The Macro Movie of 2023

Life on Mars

The good news this week was that journalists have done a spectacular job in their reporting of the now global banking crisis. At the end of this post, I am attaching several links that are worth reading and will help make sense of the more technical aspects of SVB, NIBD, FIDC, ECB, SNB, HTM, AVS, MTM, and the many other acronyms that are popping out of the pot of this plot like kernels of corn.

Last week, I pointed out the Holly Woodiness of the Silicon Valley Bank scandal. Many experts thought it would fall out of the news cycle in a week. Instead, the situation has become even more bizarre with no end in sight. Unfortunately, the scandal has become a saga. The United States is diving headlong into a major credit crunch.

The Federal Reserve and the European Central Bank are quixotically implementing drastic measures to maintain the stability of the system. Through the backdoor, you and I are victims to what amounts to a stealth wealth transfer, from us to the banking system, which, as we shall see, will also get its comeuppance.

The Honorable Secretary of Treasury, Damn the Torpedoes Full Speed Ahead Janet Yellen pledged last Sunday there would be no government bailout. Sunday, uninsured depositors of SVB were bailed out with the government tapping the insurance fund financed by the banking sector (the "FDIC"). Sorry, an acronym slipped in.

On Thursday, Yellen said this in Congress:

“Shareholders and debtholders are not being protected by the government. Importantly, no taxpayer money is being used or put at risk with this action. Deposit protection is provided by the Deposit Insurance Fund, which is funded by fees on banks.”

Like the famous brave little Dutch boy who stuck his finger in the dyke to save the town from a devastating flood, Yellen made a point to "reassure the members of the Committee that our banking system remains sound."

Both Yellen and Chairman Jay Powell of the Federal Reserve knew that FDIC's finger was not enough, and in a New York minute, on Sunday, announced a bargain basement lending program for the US banking system.

To illustrate how it works, let's say your house is worth $500,000.

Call a bank and ask them how much they will loan you with the house as collateral. About $425,000. What rate would they charge you? Around 8%.

Now imagine owning another asset, a portfolio of United States-backed bonds that had depreciated 25% over the last year. If you were a bank, you can now call the Fed and ask them to loan you money collateralized with the bonds. Service with a smile! The Fed wires you the amount you orignally paid for the losing investment, $700,000 and charges you just 5%.

This is what the Fed did $11 billion times this week, as banks first used other financing facilities including the discount window to borrow a total of US$303 billion. JP Morgan projects that with further stress in the system, the number could grow to $2 trillion. To get a sense of magnitude, Biden's budget proposal for 2024 is $6.9 trillion, which, unlike Powell's financing largesse, requires Congressional approval. Such are the powers of the Fed.

Chairman Jerome Powell is attempting to tie his shoes and untie them at the same time. To fight inflation, he has been allowing the $5 trillion bonds purchased during Covid to mature, gradually decreasing the Fed's balance sheet and reducing reserves, that is, liquidity, from the banking system. This is a key tool in the Fed's fight against inflation.

To stabilize the banking system, with Yellen and Biden's complicity, the Fed is now adding bonds to its balance sheet through the financing scheme described above, thereby increasing liquidity in the system. Bulls have seized this liquidity as the reason for risk assets to appreciate. After all, last week's liquidity injection erased 50% of the reductions the Fed had managed since last June!

The Treasury and the Fed's claim that taxpayers are not paying for this sleight of hand is untrue. They are being dishonest. The Fed, by offering off-market juicy financing to the banks, is effectively using our money to subsidize them. The extra bucks in the system work their way into the price of goods and services that we consume, and inflation makes us poorer.

The Federal Reserve's European Union counterpart, the European Central Bank, raised its overnight rate to 50 basis points on Thursday after the Swiss National Bank loaned 50 billion Euros to Credit Suisse, a bank that has teetered on the verge of bankruptcy for years. On a GDP-to-GDP basis, this would be like the US loaning $1 trillion to one of the giant US Banks. Interestingly, the Swiss indirectly blamed bank supervision in the US for the pressure on their banking system.

This Sunday afternoon, there are swirling rumors that Credit Suisse's rival Union Bank of Switzerland is acquiring Credit Suisse for $1.1 billion, although Credit Suisse’s market capitalization at Friday’s market close was $8.5 billion. (The deal settled at $3.2 billion , with lascivious guarantees given by the Swiss National bank to UBS, to get the deal done before the markets open in Asia).

Meanwhile, back at the farm, Donald Trump is riling up his supporters by posting the longest acronym of the week, in all capital letters, advising them of his imminent arrest, and for a change, he may not be lying.

On the other side of the Atlantic, Putin is visiting what little of the city of Mariupol his bombs did not destroy as the Poles up the ante and send fighter jets to Zelensky, while Turkey finally gives the green light to Finland to join NATO.

On the other side of the planet, Kim Jong-il, Trump's favorite rocket man, is lobbing ICBMs in the direction of both Japan and South Korea, while China must be feeling smug after having brokered a potentially major diplomatic milestone between Iran and Saudi Arabia.

Market dislocations abounded last week. Treasury securities traded like an emerging market. The volatility in the two-year note surpassed the panics of 2007 and 2008.

Bitcoin was up 25%, trading like a safe haven for the first time in its history. Oil was down 13% with fears of a hard landing. The Regional Bank ETF KBY was down 13% while Nasdaq saw lower interest rates and jumped 5.80%.

Many Americans tuned in to March Madness basketball this week but found time to transfer billions of dollars from non-interest-bearing accounts at their regional bank to money market funds paying close to 5%. Billions also were transferred to non-interest-bearing deposits at large banks like JP Morgan, Citibank, and others that the Fed has deemed "Too big to fail."

My view, and I may be overestimating my countrymen's intelligence, is that this money will not stay parked earning zilch. Money will flow from deposits at the big banks into money market funds. Even if this migration occurs without triggering any further bank runs, the higher cost of money for banks will result in their increasing the price of money offered to clients. That is a fancy way of saying a credit crunch is coming.

I continue with the view that cash, at 5%, in a money market fund or a short TReasury bill, is king.

Everything is not hunky-dory. This is Life on Mars.

In 1971, the musician David Bowie released the album "Hunky Dory" with the moody, mysterious, and cynical song, "Life on Mars."

I saw him perform this masterpiece in 1983 when I was nineteen, at the Washington DC Capital Center. The mixed metaphors and loony lyrics have intrigued and befuddled me until now, as I sit here and reflect on the macro movie of 2023:

Life on Mars

"It's a god-awful small affair

(Silicon Valley Bank failure)

To the girl with the mousy hair

(The United States, home of Mickey Mouse)

But her mummy is yelling "No"

(Elizabeth Warren)

And her daddy has told her to go

(Janet Yellen)

But her friend is nowhere to be seen

(capitalism)

Now she walks

through her sunken dream…

(the American Dream)

… Sailors fighting in the dance hall

(day traders)

Oh man! Look at those cavemen go

(the too-big-to-fail banks)

It's the freakiest show

(It's the freakiest show)

Take a look at the lawman

(The Federal Reserve)

Beating up the wrong guy

(the taxpayer)

Wonder if he will ever know

(only if he reads my blog)

He's in the best-selling show

(the Macro Movie of 2023)

Is there Life on Mars?

(Is there Life on Mars?)

Hear Bowie’s Life on Mars now, with an image for every lyric generated by artificial intelligence

Double click NOW and SING ALONG in Mars.

Working Title for next week’s post is a Bowie Lyric from his song about me and my wife, “Cat People.”

It is also about the Fed.

“Putting out the fire with gasoline.”

Have a good week, like, and make cynical comments below.

David, the wolf of wall street (lower case)

Suggested reading on the crisis:

Click on the links!

How the Fed's emergency measure could turn into a $2 trillion gift:

Excellent article explaining how the Fed stress tests banks and how they should:

The Federal Reserve Act of 1933, including the important section 3, which allows the Fed to do virtually anything.

Before Collapse of Silicon Valley Bank, the Fed Spotted Big Problems, from The New York Times

George Will in the Washington Post, with a similar message about the socialization of the banking system, better written than mine, but too serious and with no link to a Bowie song.

A simple, but very clear video explanation of the difference between bank deposits and money market funds.

An article from the Financial Times on the crisis, which I have not yet read, but must be good because it talks about Schrodinger’s cat, and I have eight.