The ‘low rate’ junkies ignoring US banking crisis

The rally in the stock market last week is really worth watching.

Share prices climbed on Thursday and again on Friday, right after the Fed raised interest rates, and not because corporate earnings are killing it, inflation has been relaxed, or the economic forecast is so bright.

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No, stocks went up because we have a banking crisis and interest rates are likely to come down soon. That means traders are betting, like drug addicts, that the Fed can start giving them their fix again – low interest rates in the form of “heroin” to drug addicts, ie the US stock market is low. Pumping up in the form of interest rates.

This is correct. The modern-day stock market is an addict – and like an addict, it cannot be trusted. It will mislead you with false promises. Steal from you to feed his habit, pretend to have health and strength when he doesn’t have it. More than anything, it needs help – a treatment center, if you will, that overcomes addiction to free money and allows prices to reflect the real state of the US economy and projected corporate profits.

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The treatment is painful, as we are seeing. It is the higher interest rates imposed by the Fed to reduce inflation in food and fuel and bloated financial assets. Crypto, meme stocks, then tech stocks and more have tanked recently, highlighting a damaging bubble that only free money and high interest rates can fix.

Now the measure of higher rates is exposing a similar rot inside the banking system. Buttoned-down commercial bankers took wild gambles on commercial real estate and early-stage VC companies as opposed to meme-stock-pumping retail traders. They, too, are being crushed by higher rates as asset prices begin to wean themselves off their risk-on addiction.

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and banks may fold

First there was Silicon Valley Bank, or SVB, then almost simultaneously Signature Bank which succumbed cold turkey. I’m told there will be another two dozen. All have remarkably similar balance sheets to SVB and Signature. If things keep going south, they too are ready to fold, guaranteeing a sharp downturn.

Then again, you don’t see this argument as much in the stock market, where combined wisdom is one of the idiosyncrasies of a junkie who fixes whenever he hears low rates.

Thankfully, there are people on Wall Street who aren’t high up and you can trust for a straight story — people like JP Morgan’s Jamie Dimon and Larry Fink, the head of money-management powerhouse BlackRock. They have nearly a combined century of risk-management experience, and when people in D.C. mutter bromides about the strength of the banking system and stock traders talk about low interest rates, they ignore the noise. are doing.

They know that stock traders are not the best barometers of the long-term health of the economy or even the markets themselves. They are also aware of risk taking in SVB et al. Is more endemic in the banking system than in stocks. If we don’t play it right, we are headed for a massive collapse, a sharp recession and a market collapse.

saving the first republic

In a way they are doing this, possibly in vain, by first trying to save Republic Bank and eventually selling it. The once rock-star bank headquartered in San Francisco is no small fry; It has assets of over $200 billion. It caters to the needs of the affluent in technology and other major industries.

Unfortunately, this created some of the same terrible portfolio choices as SVB: loans to businesses (tech and commercial real estate) that are underwater, resulting in a jittery deposit base that keeps straying from accounts.

Daemon is looking to arrange a “club deal” to save the First Republic. That means selling it after getting a commitment to put real capital into the bank (up from the recent $30 billion in deposits). He and his men are talking to private equity firms (former Treasury Secretary Steve Mnuchin, now a PE banker, is interested), other banks and some uber-wealthy friends like maybe Warren Buffett or members of the Saudi royal family.

Fink, meanwhile, has been pitching ideas to the White House on how to prevent the contagion from reaching epic proportions, as he successfully did during the 2008 financial crisis, and has warned his contacts in D.C. Not facing a crisis if the government doesn’t act, unlike the one that hit S&Ls decades ago.

So far, it doesn’t seem like the White House is taking Fink’s words to heart, given its continued nerdy cheers. Dimon’s club deal and sale also appear to be on hold. As I first reported, bankers are going to the federal government for a handout: capital in exchange for warrants that once sold will be repaid at a profit.

Yes, things can get much worse, so don’t count on junkies trading stocks.