Upside-Down: Trouble in the Banking Sector

Andy Snyder|March 13, 2023

Here we go again.

Failure.

It’s a look into the past… and an oh-so-scary look into the future.

Banks are failing. Bailout talks are increasing. And the president plans to engage in even more of the borrow-and-spend antics that got us here.

We’ll start with the president’s budget proposal, as it so aptly sets the scene.

It’s a scene of desperation, depression and lunacy – as if the front door of the silly ward has fallen off and the inmates are in the streets buying sprinkled ice cream cones.

Biden wants to take $5 trillion from the rich and give it to the poor. And he wants to cut the deficit by $3 trillion… but raise the national debt from $31 trillion to $51 trillion within a decade.

At current interest rates, it’d be a disaster. We might as well start the mountain of bankruptcy paperwork now.

That’s what the banks are thinking.

It’s hell in that world right now. With the rate to borrow for six months nearly 40% higher than the rate we get paid for a 30-year bond, the banking world is as upside-down as the yield curve.

And it shows.

You’ve surely heard the news.

Off Balance

Shares of bank stocks plunged last week, led by now-failed Silicon Valley Bank. Its shares dipped more than 60% on Thursday after the company said it was forced to book a loss of $1.8 billion.

By Friday afternoon… it was gone.

While SVB is the dull tip of the spear, it’s got a host of banks piling in behind it.

Wall Street is punishing the sector for it. The popular KBW Nasdaq Bank Index (BKX) plunged more than 15% last week. Just from the four biggest U.S. banks, that equals more than $50 billion in lost market share.

And that’s not just pie-in-the-sky money. In the banking world, it’s the real deal. As valuations fall, banks are forced to balance their books.

Much of the pressure is coming from folks moving their money out of banks. They’re proving the old line (that we mutter oh so often) that money goes where money is treated best.

Money has never been treated well in a traditional bank. But in the zero interest rate world we were living in, zero was zero no matter whence it came.

But now that Mr. Powell has exchanged his helicopter for a sharp-beaked hawk… things have changed.

Upside-Down

As we told our paying subscribers last week, it’s now possible to get 5% on your cash… so do it.

As more investors put this idea into action, more cash will get sucked out of the traditional banking world. And as the withdrawals pile up, banks will be forced to sell the assets they’d used their customers’ money to buy.

Unfortunately, many of those assets aren’t worth as much as they paid for them.

Worse, with an inverted yield curve, banks can’t arbitrage the difference between short- and long-term debt.

The system is upside-down.

Why?

See the top of this essay. We spend more than we make… and in 2020, we printed $5 trillion that we didn’t have and, worse, didn’t need.

And the latest figures from D.C. tell us that, sadly, we ain’t seen nothing yet.

Uncle Sam is going to spend his way into prosperity.

But this time, he promises, it’ll actually work.

Ha!

Hold on. It’s about to get bumpy.

Bank failures rarely portend good times.