The Bank Run Genie Is Out Of The Bottle

With rates close to 5%, how could we have not seen this coming?

There isn’t much to say this morning.

I’m prepping this note at about midnight EST, to be released at 5AM.

I’m assuming the shit show from yesterday - a bank run on VC banks, crypto banks, and who knows what other banks - will carry on today. Upon calling it a night this evening, Dow futures are down about 200 pts on top of the 500 they dropped yesterday. NASDAQ futures are down about 0.5%.

I wouldn’t be surprised if things got worse overnight. (Or if futures are +600 pts off their lows, because, as they used to say on Whose Line Is It Anyway?, everything’s made up and the points don’t seem to matter anymore.)

But as I’ve repeatedly said on my podcast and in posts here: “One night you go to bed and everything’s fine. The next morning you wake up, and everything’s different.”

This potentially feels like one of those moments.

For those of you located on planet Uranus over the last 12 years, the major story in markets is that West Coast VC banks are on the verge of collapse, led by SVB Financial Group, which got porked $161.79 yesterday, falling to $106.04, down -60.41% in the cash session - all before taking one final Spaceballs-style Schwarz-ring-induced zap to the testicles in the after hours session, plunging another -22.2% to $82.50 on news that, in general, it has been agreed upon to get assets out of the bank.

“Yes. That.”

At the end of my note on Wednesday, I asked:

The only question I have is whether the market crash will shock market psychology and begin a massive re-rating, or whether market psychology will break first, driving the crash. In either situation, we wind up in the same place: lower.

Now, we could know the answer. And this morning, I can’t take a victory lap - for one, because I don’t care to when good people are losing money, and for another, because one day a pattern does not make.

But what I will say is that things likely aren’t going to get better. To address my question from earlier this week, psychology appears to have broken first.

Now there’s two genies out of the bottle that feed off psychology: inflation and systemic-style questioning of banks’ solvency.

You all know the drill: if the panic gets bad enough the Fed will step in. But, unlike days past, their options are going to be severely limited by the fact that inflation is nowhere near under control.

Later this morning we’ll get the employment report. Some are hoping for ugly numbers, with the thought process being that poor numbers will show that the Fed is doing their job, which will get us one step closer to a pause or pivot on rate hikes. To that, I say we are so far down the wrong path right now, it doesn’t even matter. Any spike because of the employment numbers in the morning I’ll likely try to short.

I’ve been saying for a while things are FUBAR and that we just don’t know it yet. Yesterday, some banks were put on notice. But, as shown below, not everyone has “gotten it” just yet, meaning Friday and the weekend will likely be stress-inducing for junior interns at shitty banks across the country:

Ben Bergman @thebenbergman

I just called a VC to ask how he was advising his portfolio companies to deal with the Silicon Valley Bank fallout. "You're going to have to make this quick," he said. "I'm on the gondola in Aspen and we're almost to the top."

I could spent another hour prattling on about deleveraging cycles and the perils of a bank with $200 billion in deposits facing a run, but I don’t want to insult your intelligence. You know how big of a deal it is.

It feels to me tonight that the snowball has officially been pushed off the hill and that it’ll gain steam until the Fed caves. But with CPI where it is, what can the Fed do with their “tools” they so often boast about?

Fed “tool”, Exhibit A.

Let’s not mince words. This is officially the “rock and hard place”, Catch-22 style predicament everyone has said the Fed would be backing itself into for the last 18 months. I’m not even going to pretend to know what these bureaucrats are going to propose next as the solution: QE 5, 6 and 7? Longer dated maturities? Raising the target inflation rate to 10%? Minting a $100 trillion dollar coin? Backing the U.S. dollar with waffles manufactured under the Eggo brand name?

If it doesn’t get brutally ugly on Friday heading into the weekend, my guess is it won’t be much longer. I wish I had something special for you this morning other than: “We’re only getting started. Rates are close to 5%. How could we have not seen this coming?”

But I don’t.

We’re only getting started. Rates are close to 5%. How could we have not seen this coming?

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