Are You Ready? Banks Postitioned For A Bail-in As Silicon Valley Bank Fails (FDIC, Fed Weigh Special Vehicle After SVB Collapses, AOC Alert!)

Are you ready?

Despite cries from Summers, Yellen and other the DC illuminati (Biden is oddly silent), US banks are NOT fine. In fact, banks in general are suffering from Fed rates increases due to holding of long-term Treasuries and MBS.

In fact, The Federal Reserve’s fight against inflation is causing serious problems, as exemplified by AOC. No, not THAT AOC. but bank Accumulated Other Comprehensive Income.

Accumulated Other Comprehensive Income (AOCI) are special gains and losses that are listed as special items in the shareholder equity section of a company’s balance sheet. The AOCI account is the designated space for unrealized profits or losses on items that are placed in the other comprehensive income category.

On the regulatory call reports, AOCI is added to regulatory capital. Since SVB’s AOCI was negative (because of its unrealized losses on AFS securities) as of Dec. 31, it lowered the company’s total equity capital. So a fair way to gauge the negative AOCI to the bank’s total equity capital would be to divide the negative AOCI by total equity capital less AOCI — effectively adding the unrealized losses back to total equity capital for the calculation.

Getting back to our list of 10 banks that raised similar red margin flags to those of SVB, here’s the same group, in the same order, showing negative AOCI as a percentage of total equity capital as of Dec. 31. We have added SVB to the bottom of the list. The data was provided by FactSet:

Or this chart of vulnerable banks from Morningstar of unrealized losses and liquidity risk.

Here is a snapshot of SVB’s balance sheet. Or UNbalanced sheet.

After Congress passed the greatly flawed Dodd-Frank banking legislation, bailouts of banks are prohibited. But bank BAIL-INs still exist. Banks use money from their unsecured creditors, including depositors and bondholders, to restructure their capital to stay afloat. Put simply, they can convert their debt into equity to increase their capital requirements. Although depositors run the risk of losing some of their deposits, banks can only use deposits in excess of the $250,000 protection provided by the Federal Deposit Insurance Corporation (FDIC).

In any case, the FDIC and Fed are weighing a special vehicle after SVB swiftly collapses. Special vehicle? Sounds an awful like the mega bank bailout of 2008 under Hank Paulson.

No, not THIS AOC!

Sink The Economy! S&P 500 Down -6% Since Fed Started Raising Rates On May 4, 2022, Equity REITs Down -16% (Pension Pain From Interest Rate Increases)

Interest rates are an important driver of the economy and financial markets. And what has happened to the S&P 500 index since The Federal Reserve started raising their target rate on May 4, 2023 to fight surging inflation?

Since that fatal day, the S&P 500 index has fallen -6% and equity REITs (commercial real estate) has fallen -16%.

What about returns on US Treasuries and Mortgage-backed Securities (MBS)? Same thing. PAIN!

Although The Fed has pledged to keep raising rates to fight inflation (and further decimate retirement accounts), investors are pointing to a peak (terminal) Fed rate of 5.44% at the September 2023 FOMC meeting. Then rate cuts following the September 2023 meeting.

Of course, much of the blame belongs to former Fed Chair Ben (QE) Bernanke and current Treasury Secretary Janet “Too Low For Too Long” Yellen who never met a Fed rate hike that she liked. But Yellen LOVES giving away US taxpayer dollars … to Ukraine.

South Of The Border? Price Of Insuring Against US Debt Default Rises To 76.75, More Expensive Than Mexico, Almost As Expensive As Guatemala

South of the border, down Mexico (and Guatemala) way.

What a mess in Washington DC. While House Republicans are at lagerheads with Senate Democrats and Resident Biden over Federal spending cuts, the price of insuring against a debt default just rose to 76.75.

How bad it that? Put it this way. Millions are fleeing Mexico and Guatemala and coming to the US. But Mexico has a lower cost of insuring against a debt default than the USA. And Guatemala is almost as expensive as the USA.

It will all be over soon, according to CDS prices.

Maybe the USA needs Gene Autry as Homeland Security Chief instead of Alexander Mayorkas. Even Smiley Burnette would be better at securing the border than Mayorkas.

US Durable Goods NEW ORDERS Fall -4.5% In January As Fed Retreats (Defense Capital Goods New Orders UP 25.4% YoY)

The Federal Reserve is retreating from its Covid-era monetary expansion. And with the retreat, US durable goods NEW ORDERS fell -4.5%% in January. The worst reading since … Covid in 2020.

A breakdown of new orders shows that while NONDEFENSE capital goods orders dropped -5.4% YoY in January, DEFENSE capital goods orders increased by 25.4% YoY.

Damn, it feels good to be a gangster.

Get Ready! Dash for $10 Trillion of Metals For Energy Transition Starts Now (Copper, Aluminum, Lithium, Silver, Rare Earths)

Get ready! The mad dash for metals is here!

Copper set to be most valuable opportunity in race to net zero
Electric vehicles and wind turbines are main demand drivers

Everything is a race when it comes to the energy transition. A race against time to reach net-zero emissions by the 2050 crunch point; a race to build enough wind turbines and replace gas-guzzling cars with electric vehicles; a race between superpowers to shore up domestic supply chains and capture the economic benefits of decarbonization.

There’s one common thread that runs through them all: the need for metals. A greener future is impossible without copper to expand the world’s electricity grids, lithium for batteries and aluminum for solar panel frames.

Companies are now hunting for more direct access to these essential raw materials as they recognize metals will form the backbone of the energy transition. General Motors Co., for example, announced at the end of last month that it will invest $650 million in Lithium Americas Corp. and help develop the Thacker Pass mine in Nevada. The automaker is also reportedly competing to buy a stake in the base metals unit of mining giant Vale SA, according to Bloomberg News.

What exactly is driving this hunger for metals? Achieving a net-zero world will entail electrifying as much as possible. BNEF estimates the size of the global power grid will have to almost double to 152 million kilometers by 2050, requiring masses of steel, copper and aluminum. This means the expansion of grids will use the most copper out of all energy transition applications, coming in at 427 million tons between now and mid-century.

Clean electrons will need to flow through those grids, enabled by the scale-up of wind and solar power. Wind turbines are projected to consume the most metals overall by 2050 if the world gets on track for net-zero emissions. Today, steel accounts for nearly 90% of the materials used by weight in offshore wind and about 25% in onshore wind, although as turbines get bigger, they will use less steel on a per-megawatt basis. Consumption of rare earth metals such as neodymium will become more intense, however, as permanent magnet generators become more common in turbines.

Rising demand for energy transition metals is essentially a given at this point. The real question is whether there will be enough supply. As things currently stand, lots of these metals, including copper and cobalt, are at risk of a shortfall in the coming decades unless current reserves can be supplemented with new geological discoveries and projects, and recycling of old material is stepped up.

Many countries have known resources of metals – in other words, natural occurrences of minerals in high concentrations and sufficient quantities. But not all of these resources have been turned into reserves that can be profitably mined yet. This requires time and investment to go through the exploration, discovery and feasibility stages, and these processes could be thwarted by policy.

Here are metals today.

So, people get ready! Whether you agree with green energy policies or not, it is where markets are headed. Personally, I am sticking to my gasoline guzzling cars until I am ordered not to drive them. Stated differently, if Joe Biden can drive a gas guzzling V-8 in a Chevy Corvette, why can’t I?

At least I didn’t leave classified documents in my garage.

Is That All There Is? US GDP Expands At Only 2.9% Pace While Slowdown Signs Mount (Like M2 Money Slowing To -1.31% YoY And PCE Growth Less Than Forecast)

Today’s GDP report from the BEA reminds me of the Peggy Lee song “Is That All There Is?” Between the massive Fed monetary stimulus since late 2008 (and particularly since Covid in 2020) and all the Federal spending (Covid relief, Inflation reduction, Omnipork spending bill, etc.), US real GDP rose by only 2.9% in Q4 from Q3.

But signs of slowing underlying demand mounted as the steepest interest-rate hikes in decades threaten growth this year.

Gross domestic product increased at a 2.9% annualized rate in final three months of 2022 after a 3.2% gain in the third quarter, the Commerce Department’s initial estimate showed Thursday.

Personal consumption, the biggest part of the economy, climbed at a below-forecast 2.1% pace (forecast was for 2.9%). Again,

The report also showed some signs of stress for American consumers whose wages have failed to keep up with inflation and continued to encourage them to draw down savings accumulated from government pandemic-relief programs. The burden of elevated prices and higher borrowing costs is mounting, pointing to a tenuous outlook for the economy.

A key gauge of underlying demand that strips out the trade and inventories components — inflation-adjusted final sales to domestic purchasers — rose an annualized 0.8% in the fourth quarter after a 1.5% gain.

Core PCE growth grew at 3.9%, but is slowing already as M2 Money growth dies.

Stock-index futures and Treasury yields remained higher and the dollar was little changed after the GDP report and better-than-expected weekly jobless claims. Applications for unemployment insurance dropped to 186,000 last week, the lowest since April.

Recent data show cracks are developing more broadly. Retail and motor vehicle sales data showed households are starting to retrench, the housing market continues to weaken and some businesses are reconsidering capital spending plans.

As the Federal Reserve continues to hike interest rates to ensure inflation is extinguished, housing and manufacturing have deteriorated quickly while industries including banking and technology are carrying out mass layoffs.

The GDP report showed the personal consumption expenditures price index, a key inflation metric for the Fed, rose at an annualized 3.2% rate in the fourth quarter, down from a 4.3% pace in the prior three months. The core index that excludes food and energy climbed at a 3.9% rate compared with 4.7% paces in the prior two quarters. Monthly data for December will be released Friday.

The moderation in price pressures is consistent with forecasts that the Fed will further scale back its tightening campaign next week, when it’s expected to raise rates by 25 basis points. Policymakers boosted the benchmark rate by 50 points in December after 75 basis-point hikes at their previous four meetings.

The world’s largest economy expanded 2.1% last year. In 2021, when demand snapped back from pandemic-related shutdowns, the economy grew 5.9% — the best performance since 1984.

The GDP data showed services spending increased at 2.6% annualized rate in the October-December period, the slowest since last year’s first quarter. Outlays on goods rose at a 1.1% pace, the first advance since 2021.

Business investment slowed sharply after a third-quarter surge. Spending on equipment declined an annualized 3.7%, the most since the second quarter of 2020. Outlays for structures rose at a 0.4% pace.

Let’s hope the BEA isn’t padding the numbers like the BLS was caught doing in the first half of 2022.

Lastly, US Real GDP growth YoY FELL to only 0.95925% as M2 Money growth disappears.

Winter Is Coming! Richmond Fed Outlook Declines To -11 As Philly Fed Outlook Down To -8.9 And NY Empire State Outlook Down To -32.9 (US 10Y-3M Yield Curve Inverts To -126.5 Basis Points)

Three regional Fed reports I like to watch are New York’s Empire State Outlook, Philly Fed’s Outlook and Richmond Fed’s outlook. Today, The Richmond Fed released their manufacturing outlook and … it declined to -11.

So the big three are all down (Philly down to -8.9 while NY’s Empire State outlook is down to -32.9.

On the Treasury front, the US 10Y-3M yield curve inverted further (a signal of impending recession) just tanked to -126.462 basis points.

Winter is coming!

United States Yield Curve 3M10Y Most Inverted In 30+ Years! (But Other Assets Signaling Cooling Odds Of Recession)

The first headline I saw when I turned on Bloomberg.com was “DOJ Officials Find More Classified Documents at President Biden’s Home.” This is an improvement! So far, the task has been handled by Biden’s private attorneys who don’t have proper security clearance; at least the Justice Department is finally getting involved!

But back to the US yield curve. It is now the most inverted in 30+ years as M2 Money growth stalls. Inverted yield curves have preceded recessions in the past.

But as China reopens and Europe is experiencing a warmer winter than expected (meaning that Europe has sufficient natural gas reserves) and US inflation cooling,

we are seeing market-implied odds of a recession falling in January.

I am still betting on a recession in the second half of 2023.

Sign Of The Times? Citi Economic Surprise Index Falls To -17.70 As US CDS (Default Insurance) And Fed Reverse Repos Remain Elevated

Its a sign of the times!

First, US default risk as measured by credit default swaps remains elevated (primarily because Biden and Democrats refused to cut wasteful spending or reign in non-retirees on Social Security). And NY Fed’s Reverse Repos remain elevated.

And then we have Citi’s economic surprise index for the US at -17 as The Fed slows money growth to 0%.

I wish I knew a place where inflation and insane Federal government spending and policies doesn’t exist.

Janet Yellen And Treasury Tap Retirement Funds (Social Security) to Avoid Breaching US Debt Limit (US CDS Elevated To 2013 Debt Crisis Level)

US Treasury Secretary Janet Yellen has signalled that she will “tap” into Social Security to avoid breaching the US debt limit. Of course, if she does, it is unlikely that she will return the dollars.

The Credit Default Swaps 1-year for the US (insurance against default) sits at 68.55, near the highest since 2013 debt ceiling crisis.

Notice that the debt ceiling keeps on climbing once the Kabuki Theater of Democrats and Republicans is over.

The Volatility Cube for the US CDS 1 year signals that it will all be over soon.

So, Yellen and Treasury are threatening us with taking away Social Security and Medicare if we don’t agree with their lavish Pelosi-like spending sprees and debt.

And why exactly is Janet Yellen flying to China? I admit Washington DC has lousy Chinese food, but at least I hope Yellen takes Hunter Biden with her to negotiate the impending US default and debt workout.