By now everyone knows what happened. Silicon Valley Bank (SIVB) and Signature Bank NY (SBNY) have both been seized by the federal government.  They’ve both failed.  They’ve both collapsed. 

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Tante Janet promised to sell the assets in an orderly fashion to ensure market stability. And your rich Uncle Sam came to make everyone whole again, even though the FDIC is supposed to do that without the Fed and Treasury.

Government officials, elected and appointed alike, began coming out in droves, and they’ll continue to do so this week. They’ll all swear (cross their hearts, hope to die, stick a needle in their eyes) that the banking system in America is the best in the world, we have absolutely nothing to worry about, and this problem with SVB was contained to that little corner way over there where we can barely even see it. Though one must wonder if that is the same corner that the Fed has painted itself into with QE and QT policies run amok.

Behind closed doors, though, they’re all soiling their pants.

How do I know that?  For one thing, when every bureaucrat comes out of the woodwork to repeat the same lies over and over to make sure you believe it’s really true, it’s a pretty good sign that things are far worse than they want you to know.  For another thing, why did the chairman of the FDIC, the chairman of the FOMC and Fed, and the secretary of Treasury all convene an emergency meeting over the weekend for one bank failure? In a normal expansionary period, we usually see 2-3 bank failures per month.  Granted this is the biggest bank failure since Washington Mutual in the GFC, and 2.5 times the deposits were withdrawn in one day now vs 10 days then. But it’s just one bank, right?  

Or is it?

For a third thing, every commentator on CNBC, Yahoo Finance, MarketWatch, CNN Money, and literally every single website, every last one of them is wont to ask the question that this bank collapse begs. None of them will ask it because even if they’re trained in the subject matter, their training is all the same, regardless of which institution of higher learning they attended, and regardless of their degree on the wall.  They’ve all been trained that the government knows best and does what’s best, especially when it comes to Keynesian economics and business cycles.

There are a few economists and asset managers asking the right questions.  You won’t find Peter Schiff or Michael Pento on CNBC anytime soon.  So too, you won’t hear the host on CNN speaking to Danielle DiMartino Booth, Eric Sprott, Keith Weiner (no relation), or the rest of usual Austrian economics “doom stinkers”.

The question they should be all asking on TV and your favorite financial news websites, but don’t even know to ask it, is what banking policies are really at the root of the problem, and is it really contained just to SVB or is this indicative of something that’s baked in?

But it’s just one bank! Yellen and Powell said so, for cryin’ out loud.

Or is it?!

In a world of fractional reserve banking with a 10% reserve requirement, you can deposit $1000 into your account and the bank can turn around and lend out $10,000.  The bank can also purchase assets with 100:1 leverage in some cases. SVB is said to have been leveraged 185:1.

Herein lies the problems.  If you deposit your $1000 on Monday, and the bank lends out $10,000 by Tuesday, who says the bank will have $1000 to give back to you on Wednesday when your boiler breaks?

In the case of the bank being able to use leverage to buy assets, that magnifies the problem even more.  This is because when the bank uses your $1000 to buy $100,000 of any type of security (stocks, corporate bonds, gov’t bonds, options, etc), and then the securities lose 1% of their value, the bank suddenly becomes insolvent.  They can’t pay it back to you, because their assets are now worth only $99,000, but they owe $100,000. 

I’ve written about this very issue in the past, and I’ve also been on record saying the phony stress tests banks are required to complete are phony baloney gobbledygook. SVB demonstrates this clearly, because they stress tested themselves for a steep rise in interest rates combined with depositors asking for their money. I’ve also written about the core of this issue being the solvency of our banks, or perhaps better stated, the lack thereof.

Fast forward to SVB, and you have hundreds or thousands of people who deposited their money a year ago or more.  At the time, SVB did what any bank does, and bought assets which were paying around 2% interest on government bonds, while at the same time paying depositors below 25 bps on large deposits.  For those depositors who thought they might need the money right away, they were willing to take the token interest payments in exchange for immediate liquidity.  

But then the Fed started raising interest rates, and suddenly the bank’s bond portfolio was paying half of what the market was offering.  Depositors were still earning 25 bps, or maybe the bank began to be a little generous and paid 50 bps.  If these depositors came to a realization that they really didn’t need that much money and could tie it up instead at 4% or more on a 2Y treasury, well, what the heck, why not?!  

But what must happen if enough depositors come to the bank in a short enough period of time (think SVB), and they all want their money so that they can buy government bonds paying 4% (with tax benefits at the state and local level) instead of the 25-50 bps (fully taxed)?  If the bank runs out of cash, it will have to sell its own asset portfolio and pay its depositors.  

All those assets valued at par yesterday on the bank’s ledger, will suddenly revalue to market and realize losses immediately upon their sale today. (The fact that banks aren’t required to mark to market if they “intend” to hold to maturity should raise a few eyebrows. See why the stress test is a phony test?)  

This has to happen. If you buy a bond at par value of $1000, and it’s paying you 2%, you get $20 at the end of the year.  If the market rate goes to 4% over that same time period, all else equal, your bond’s 2% is unattractive to sell when someone can buy another bond paying 4% ($40 for the same $1000 bond).  If your $20 payment is to become attractive once again to the buyer of the bond you wish to sell, all else equal, your bond needs to be sold at about $500 for the buyer to earn the same 4% as on another bond.

For quite some time already, money has been rotating out of low yielding bank accounts into higher yielding government bonds, especially on the short end of the yield curve where money won’t be tied up too long and as a bonus it’s yielding higher than the long end.  This has been happening at the same time that assets on bank balance sheets have been selling off at lower and lower prices to cover the demands of more and more depositors on their demand deposits at their financial institutions.  

SVB is just the first bank failure.  According to the federal government, all the elected and appointed officials, the financial news anchors, the likes of Hannity and Carlson, even your retail broker and your CPA, all are touting the same story: the banking system is strong, we have to maintained the sanctity of the system, and this is contained to just SVB.

But is it?!

How many other banks in the country have the same issue? Is it really just mid-tier regional banks? Those of you reading this who can think outside the Keynesian box already know the answer.  This is not contained to SVB.  This is not contained to mid-tier regional banks.  This is actually a system-wide problem that won’t go away.  In fact the problem is so big that the GFC will look like a child’s T-Ball game by comparison to the MLB version we’re entering now.  All banks are at risk, including Chase, Bank of America, Wells Fargo, and Citi Group.

The problems don’t stop here, though.  As I see things, there are at least two more issues to deal with.  Neither of which any politician will address.  They’ll be out of a job if they attempt to do so.

First, the way the government handled this creates a very big moral hazard.  Think of the three-headed serpent you may have seen in cartoons as a child. The one that they cut off one of the heads, and 3 seconds later it grew back. The FDIC is the same moral hazard, albeit on a much smaller scale.  

Any banker running the department, division, or the entire bank, already knows that they can make riskier business decisions because the FDIC will pay you and I back, up to $250,000.  Now that they all know they can take any risk with your money and the government will pay you in full, you can believe with complete and perfect faith that they will do just that.  All bets are now off for bankers.  Honest bankers need not apply, this position is only for fraudsters. Political donors need not apply either, as we found out here.  Just follow the money and you’ll know exactly why the SVB depositor bailout happened exactly as it did, instead of other banks coming in to bid at the SVB auction.

You see, without FDIC insurance or any other government program, banks would actually have to make much more risk averse decisions as the steward of your cash.  Their ability to pay you on demand would ride on it, as would their ability to make money for the bank.  The entire business model would ride on it. Naturally the bankers behind your account would be much more careful to make sure your money would be both safe and available at any time you need it.  But if they don’t have to worry about that because the federal government will pay you back for their mistakes, then who really cares what mistakes they make?  It doesn’t matter.

The second problem is an outgrowth of the first problem, and while politicians will claim they want to eat the rich, they’ll actually be handed the poor and middle class on a silver platter.  The rich have the wherewithal to bear what’s coming, and they also have access to the smartest advisors who will help them.  The poor and middle class don’t have this benefit.  Neither do they have the financial ability to weather this storm.  The poor and middle class will be hurt the most, whereas the rich will barely feel but a summer breeze.

What’s coming is far from the 2% inflation target the Fed so desperately seeks.  Now that the inflation genie is out of the bottle, it will be nearly impossible to stuff it back in.  Sure, inflation has eased over the last few months.  That’s just the 7th inning stretch.  If the government will have to bail out main street, at this point in time we are looking at $4.96T in acknowledged demand deposits at financial institutions.  The only way to make all those deposits whole is to print the cash.  That’s what just happened with SVB, and it will now happen every single time there is another bank failure.  And there will be plenty of bank failures for the reasons I have described above.

If the government decides to attack inflation head on, Paul Volcker style, here too the poor and the middle class will be decimated and the rich will make out either unscathed or better off.

I don’t think you need to go crazy with prepping.  I do think you need to have a gun and man-eater dog, as well as some physical bullion.  You’ll also want to have direct ownership of real assets that pay you monthly or quarterly income, such as cash-flow positive real estate and direct ownership of cash flow positive businesses.  Whatever you do, I beg you, don’t buy this dip. Buying the dip is for bull markets. If you really insist to be a dip-s***, you can DM me for my chase-pay info.  The chase-pay will be faster and far less painful, like ripping off a bandaid. The financial sector has another 50-75% haircut to go.  Plenty  of other companies will be available at fire sale prices too. Make your list and check it twice.

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