Did the Fed just Pivot?
Last week, we had this to say about the implications of SVB’s collapse…
Everyone in the market has to think about an unpleasant reality and come to grips with it. They have to consider the risks of things that previously they may have thought absolutely safe. Such as bank deposits, and Treasury bonds (and government-guaranteed mortgages).
This line of thinking has but one destination. Gold…
FTX vs SVB
Are my bank deposits safe? Was SVB an anomaly? Will more banks fail?
While FTX was allegedly a clear case of fraud, SVB’s collapse was different. It was a result of a duration mismatch of its balance sheet and high-interest rates.
And investors are rightfully scared because SVB looks different only in degree to other regional and specialty banks, not different in kind.
SVB was the marginal bank, but certainly not the only bank at risk of collapse. And we can prove it. The risks are not bank-specific they are inherent to the banking system.
Saying the Quiet Part Out Loud
Larry Summers, Director of the National Economic Council under President Obama after the last banking crisis, recently tweeted about the SVB collapse: “Of course banks borrow short and lend long…”
Responding to some of the comments here: Of course banks borrow short and lend long, but properly managed and supervised banks limit duration mismatch between liabilities and assets so their capital position is not gravely compromised by rising long-term interest rates.
— Lawrence H. Summers (@LHSummers) March 14, 2023
This could be translated into “of course, banks engage in duration mismatch!” and regular readers of Keith’s know, duration mismatch will always fail.
Summers essentially admits that the business of banking today is to engage in the unsustainable, destructive behavior of mismatching assets and liabilities. This is one of the reasons there have been over 563 bank failures since 2001!
And SVB and Signature Bank of New York come in at the #2 and #3 all-time largest bank failures measured by total assets at the time of the collapse.
The cause of SVB’s failures, as we articulated in our article last week, are a direct result of the monetary and banking system we have in place today, headed by the Federal Reserve.
Let’s now look at how the Federal Reserve has responded to this latest crisis.
Emergency Measures, Again
In an absolute shocker, the Fed, together with the US Treasury and the FDIC issued a joint statement where they committed to…
“make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.”
Specifically, they are creating the “Bank Term Funding Program” that will provide loans on even easier terms than typically provided by the Central Bank.
While JPMorgan believes this program could “inject anywhere up to $2 trillion in liquidity,” but that’s not the worst part.
The worst part is that the program will “provide loans of up to one year, and value the collateral at par(!), or 100 cents on the dollar.”
In other words, the Fed will now loan $100 on $80 worth of collateral.
Folks, if you think this is a remedy to the current banking crisis, then we have some shares of SVB equity we’d like to sell you…
This is a standard page out of the central plan playbook. Essentially, the Fed is saying, “give us the assets, we’ll take them on our balance sheet.”
And while it’s true that the losses of SVB may no longer be borne directly by SVB’s depositor base, instead they’re now being subsidized by the creditors of the Federal Reserve, meaning, everyone. The quality of the Fed’s liability, the dollar, just declined.
Is this the Beginning of a Fed Pivot?
These actions insinuate the possible beginnings of a Fed pivot.
The market seems to think so at least. Last week, the 10-year Treasury yield traded above 4%. This week it dropped below 3.5% due to a surge in Treasury purchases.
In our Gold Outlook Report, we predicted that a Fed pivot (reversing from a rate hike purge back to a rate cut binge) would cause a “different kind of bull market to erupt” in the prices of precious metals.
It’s possible we’re seeing the beginning of that eruption playing out now. However, it’s also possible the market views this new Bank Funding program as adequate to contain the contagion, and Powell continues with his rate-hiking purge. His decision will be revealed next week.
One thing is certain, the volcano that could have erupted has been plugged (for now at least). But at the cost of increased risk. People are re-evaluating the risk of having money in a bank.
Gold is money without the bank risk.
And for those who want to earn a yield on their gold, we have opportunities to earn interest on gold, paid in gold. Contact us to learn more, or open your account today.
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