This past week’s bounce-back of the stock market really is something to behold.
Stock prices climbed Thursday and again Friday, right after the Fed raised rates of interest, and never because corporate earnings are killing it, inflation has been put to rest, or the economic forecast is so vibrant.
No, stocks rebounded because we’ve got a banking crisis and the potential of lower rates of interest sometime soon. Which means traders are betting, like drug-addled junkies, that the Fed could resume giving them their fix — pumping “heroin” in the shape of low rates of interest into the drug addict that’s the US stock market.
That’s right. The trendy-day stock market is an addict — and like an addict, it might’t be trusted. It can lead you astray with false guarantees. Steal from you to feed its habit, feign health and strength when it has neither. Greater than the rest, it needs help — a treatment center, when you will, that removes its addiction to free money and allows prices to reflect the actual condition of the US economy and forecasted corporate profits.
The treatment is painful, as we’re seeing. It’s the upper rates of interest now imposed by the Fed to quell inflation in food and fuel and bloated financial assets. Stuff like crypto, meme stocks, then tech shares and loads more have recently tanked, exposing a pernicious bubble that only free money could create and better rates of interest can cure.
Now the treatment of upper rates is painfully exposing an analogous rot contained in the banking system. Buttoned-down business bankers versus meme-stock-pumping retail traders took wild gambles on business real estate and early-stage VC corporations. They, too, are getting crushed by higher rates as asset prices begin to wean themselves off their risk-on addiction.
Many traders have jumped onto the rising stock market rates. Bloomberg via Getty Images
More banks might fold
First there was Silicon Valley Bank, or SVB, then nearly concurrently Signature Bank that succumbed to the cold turkey. There will likely be others, as many as two dozen, I’m told. All have balance sheets remarkably just like SVB and Signature. If things proceed to go south, they’re able to fold, too, guaranteeing a steep recession.
Again, you’re not seeing this logic that much within the stock market, where the combined wisdom is one among a stupefied giddiness of a junkie who just got his fix every time he hears lower rates are within the offing.
Thankfully, there are people on Wall Street who should not high and you’ll be able to trust for the straight story — people like Jamie Dimon of JP Morgan and Larry Fink, the top of money-management powerhouse BlackRock. They’ve nearly a combined century of risk-management experience, and while people in DC fiddle with bromides in regards to the strength of the banking system and stock traders salivate about lower rates of interest, they’re ignoring the noise.
They know stock traders should not the perfect barometers of the long-term health of the economy and even the markets themselves. Additionally they know the risk-taking at SVB et al. is more endemic within the banking system than stocks are signaling. If we don’t play this right, we’re heading for a broader collapse, a steep recession and a market collapse.
Banks and the US government are actually scrambling to save lots of First Republic bank. NurPhoto via Getty Images
Saving First Republic
A technique they’re doing that is to try, possibly in vain, to save lots of First Republic Bank and ultimately sell it. The once rock-star bank headquartered in San Francisco isn’t any small fry; it has greater than $200 billion in assets. It caters to wealthy people in tech and other major industries.
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Unfortunately, it made among the same horrible portfolio selections as SVB: loans to businesses (tech and business real estate) which are underwater, leading to a jittery deposit base that keeps yanking from accounts.
Dimon is seeking to arrange a “club deal” to save lots of First Republic. Which means selling it after getting commitments to place real capital into the bank (above the recent $30 billion infusion of deposits). He and his individuals are talking to personal equity firms (former Treasury Secretary Steve Mnuchin, now a PE banker, is alleged to have an interest), other banks and a few uber-rich dudes like possibly Warren Buffett or a member of the Saudi royal family.
Fink, meanwhile, is passing ideas to the White House on the way to stop the contagion from reaching epic proportions, very like he did successfully back throughout the 2008 financial crisis, and warning his contacts in DC that we’re facing a possible crisis not unlike the one which afflicted S&Ls a long time ago if the federal government doesn’t take motion.
Up to now, it doesn’t appear to be the White Home is taking Fink’s words to heart, given its continued vapid pleased talk. Dimon’s club deal and sale also appears to have stalled. As I first reported, bankers are weighing going to the federal government for a handout: Capital in exchange for warrants that will be repaid at profit once the thing is sold.
Yes, things could get pretty bad, so don’t trust the addicts trading stocks.
