ECONOMIC UPDATE: As Smaller Banks Go Bust the Bigs Will Get Bigger
ECONOMIC UPDATE: As Smaller Banks Go Bust the Bigs Will Get Bigger
Stocks on Tuesday were little changed as investors wait for the Fed's decision on interest rates
NOTE TO READERS: The following is our weekly Economic Update — Market Overview found in this week’s issue of The Trends Journal. Consider subscribing here for in-depth, independent geopolitical and socioeconomic trends and trend forecasts that you won’t find anywhere else.
In The Bronx, we used to say, “Bullshit has its own sound.”
Let’s look at the facts… just the facts.
Back in October 2021, as inflation was sharply spiking, U.S. Treasury Secretary Janet Yellen said “I believe it’s transitory,” and it was just a “small risk” and inflation would be only “temporary.”
Therefore, considering that she was either full of shit knowing that inflation was real but lied about it so the Fed Banksters could keep interest rates low to keep artificially pumping up the equity markets and economy to fight the COVID War—or she was too stupid to see the hard facts—why would anyone with a brain bigger than a pea believe what Ms. Facia Brute is saying now about the banking crisis?
TRENDPOST: We had long ago forecast stronger inflation in articles such as our Economic and Markets Overview sections in our 27 October, 2020 and 3 November, 2020 issues and documented it through last year in our Markets Overview sections on 23 February, 2021 and 18 May, 2021, “Inflation Spreads” (12 Oct 2021) and “Inflation on the Rise” (7 Dec 2021), among a host of other articles.
We were among the first to forecast untamed inflation as a key factor facing the world after 2020’s economic shutdown (“Consumer Prices Rise in July,” 18 Aug 2021).
This is the same Yellen who lied on 12 March that there would be no Federal bailout for the collapsed Silicon Valley Bank (SVB)… as Washington bailed out every one of the banks uninsured venture capitalists and wealthy depositors.
Yesterday, Yellen declared that the banking crisis “situation is stabilizing” and “the U.S. banking system remains sound.” The former Fed-Head, also said “The Fed facility and discount window lending are working as intended to provide liquidity to the banking system.”
In other words, the U.S. government would print more money backed by nothing and printed on nothing to backstop more deposits so they can continue to artificially prop-up failing banks.
And as for the banking situation remaining “sound,” you would have to be deaf not to hear more of them crashing down.
As we have detailed, but ignored by the mainstream media, is one of our Top Trends for 2023, Office Building Bust.
We have noted in great detail that with office occupancy rates in the largest U.S. cities at about 50 percent… with interest rates rising, the economy slowing and layoffs increasing, it will hit the banking sector hard.
Simply, with fewer people in the workforce, more tenants will shrink office space and/or not renew leases. This will inflict great economic pain on the owners of the buildings, many of whom will default on their loans, thus putting more pressure on the banks.
And as for what else will crash the banks, there is “The Looming Quadrillion Dollar Derivatives Tsunami” that Ellen Brown has detailed. She noted that in May 2022, the Bank of International Settlements (BIS) reported that the bank derivative bubble reached $600 trillion and is estimated at over $1 quadrillion.
TREND FORECAST: As the smaller banks go bust the Bigs will Get Bigger. Back in 1994 there were some 10,000 banks in the U.S., but now there are a little over 4,000.
Thanks to the “too big to fail” sham that bailed out the Bankster Bandits that ignited the “Panic of ’08” with their subprime mortgage and derivative schemes… with the “smalls” going out of business, the top largest banks now have a much greater share of the banking systems total assets than they 20 years ago.
As reported by the Washington Post who quoted Cam Fine, chief executive of Calvert Advisors, “The midsize regionals and up is where the deposit flows are coming from into the [giant banks]. The regionals are suffering.”
PUBLISHER’S NOTE: And speaking of the charade called the “media,” just before Silicon Valley Bank went bust, Forbes (or is it Frauds?) magazine declared SVB one of “America’s Best Banks”… as they did for five straight years.
TREND FORECAST: Today, the Federal Reserve is expected to raise interest rates 25-basis points. Banks, like SVB, with lots of cash coming in during the COVID War as the hi-tech sector boomed, put their depositor’s money into long-term bonds that were only yielding about 1.5 percent to 1.75 percent. Thus, the higher interest rates rise, the lower the value of the long-term bonds.
So when depositors started to withdraw money and bad loans worsened, SVB and other banks started to cover their losses by selling long-term bonds at a deep loss.
And now with interest rates rising and depositors getting a grand total of about a 0.2 percent yield, they will be buying safe government securities such as two-year Treasury notes that yield about 4.5 percent.
Again, the beginning of the banking and economic crisis has just begun… and as we detail in last week’s and this week’s Trends Journal, it is global. Indeed, last week the European Central bank raised interest rates 50-basis point… as the EU slips into recession.
Yet, despite the gloom on the near horizon, the equity markets keep rising. Why? Because the system—as evidenced by the bailouts and other dirty banking sector deals—the system is rigged. Just take a look at the crime syndicate’s “Plunge Protection Team.” A gangster club that artificially pumps up stock markets to make it appear that the worst is over and the best is yet to come.
OVERVIEW: As we keep forecasting, the higher interest rates rise, the more vulnerable the economy.
Silicon Valley Bank (SVB) failed, in large part, because it held long-term, low-yielding government bonds that it was unable to sell as the U.S. Federal Reserve steadily raised interest rates from 0.25 percent to as high as 4.75 percent over the past 12 months.
The bank seems to have assumed that low interest rates would endure for years to come and failed to hedge against a different future.
When the bank hit the skids, it was unable to sell its bonds with low-yields because investors could get a better price on bonds with notably higher returns.
The bank’s collapse is a cautionary tale of the long-term impact of interest rates sitting near rock bottom from October 2007 until a year ago.
In the aftermath of SVB’s implosion, it was revealed that U.S. banks are sitting on $620 billion worth of unrealized losses—the difference between the face value of the low-yield bonds they hold and the price those bonds would fetch now on the open market.
However, banks also are facing other losses due to investments they made when rates were low—including the wave of mortgage loans they made during the COVID War.
As a result, banks’ total unrealized losses may be closer to $1.75 trillion, according to a study by New York University economists.
Banks can make up a good portion of the difference by lending money now at higher interest rates, but that requires depositors to have enough faith in banks to leave their deposits where they are—not yank them out, as account holders did at SVB and continue to do at regional banks around the country.
Aware of the risk as public faith in the stability of banks has been shaken, the U.S. Federal Reserve set up an emergency lending program for U.S. banks that face unusually high demands for withdrawals.
Under the program, banks can use their bonds at full face value as collateral to borrow from the Fed, even though the bonds are now worth far less on the open market.
The Fed also loosened requirements for banks that borrow from its discount window, the usual venue for banks to take loans from the Fed.
Another weak spot that became visible when the Fed began raising interest rates was the tech sector’s delicate economic balance.
Tech stocks usually are seen as growth stocks that have high prices relative to their earnings and pay minimal dividends. High interest rates shrink their cash flows and leave them less able to reinvest in their businesses.
As a result, Amazon, Microsoft, Meta, Uber, and other household names have collectively dumped hundreds of thousands of workers, with the number of unemployed rising with each increase in interest rates.
Higher interest rates are supposed to have that effect: weaken the job market, slow growth, and give people less money to spend so prices can settle down.
However, that method is a shotgun approach that cannot be selectively aimed.
“This teaches you that we have these blind spots,” Harvard economist and former Fed governor Jeremy Stein told The New York Times. “You put more pressure on the pipes and something’s going to crack,” he said, “but you never know where it’s going to be.”
On 17 March, interest-rate futures markets were betting the Fed would raise its key rate a quarter point this week and the rate would peak at about 4.77 percent.
If the Fed adds a quarter point to its rate this week, it would meet the markets’ expectation of a rate peak, meaning that the Fed would halt increases after its March meeting.
“The [banking] industry’s lack of recent experience with higher and more volatile interest rates, coupled with material levels of market uncertainty, present challenges for all banks,” Carl White, vice-president of the Federal Reserve Bank of St. Louis, wrote last November.
Michael Feroli, chief economist at JPMorgan Chase put it more bluntly.
“There’s an old saying that when the Fed hits the brakes, someone goes through the windshield,” he noted. “You just never know who it’s going to be.”