposit losses here is that the next, least well-capitalized bank faces a run and fails and the dominoes continue to fall.”
Bank stocks, in general, took a beating this week. The four largest banks, JPMorgan, Bank of America, Citigroup, and Wells Fargo, lost a combined $52 billion in valuation. Silvergate and Silicone Valley Bank had exposure to crypto and startup tech companies, both of which got hammered. But the rest of the banking sector doesn’t have that. A different thing is happening there.
The problem? The Federal Reserve is raising rates, making key assets banks hold lose value. That’s fine if things are good, but if banks have to sell these useless assets, they’ll take on losses, and that could trigger a run. The Wall Street Journal explains:
Thursday’s rout is another consequence of the Federal Reserve’s aggressive campaign to control inflation. Rising interest rates have caused the value of existing bonds with lower payouts to fall in value. Banks own a lot of those bonds, including Treasurys, and are now sitting on giant unrealized losses.
Large declines in value aren’t necessarily a problem for banks unless they are forced to sell the assets to cover deposit withdrawals. Most banks aren’t doing so, even though their customers are starting to move their deposits into higher-yielding alternatives. Yet a few banks have run into trouble this week, sparking fears that other banks could be forced to take losses to raise cash.
“This is the first sign there might be some kind of crack in the financial system,” said Bill Smead, chairman and chief investment officer of Smead Capital Management, a $5.5 billion firm that counts Bank of America Corp. and JPMorgan among its holdings. “People are waking up to the gravity that this was one of the biggest financial euphoria episodes.”
How much is potentially at stake if the banks have to raise cash? Potentially $620 billion: “The Federal Deposit Insurance Corp. in February reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion as of Dec. 31, up from $8 billion a year earlier before the Fed’s rate push began.”
The WSJ notes in another piece that banks are in this bind because government regulators encouraged banks to load up on these bonds and treasuries. But inflation was an unexpected wrench thrown into the machine, and now interest rates are rapidly climbing. The result is fears of another credit crunch.
The banks are all saying they’re fine, but investors are increasingly spooked, causing this selloff. In November, the WSJ covered this as a possible news item to watch. In it, Silicon Valley Bank gets quoted as saying it’s fine and well capitalized, but a few months later, it is on life support.
I’m not writing this to scare people or say collapse is imminent. I’m pointing out that there’s another crack in the economy. And right now, expectations are that the Federal Reserve will be forced to continue raising interest rates.
Federal Reserve Chair Jerome Powell testified before Congress this week, and for the most part, it was useless testimony. Most of the Senators and Representatives asking questions wasted everyone’s time. But the overarching takeaway was simple: more rate hikes are likely, and these high rates will stay longer.
We’ve shifted from markets believing rate cuts would happen in 2023 to rate hikes that will continue through the summer. Everyone was betting on March being the last stop for rate hikes for this inflationary cycle. That thought process is gone, barring some unforeseen shift in the data (again).
More rate hikes places pressure on every part of the economy. Crypto and tech will continue to be hurt by increasing rates. And now, the financial sector will feel increasing burdens as well.
The question everyone has is this: does something break in the economy, and if so, what and when? There’s no way of telling. But right now, the January soft landing scenario is less and less likely. We’ll see where things stand at the end of the month after all the data comes in and the Fed decides.
But for now, inflation is raging on.
Links of the week
Why the Recession Is Always Six Months Away: Continued strong hiring and consumer spending are complicating Federal Reserve Chair Jerome Powell’s campaign to tame inflation. – Nick Timiraos, WSJ
Sickle-Cell Cure? Forget designer babies. Here’s how CRISPR is really changing lives: The gene-editing tool is being tested in people, and the first treatment could be approved this year. – MIT Technology Review
The corruption of California: Bribery is the only way to get things done – Matthew Crawford, Unherd
LinkedIn’s State of the Labor Market Report for March 2023 – LinkedIn
Doctors caring for John Fetterman say the senator should limit his exposure to cable TV, the internet and social media — an information detox for someone whose obsession, and occupation, is politics. – Seattle Times/NYTimes
Semafor’s China problem – Axios
BlackRock’s tyrannical ESG agenda: Is Larry Fink a threat to democracy? – John Masko, Unherd
How the WHO was captured: Private capital wields far too much influence – Thomas Fazi, Unherd
The Meaning of a B- – John McWhorter and Glenn Loury
Chaim Topol, Tevye the Milkman in ‘Fiddler on the Roof,’ Dies at 87: The spirited Israeli actor and singer portrayed the iconic character more than 3,500 times over more than four decades. – The Hollywood Reporter
‘Yiddler’ and the Sweetie-Pie Jew: Reflections on American Jewry’s cultural journey after seeing the staging of a beloved musical in Yiddish – John Podhoretz, Commentary
Up on the Roof: A half century of Fiddler. – Terry Teachout, Commentary
Thank You and God Bless, Bruce Willis – John Nolte, Breitbart
The Best Film of the Year that Won’t Win Best Picture: From Heyday to Doomsday – Sasha Stone
Twitter Thread(s) of the week
Glenn Greenwald going through hypocrisy of Democratic questioning of Twitter files.
How construction employment is saving the economy and jobs reports (so far).
Satire of the week
AI Chatbot Obviously Trying To Wind Down Conversation With Boring Human – Onion
New NFL Combine Drill Tests Player’s Ability To Half-Ass Taping Of Local Sandwich Shop Commercial – Onion
Biden Gives ‘Black American Of Courage’ Award To Robert Downey Jr. For Role In ‘Tropic Thunder’ – Babylon Bee
Baptist Church Forced To Cancel Communion After Grape Juice Ferments – Babylon Bee
How to Keep in Touch With Long-Distance Friends Even Though You Don’t With the Short-Distance Ones – Reductress
New ‘Ocean’s 11’ Remake Centered Around Daring Grocery Heist – Waterford Whispers News
Thanks for reading!