Have The Bank Runs Only Just Begun?
Have The Bank Runs Only Just Begun?
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For the last year, among my friends, I’ve been saying about the market that something was “eventually going to break”. My readers over the last year won’t be surprised: they have heard me - and the content I aggregate - drone on and on about how, with rates as high as they are, it’s simply a mathematical impossibility for something not to break.
And with Silicon Valley Bank, that’s exactly what happened.
The firesale of their assets and the ensuing $1.8 billion loss they endured, which scared the market at the end of last week, was because the bank had bought treasuries when rates were low and now, with yields higher (meaning bond prices are falling), they were forced to take drastic action and absorb losses.
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Already we are learning about companies that held assets at SVB. These companies will be forced to either raise the cash elsewhere or sell off assets themselves. As I noted on Friday, the bank run genie is officially out of the bottle.
The contagion has also spread to crypto, with “stablecoin” USDC collapsing, trading at about a 10% haircut as of Saturday morning. I’m guessing contagion throughout crypto is taking place behind the scenes as we speak.
We don’t know who or how, but there are definitely companies behind the scenes this weekend scrambling to shore up assets and liquidity. We may have a better picture of who is under pressure by Monday’s cash open. It may even take a couple days after that.
In the interim, markets next week eagerly await some idea of whether or not the Fed is prepared to ride to the rescue. With inflation still over 6% and Jerome Powell postured up as though the Central Bank would do anything to stop inflation, the Fed is now stuck between the rock and a hard place that many of us predicted would happen months ago. Heck, it was just 12 days ago that I wrote that the next bear market shoe was about to drop.
And while, economically, that has happened and is playing out behind the scenes, whether or not the fear translates over to equity markets remains to be seen - and it likely all depends on the Fed’s action, or lack thereof. I think it’s only a matter of time that stocks - priced still at about 18x declining earnings - take a major haircut. I wrote last week:
The market and the economy become two distinctly separate entities during a period of quantitative easing. When there’s free money flooding the market, the market does whatever it wants regardless of the underlying economy. During a period of tightening, like now, the opposite happens: the market becomes tethered again to the economy. This means an optimistic market can no longer be the tail that wags the economic dog. Instead, investors are being force-fed a reversion back to reality that they may not even have had time to stop and taste yet.
Recall, three weeks ago I also pointed out the fact that the bond market appears to be in the midst of a historic panic attack wherein, if historical norms are to be observed, it is signaling an imminent and intense recession that I believed will cause equity markets to plunge lower with it.
My market forecast for 2023 continues to see equity markets under pressure, as well as a whole host of potentially negative catalysts - many of which top market strategists and talking heads on financial television dared not talk about. At least, until we’ve witnessed a bank collapse. I believe the sectors and equities I am personally invested in for the year will give me an advantage versus just pouring money into index ETFs throughout the year.
Finally, let’s take a look at what was new on the blog this week:
The Fed Will Soon Raise Their 2% Inflation Target
Raising their long-term inflation target is one way for the Fed to navigate this mess. One market veteran is expecting it.
Jerome Powell, Black Swan
My take on the coming wreck just hours before SVB’s collapse. "...the ultimate rate peak is likely to be higher than expected."
It's Starting To "Reek" Of A Cold War
"Is there anyone out there that still thinks China is not going to take Taiwan before November 2024?"
Will Real Estate Ever Crash Again?
"The peanut gallery seems convinced that the housing market is crashing, but perhaps we should be even more concerned that it isn’t."
One Sector I Think Could Get Ugly Without Warning
One group of names I'm still avoiding due to what I believe is an asymmetric risk profile that looks as risky as it ever has.
Massive “Valuation Reappraisal” Lower For Tesla Is Coming: Mark Spiegel
Mark estimates FSD liabilities could even reach the "tens of billions" and that Tesla will soon be valued like just another automaker. He also lays out his fund's long positions in his recent letter.
The Next Bear Market Shoe Is About To Drop
The economy and the stock market are disconnected when the Fed's policy is quantitative easing. But when the Fed is raising rates, the two are tethered back together.
Three Names I'm Buying Despite The Market Being Overvalued
If you focus hard enough on your computer screen, you almost won't even notice the world going up in flames outside your window. How 'bout that?
The Fed Is In No Rush To Cut Rates
"...I remain in the camp that we will see continued volatility ahead until we get some calming in the economic macro data points."
The Bond Market Is Having A Historic Panic Attack
The last time this happened, it was 1981 and the market was on the verge of a historic collapse. Will history repeat itself?
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QTR’s Disclaimer: I am not a guru or an expert. I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning and generally trade like a degenerate psychopath. This is not a recommendation to buy or sell any stocks or securities or any asset class - just my opinions of me and my guests. I often lose money on positions I trade/invest in and I’m sure have lost more than I’ve made in my time in markets. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. Positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. Also, I just straight up get shit wrong a lot. I mention it three times because it’s that important.