It’s time to sit back, relax and enjoy a little joe …
Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.
Well … another busy week is behind us. So with that in mind, let’s get this party started …
The first duty of a man is to think for himself.
The last duty of a central banker is to tell the public the truth.
– Alan Blinder, former Vice Chair of the Fed
He who panics first, panics best.
– Anonymous
Credits and Debits
Credit: Did you see this? It’s no secret that America has rested on its laurels ever since it broke the US dollar’s anchor to gold in 1971. In fact, the US has been eating its seed corn ever since – and it has grown soft in the process. James Howard Kunstler warned this week that’s because Americans have been living in an economic fantasy world where “we discontinued the rough and messy business of making stuff, and thereby generating real wealth. But now a klaxon blares, signaling the end of dreamtime. And the nation wakes up in a ramshackle house with the floor giving way under the bed.” If you think that sounds ominous, that’s because it is. And speaking of dreamtime …
(h/t: @CalebFranzen)
Debit: Now, if you were lulled into believing that the Fed somehow managed to “fix” the Great Financial Crisis in 2008, then you probably also believe that the last decade-plus of easy money via 0% interest rates was not only good economic policy, but that we can also borrow ourselves into prosperity. The truth is, the only thing that conjuring trillions of dollars out of thin air has done is delay our inevitable day of reckoning. So here we are: Cracks in the dam are appearing yet again – and nowhere more so than in the banking system.
Debit: For those who haven’t noticed any cracks in the system, the FDIC took over control of Silicon Valley Bank (SVB) last Friday. In case you’re wondering, SVB is the first FDIC-insured bank to fail since October 2020, when the FDIC took over Almena State Bank. However, that’s no comfort to the muppet investors who are stuck holding shares of that soon-to-be-bankrupt institution. (Not to be confused with the bank’s CEO who sold $3.6 million worth of shares several days before SVB disclosed the large loss that triggered its stock slide and collapse.)
Debit: As for SVB’s depositors, it turns out that, based on its $173 billion of customer deposits, $152 billion were uninsured because they exceeded the $250,000 FDIC insurance threshold. Which is to be expected when a bank has a lot of wealthy clients. On the other hand, only $4.8 billion in deposits were fully insured. Even so, this week the US government decided to bail-out SVB’s uninsured depositors. And while we’re being told the taxpayers are not on the hook for bailing out these uninsured millionaires, the bottom line is that, ultimately, the resulting inflation will ensure everyone will pay anyway via lost purchasing power.
Credit: Despite the large number of SVB depositors who failed to get their cash out in time, there were customers who managed to pull out $42 billion over a ten hour period the day before the bank collapsed. For those not counting at home, that’s $4.2 billion an hour, or more than $1 million for every second that the bank was open on that fateful Thursday – which just goes to show that cell phone technology has not only made banking more efficient, it has also made bank runs more efficient too.
(h/t: mediacloud.theweek.com)
Debit: As Zero Hedge points out, “The contagion of shuttering the 18th largest US bank will be widespread (because) SVB is the second largest bank failure in US history after Washington Mutual.” Signature Bank (SBNY) can sadly attest to that; it became the third largest bank failure of all time after it drowned in a sea of red ink just a few days later. Needless to say, SBNY stock investors are now screwed too, as they’re stuck holding worthless shares that will never be traded again. The good news is that SBNY’s uninsured millionaire depositors have been bailed out and made whole – just like the well-to-do who banked at SVB. So there’s that.
(h/t: @jameshenryand)
Credit: In fact, Garry Tan, the CEO of YCombinator calls the failure of SVB “an extinction level event for startups that will set startups and innovation back by 10 years or more.” He also is warning that “30% of his companies exposed through SVB can’t make payroll in the next 30 days.” But I’m sure that’s just the hysterical ranting of disgruntled customer. So please try to keep a level head. M’kay?
Debit: It’s hard not to think of SVB as being equivalent to the failure of Bear Sterns several months before the Great Financial Crisis of 2008 officially kicked off. But unlike Lehman or Bear Stearns, the recent disasters at SVB, SBNY and Silvergate weren’t the result of concentrated and levered bets and loans to poor credit risks. Instead, they were the result of a good ol’ fashioned bank run by panicked depositors. The big question is: After SVB and SBNY, what will be the next dominos to fall? What’s that? Did I hear somebody say Credit Suisse? Or maybe First Republic?
(h/t: @NihilarianZH)
Credit: Of course, SVB went under because it was forced to sell long term Treasuries they bought when interest rates were near zero – that results in big losses when interest rates are hundreds of basis points higher. Now for the punchline: As financial analyst Wolf Richter notes, investors doing the math can see that, “Other banks are sitting on potentially the same problem (as SVB): If they’re forced to sell bonds now, they’re going to lose a lot of money, even on perfectly good Treasury securities, because yields have risen and therefore bond prices have fallen.” Now for the really bad news: This doesn’t even begin to address the banks’ derivative exposure.
Net unrealized losses for Bank of America (red), JP Morgan Chase (blue), Citi (orange), and Wells Fargo (green). Nothing to see here.
Credit: So, the banks are in a real pickle – again – courtesy of suddenly “toxic” Treasury notes and bonds and a historic contraction in the currency supply. Richter goes on to warn that “If banks don’t offer competitive interest rates, sooner or later depositors will figure it out and switch from savings accounts offering 0.2% or (less), to CDs and T-bills that offer over 5%, and to money market funds that offer between 4.5% and 5%. But that would squeeze (bank) profit margins – so they don’t.” For now. Although at some point those banks will have to cry “uncle!” – or they’ll suffer the same fate as SVB. And SBNY. And …
Debit: By the way, in case you’re wondering what kind of health the Federal Reserve Bank is in – and why wouldn’t you, since it is the lender of last resort? – you should probably sit down. That’s because the Fed’s net worth is negative $1.1 trillion. And why is that? Well … because the Fed is suffering from the exact same Treasury funding and investing mismatch issue that took down SVB and SBNY. So, although they’d never admit it, the only way for the Fed to backstop the system and keep any future bank implosions from destroying the US financial system is to print even more fiat currency. Imagine that.
(h/t: @goldseek)
Credit: The other day I saw the following remark posted on a forum comment board: “We’re well past the end of the beginning. We’re now witnessing the beginning of the end. Just as the failures of Silvergate, Silicon Valley and Signature banks came as a surprise, the irreversible collapse of the markets will arrive without notice and shock everyone.” Well … at least everyone who doesn’t read Black Coffee every week.
Last Week’s Poll Result
How concerned are you about losing a portion of your deposits in a banking crisis?
- Not concerned at all (36%)
- Slightly concerned (31%)
- Significantly concerned (20%)
- Extremely concerned (13%)
More than 1900 Len Penzo dot Com readers answered last week’s poll question and it turns out that 2 in 3 say, at best, they’re slightly concerned about losing some or all of their deposits in a banking crisis. Behold the power of federal deposit insurance. 😉
If you have a question you’d like to see featured here, please send it to me at Len@LenPenzo.com and be sure to put “Question of the Week” in the subject line.
The Question of the Week
[poll id="466"]
By the Numbers
Bear markets happen more often than many realize, and most people will have to navigate multiple severe downturns during their investing years. Here is the frequency of various bear market declines in the S&P 500 since 1928:
4.1 Average number of years between market declines of 20%.
6.3 Average number of years between market declines of 25%.
8.6 Average number of years between market declines of 30%.
14 Average number of years between market declines of 40%.
19 Average number of years between market declines of 50%.
95 Average number of years between market declines of 80%.
Source: @PeterMallouk
Useless News: Doctor’s Orders
An old man went to the doctor to get a physical.
A few days later, the doctor saw him walking down the street with a gorgeous young woman on his arm.
A couple of days later, the doctor spoke to him and said, “You’re really doing great, aren’t you?”
He replied, “I’m just doing what you said, Doc: ‘Get a hot mamma and be cheerful!'”
The doctor said, “I didn’t say that. I said, ‘You’ve got a heart murmur; be careful.'”
(h/t: RD Blakeslee)
More Useless News
Here are the top — and bottom — five Canadian provinces and territories in terms of the average number of pages viewed per visit here at Len Penzo dot Com over the past 30 days:
1. Quebec (2.33 pages/visit)
2. Alberta (2.12)
3. Prince Edward Island (1.95)
4. Nunavut (1.79)
5. Saskatchewan (1.72)
9. Manitoba (1.50)
10. British Columbia (1.47)
11. Newfoundland & Labrador (1.33)
12. Northwest Territories (1.25)
13. Yukon (1.00)
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Letters, I Get Letters
Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach me at: Len@LenPenzo.com
After reading my article explaining why Boardwalk is not the most valuable property in Monopoly, Rick asked this question:
Have you ever played Monopoly where a fight at the end hasn’t happened?
Wait … you mean Monopoly actually has an end?
If you enjoyed this edition of Black Coffee and found it to be informative, please forward it to your friends and family. Thank you! 😀
I’m Len Penzo and I approved this message.
Photo Credit: stock photo
Good morning, Len, and what a crazy week it’s been! I swear we’re living in Superman’s “Bizarro World” these days, where everything is reversed from what it should be! Crazy times and I’m considering investing piggy banks at this point! 😉
Lauren, what is really bizarro is they are doing QT at the same time they are doing stealth QE (which they don’t admit to). Nothing makes sense and everything seems to be a lie. Strange days.
Yep … and I think nothing changes until we get a new monetary system.
Strike that – things will only get more “bizzarro-er” until we get a new monetary system!
Hi Len,
I really thought this was going to be the week the stock market finally rolled over. Didn’t happen though.
Also very interested in the results of this week’s question. I think I’d rather have my money in a credit union right now. But maybe I’m wrong?
Have a great weekend everybody!
Sara
Well … it’s Sunday evening and UBS just bought Credit Suisse for pennies on the dollar. Even so, they are being backed up by the Swiss National Bank (i.e., Switzerland’s central bank). So S&P and Dow futures are SOARING. Unbelievable.
This is the equivalent of putting a band-aid on an amputated limb. They may have bought some time, but the system is coming down. That is obvious to anyone who is paying attention.
The unraveling has started. Hard to see how more banks will not be going under in the coming months. Credit Suisse may bring down the whole house of cards.
Well … you were correct about Credit Suisse going down. Looks like the SNB and UBS have staved off the final reckoning for a little while longer. But a reset is coming. Looks like they have chosen to save the banking system over the world’s fiat currencies (including the dollar). Get ready for higher inflation down the road.
So to sum up, the government (taxpayers) says it is backing the funds blown by these banking clowns who never even attempted to manage and oversee the risk. Same old story. Taxpayers get the shaft again.
It looks like that they’ve decided that they are going to inflate the debt away – and in rapid fashion from this point forward. We’ll have a better idea after this week’s Fed meeting; if they don’t do another rate increase or actually lower rates, it is a fait accompli and anybody who has a low-interest rate mortgage would be foolish to pay it off.
Buckle up if Credit Suisse goes down. They’re sitting on $600 billion in deposits. That’s more than WaMu and SVB combined.
Looks like Credit Suisse benefitted from a desperate stick save by the SNB and UBS. They’ve bought a little more time, but methinks it’s game over. The worst is yet to come.
Gold and silver were WAY up Friday. Gold: $70/oz. at Apmex.
Financial press doesn’t say much about it: “barbarous metal”, you know?
But it may be that the public is wising up to the intrinsic worth (lack thereof) of paper money and there’s now beginning a run on PMs!
COMEX is at risk …
https://www.zerohedge.com/markets/comex-far-worse-shape-svb-if-run-physical-accelerates
Yep. Big time, Dave.
Gold was up 3.5% on Friday. I can’t remember the last time it was up more than 2.0% in a single day. In fact, since 2011 it’s as if there was a hard cap of 2.0% for gold on a daily basis. Of course, there was no such floor under gold. It has always been free to fall more than 2% in a single day!
He’s dead, Jim. That which cannot be paid, will not be paid. Fire up the printing presses and let’s get this over with.
I say TSHTF by October. Probably sooner. Somebody tell me why I’m wrong.
That sounds reasonable to me.
Mission accomplished, Keegan.
The CEO of SVB had been serving on the SF Fed Board. In spite of multiple warnings about the condition of SVB, nothing was done. Hmmm Things that make you go Hmmm.
The SVB CEO seemed to be oblivious to the risks to his bank, but he sure knew enough to cash out more than $3 million in SVB stock shortly before the bank went tits up. It’s good to be part of of the privileged class.
Poll results on readership….this Canadian likes the Monday morning Len Penzo surprise.
General comment? The great unravel? A Kuntsler opinion? Man, I just don’t know anymore? JHK’s book the Long Emergency really struck a chord with me eons ago, but we didn’t run out of oil and gas and the World as we know it did not end. However, polnt taken in that our lifestyles are simply not sustainable anymore than unrestrained credit is. We are savers in our house with land etc etc, but I suspect this time there will also not be a collapse. Think more of a staircase going down as reality shows its face. There are too many safeguards and better communication avenues these days to interrupt a crash, even if it is Yellen doing the talking. The pols will always adjust policy to save their jobs and the wealth of their masters. Stay safe and enjoy the day fellow readers. Regards.
Thanks, Paul.
Long time readers here know that I have always maintained that the implosion of the current system will not result in a Mad Max world – but it will lead to some uncomfortable times during the transition (mainly in the form of broken supply chains as the credit system temporarily breaks down).
I was not aware of JHK’s previous claims. However I, like JHK, do believe we are witnessing the beginning of the end for the current monetary system.
Since 2010, the Fed (and other global central banks) have been able to have their cake and eat it too, printing endless amounts of currency and using the cash to hold interest rates at the the zero bound.
That worked while the inflation genie was in the bottle, but now he’s out and these central banks are being faced with their “come to Jesus” moment: they have to choose between saving their debt-based monetary system or the banking system. One of them is going down, depending on how they handle interest rates from here.
The old trick of papering over any financial problems without any consequences (other than creating stock, bond and housing market bubbles) isn’t going to work any more.
In 2008, it took six months to go from the collapse of Bear Sterns (March) to Lehman Brothers (September) and the start of the Great Financial Crisis.
I believe the SVB & Credit Suisse failures have started the clock on GFC II. A slow-motion collapse is now in progress, but this time it won’t end until we get a new monetary system.
Thank you for this reply. Most appreciated. What propelled JHK into fame was his take on Peak Oil and the impending collapse of society as we lose our cheap energy source. Clearly this did not play out as forecast. True enough we replaced nearly free energy with free money….cheap debt, to keep up expectations.
New monetary system, wondering how that works folding into the old? I have always noticed over the years comments made by folks who have no assets or huge debt loads cheering on a great reset and/or collapse, then I have to think about most us who have been diligent and played by the rules as they understood their responsibilities and needs. Granted, life isn’t fair, but if there is a mass washout or sudden change you might not want to be a target. People will go ape—-!! Little trust in Govt already, profligate personal and public debt, (and let’s not talk about gun culture and/or current politics), we had all better hope a new system unfolds slowly and fairly. Look at France right now…today. And that is just changes to retirement age. When people feel they are shortchanged while seeing others enjoy unlimited wealth and opportunities, well…….could be nasty. Just unloaded 12 yrds of super compost soil to augment the gardens. That’s our solution.
You are 100% correct. When fiat monetary systems die, citizens who see their life savings disappear (rightfully) lose their minds, which leads to many of those in charge losing their heads (See: The French Revolution).
For a look at one example of how a modern nation handled a monetary reset, read Adam Fergusson’s When Money Dies, which chronicles the Weimar hyperinflation (c.1921-1923). Those who were savvy enough to realize what was going on before the general public – akin to those who read Black Coffee today – were able to take advantage of the reset for personal gain, with a major caveat: financial moves had to be made in a very narrow window of time. For example: 1) buying precious metals to preserve wealth before the price got too high to help; 2) paying off the mortgage with hyperinflating currency; 3) getting loans to buy land and businesses and then quickly paying those loans off in rapidly-depreciating currency; 4) getting ridiculous real estate deals with gold or silver when they were at their maximum value.
Self-reliance and prepping is one of your best protections. It’s no secret that most farmers came out of the Weimar event smelling like a rose.
The banks are still at it. In the early 90’s, one of the big banks wanted to raise my credit limit to greater than my salary. I declined the offer. It was insane. Earlier this week, a bank with whom I have a credit card, just upped my credit limit unasked. I don’t need that much credit. It’s totally irresponsible. smh.