Dr. Doom's Latest Warning
The old friend we love to hate... Stocks up, bonds down... Dr. Doom's latest warning... More Silicon Valley Bank fallout... What's better: Mexico or Silicon Valley?... The magazine indicator strikes again... Mailbag: We've been screwed since the 10th century...
Of course, stocks pop after a few banks collapse...
The major U.S. indexes were all up today, with the small-cap Russell 2000 up the most. Why the heck not?
Well, because today's stock market movement appeared to have little to do with the Silicon Valley Bank failure... or Signature Bank's closing... or any of that... It's more about the financial muse I (Corey McLaughlin) love to hate... inflation.
Today, the Bureau of Labor Statistics released the February consumer price index ("CPI") numbers, and enough folks liked what they saw... The widely followed measure of inflation fell to a 6% year-over-year gain, in line with Wall Street expectations.
Oil and gas prices dropped sharply since January, the data showed, but are still up double digits from a year ago. So are food prices, up 10% year over year. And "shelter" – accounting for rent and housing costs – was up 0.8 points from January.
Compared to January, all the measured prices increased by 0.4 percentage points. In other words, inflation is still "sticky," but the CPI came in around expectations. And as our Ten Stock Trader editor Greg Diamond wrote today, "Stocks are loving it."
Bonds sent a different signal...
After a few days of some serious drops in yields across all Treasury durations, yields were back up or stable, especially on the shorter end.
A six-month bill was up 22 basis points to 4.9%... The 2-year note was up 32 basis points today to 4.3%... And the 10-year note was up a little to almost 3.6%. The 30-year stayed about the same at around 3.7%. Notably, that's a smidge higher than the 10-year yield, which could be a really early sign of the yield curve reverting to "normal."
You could read a couple things into this behavior...
Maybe the banking crisis Band-Aid worked and contagion fears are contained (for now). Investors were flying to the safety of bonds (and gold) the previous two trading days, pushing bond prices higher and yields lower... But that trend stopped today.
Or maybe bond traders are saying that although inflation is still too high for the market to expect interest-rate cuts, the Federal Reserve might raise them less than the market thought just a week or so ago.
Following today's inflation report, that's what pro bond traders are doing... They're betting on a 25-basis-point hike from the Fed next week, a "terminal" rate in this cycle near 5%, and then rate cuts possibly happening late in the year.
We'll have some more detail tomorrow on what the Fed's next moves could be – and what that means for various asset classes. But, for now...
We're not going to skip past what happened with the now-closed banks...
First off, I tend to agree with our friend Whitney Tilson, founder of our corporate affiliate Empire Financial Research. Whitney has written each of the past two days in his free daily newsletter...
The most important thing that the average investor needs to understand is that this is nothing like 2008, when the combination of a massive housing bubble, on- and off-balance sheet leverage, and widespread fraud created the biggest financial bubble in history. When it burst, it brought the world to its knees and required every existing – and many new – tools of the U.S. government to stabilize the situation.
Today, our banking system and economy are healthy, and there is no reason why the idiosyncratic problems of a few stupid banks – most notably, tech startup banker SVB Financial's (SIVB) Silicon Valley Bank and crypto bank Silvergate Capital (SI) – should create a systemic problem.
That's not to say more problems with banks won't happen in the near future. The Fed and Treasury Department have now set a precedent that backs up deposits above the previous $250,000 guarantee. That doesn't exactly discourage banks from taking risks with customers' deposits... and doesn't guarantee we'll never see another bank run.
And, generally speaking, the handful of banks recently failing could be an early sign of something else...
Hello, Dr. Doom...
A reputation precedes Nouriel Roubini, a professor emeritus at New York University's Stern School of Business... If you couldn't tell from his nickname, he tends to warn about bad things possibly happening. And often, they do...
I'll never forget what Roubini said during a presentation at our Stansberry Conference in 2019 in Las Vegas. He said that in the next recession, we'd see even more "unconventional policy" from financial and political institutions, including central banks printing money and handing it to citizens.
A year later, amid the pandemic shutdowns, it happened... with stimulus checks and debit cards. Now, Roubini has another warning for anyone who will listen...
This is just the start of a debt crisis, Dr. Doom says...
Roubini thinks that what just happened with Silicon Valley Bank and New York's Signature Bank is just a sign that the U.S. is only in the "first few innings of a major debt crisis."
Roubini explained all the details in an exclusive interview with our editor-at-large Daniela Cambone, released yesterday. Among other topics, Dr. Doom shared why a debt crisis was inevitable once the Fed started raising rates to fight inflation...
Roubini also talked about whether we'll see bank consolidations... the "moral hazard" the Fed just created... and what he thinks will happen next with monetary policy.
He says it's "likely the Fed will pivot" to avoid a potential financial crisis, but that won't avoid more damage to the economy. It's an opinion I share. As I suggested yesterday, that could lead to higher, persistent inflation. As Roubini told Daniela...
On one side, inflation is still too high. The real economy needs the Fed to raise rates to not only 5.75% but all the way to 6%, but interest rates this high in a world in which we're in a debt trap implies the risk of a financial meltdown.
And that crisis is going to make the recession more severe, and a more severe recession can lead to more defaults. So the Fed is "damned if you do and damned if you don't." If you fight inflation, you cause an economic and financial crash. If you save the financial system and don't raise rates, you have the de-anchoring of inflation expectations like the 1970s.
Such is life trying to manipulate a free economy. As he put it, the "real economy and the financial economy are contradicting each other" in terms of what the Fed should be doing.
Click here to watch Daniela's full interview with Roubini right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
This isn't just conceptual talk...
As our colleague and DailyWealth Trader editor Chris Igou pointed out yesterday, the higher-rate environment has real impacts on banks. Not only did it punish bad decisions made by Silicon Valley Bank management, but it's also giving banks a reason to tighten their lending standards.
That means the Fed is deliberately making it harder for businesses to grow, or at least making it more expensive for them to take on debt with the intention of growing. As Chris explained...
With interest rates on the rise, banks can earn more by letting cash sit in low-risk accounts. So they're less incentivized to lend. Put simply, they can afford to say "no" to riskier loans.
Now that interest rates are in the range of 4.25% to 4.50%, banks can afford to be really discerning. Loans are only going to the absolute best applicants. The flow of cash is narrowing to a drip... and that's another leading indicator of a bad recession.
According to an index that tracks U.S. banks' lending practices, the bar to get a loan from banks, on balance, has been getting higher and higher. Lending has gotten "tighter." As Chris shared...
In the first quarter of this year, 44.8% of banks reported tighter lending.
The problem becomes clear when we look at the percentage of tightening banks relative to the past four U.S. recessions.
In 1990, 2001, 2008, and 2020, bank loan standards soared. And on all four occasions, the spike preceded a recession. Take a look...
This is a big warning sign of a hard landing... and a possible recession ahead.
Tightening may not be the most spectacular banking story in the market today. But it might be one of the most reliable.
And it suggests that this isn't the capitulation of an economic crisis... but instead, just the beginning.
Said another way, life is getting a lot harder faster for the "zombies" of the world – the businesses that can't even afford to pay the interest on their own debt. In just one way, if they want to refinance their debt now, it would be in a world of higher interest rates last seen in 2007. That can, and likely will, lead to defaults.
Or, if the Fed "pivots," there are other consequences... like the risk of higher inflation for longer.
A couple other notes on Silicon Valley Bank...
First, a lot of foreign startup owners and investors – who sought a U.S.-based bank in order to get Silicon Valley venture-capital funding – got caught up in the bank failing.
According to the international-news website Rest of World...
SVB was virtually the only bank willing to serve these young, foreign startups with little to no business history. With the demise of SVB, these foreign founders ended up entangled in a bank run reminiscent of the ones investors had feared they'd face in their home countries.
Considering the recent history of bank runs in Latin America – including Argentina's ongoing financial crisis, triggered after banks froze access to accounts in December 2001, and the Mexican shadow bank collapse in 2022 – investors saw U.S. banks as relatively more stable. "What is more likely, for a big bank to go down in Mexico or in Silicon Valley?" Daniel Bilbao, CEO and co-founder of Truora, a digital identity provider based in Colombia, said to Rest of World.
Still, despite the run on Silicon Valley Bank, Bilbao said he is confident that the "U.S. remains a safer place." That tracks with the idea we share that, from a financial perspective, the U.S. is the best house in a bad neighborhood.
But it's still in a bad neighborhood, which means bad-neighborhood problems. In this case, it means we're not immune to our neighbors' debt crises.
Finally, always remember...
Beware (or believe) the magazine-cover indicator. From the Twitter account "Freezing Cold Finance Takes"...
Until tomorrow...
New 52-week highs (as of 3/13/23): None.
In today's mailbag, thoughts on the Federal Reserve's inflation goal... and yesterday's Digest about Silicon Valley Bank's failure... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"The Fed's 2% inflation goal is unreachable no matter what they do with interest rates so long as our government deficit is running at or above 5% of GDP. What are they thinking? Deficits dilute the money supply and devalue the dollar which is just another definition of inflation. Don't they know this or are they that stupid?" – Paid-up subscriber C.M.
"You list three things responsible for the failure of Silicon Valley Bank ("SVB"):
1. The Federal Reserve (and Congress)
2. Poor management decisions at Silicon Valley Bank (and others)
3. Fear
"No! The failure was to legally allow banks with depositors to engage in 'Investment Banking'. We outlawed that in the Glass-Steagall Act of 1933. But Congress stupidly repealed Glass-Steagall protections. And they continued to ignore the dangers, but claimed they had fortified banking after the derivatives disaster of 2008. And you would think regulators would have raised some concerns when the CFO largely responsible for the bankruptcy of Lehman Bros. was hired as CEO of SVB." – Paid-up subscriber K.M.
Corey McLaughlin comment: Thanks for the note. That repeal of most of the Glass-Steagall Act is definitely up there as another reason...
For those unaware, much of this act – which indeed separated commercial banking from investment banking back in 1933 – was largely repealed in 1999. (The exception was for... drumroll, please... the part of the act that created the Federal Deposit Insurance Corp. ("FDIC")... which is saving a lot of people's behinds today.)
Along the same lines of this point, I considered sharing this in yesterday's Digest before deciding to keep a clearer, tighter focus on Silicon Valley Bank. But it's still important... and a part of the bigger picture that you bring up.
If the trigger point for the bank run in Silicon Valley was this rate-hike cycle, then we should look at why it happened. And as we've said so many times over the past year-plus, it happened because of 40-year-high inflation... And that happened because of the government's economic response to the pandemic, which was trillions of dollars in stimulus from Congress and near-zero interest rates for far too long.
This isn't a case of 20/20 hindsight. Throughout 2020, even when it wasn't popular to say it, we said there would be consequences for all of the pandemic stimulus. Well, here we are with another...
Previous examples include the massive asset bubble that took off at the end of an already record-long bull market... inflation... the "meme stock" era...
You could also argue that we reached this point because of a decade-plus of zero or near-zero interest rates following the great financial crisis, which conditioned investors to expect an indefinite easy-money environment. That's also the Fed and Congress' doing...
You could also blame going off the gold standard for good in 1971 and the fact that the dollar isn't pegged to anything tangible... Or you could say it's the fault of the ancient Chinese who reportedly first invented the idea of fiat currency.
As I wrote in the March 17, 2022 Digest – coincidentally almost exactly one year ago...
This time, it was the supply chains, they said... Then it was the pandemic, they said... Yes, there's no avoiding those as catalysts for higher prices... but the root of all inflation issues is that inflation has been baked into the global financial system as long as paper currency has been used...
That dates to at least 10th-century China, when high demand for coins exceeded supply of precious metals. Someone had the bright idea to create credit notes ‒ or paper money ‒ and enough people trusted in the system that a new way of doing business was born.
We've been screwed ever since, because greedy and fearful humans make mistakes or try to take advantage of a situation so long as value is ascribed to paper and trust. So there's all of that, yes, and many more decisions made in our fiat-currency world that have added up over time.
And it will continue.
We live in a "money printing" world... and paper is not even needed. In fact, banks actually have little physical cash on hand at any given moment, which is why the kind of bank run that we just saw can occur.
Then there's the other side... A thousand years after a local commodity shortage led to the birth of fiat currency, all a central bank has to do is make a few keystrokes on a computer to alter the fundamentals of the economy.
It's too easy to do, and the consequences are enormous. Every time a single dollar is "printed," the value of all the existing dollars in the world goes down. That's how we got here... Printing money can put a Band-Aid on a crisis, but the end result is that you get less for your money (inflation) because there is more of it.
Lastly, I'll clarify one point from your message since I've seen this mentioned a few times around the Internet...
Silicon Valley Bank's CEO, Greg Becker, was not formerly the chief financial officer at Lehman Brothers. However, the chief administrative officer of SVB Securities – the investment-banking subsidiary of the parent company of Silicon Valley Bank – was a former Lehman executive. Joseph Gentile spent six months as CFO of Lehman's fixed-income division in 2006 and 2007, then left about 18 months before Lehman's collapse.
So, it wasn't quite the top dog at SVB who was also at Lehman. But for many observers, the connection is still close enough that it makes comparisons between SVB's failure and Lehman's blowup hard to ignore.
All the best,
Corey McLaughlin
Baltimore, Maryland
March 14, 2023