Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
It’s not always sunny in Philadelphia.
The Philadelphia Business outlook remains grim at -23. This comes after yesterday’s terrible Empire State print.
Between Biden’s energy policies and massive spending by Biden/Congress, we are seeing the raging effects of inflation on the economy.
Here is Biden’s Press Secretary trying to explain how marvelous the US economy is.
Now that The Fed-induced-banking crisis has cooled … for the moment … I can focus on that mysterious positive homebuilder sentiment release from yesterday.
The sentiment was driven by 5+ unit (multifamily) starts which were up 24% in February, which 1-unit (single-family detached) starts were up only 1.10%. 23 consecutive months of NEGATIVE real wage growth and still ultra-high home prices begat lots of multifamily housing starts.
The problem for Americans is the real weekly wage growth has been negative for 23 consecutive weeks while home prices remain high, particularly after the Covid bailout by The Fed.
Here is the rest of the story.
So, 1-unit detached housing is snookered.
Market now expects FED to hike max. one more time by 25bps followed by 125bps cuts in total by end of 2023.
And bond volatility is up the most since … the last financial crisis.
No, not the Klaus von Bulow “Reversal of Fortune.” Just a Fed/Biden murder of the US economy.
Apparently, the NEO financial crisis (not the subprime, but The Fed’s “too low for too long” crisis) is still with us.
Credit Suisse Group AG’s top shareholder, whose stake has lost more than one-third of its value in three months, ruled out investing any more in the troubled Swiss bank as a bigger holding would bring additional regulatory hurdles.
“The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory,” Saudi National Bank Chairman Ammar Al Khudairy said in an interview with Bloomberg TV on Wednesday. That was in response to a question on whether the bank was open to further injections if there was another call for additional liquidity.
Credit Suisse says it has identified material weaknesses in its internal control over financial reporting as of December 31, 2022 and 2021, according to the annual report.
The material weaknesses relate to the failure to design and maintain an effective risk assessment to identify and analyze the risk of material misstatements in its financial statements and the failure to design and maintain effective monitoring activities relating to:
– Providing sufficient management oversight over the internal control evaluation process to support the Group’s internal control objectives
– Involving appropriate and sufficient management resources to support the risk assessment and monitoring objectives
Assessing and communicating the severity of deficiencies in a timely manner to those parties responsible for taking corrective action
And it could simply be that Credit Suisse was caught in the Central Bank “Bear Trap” where banks get clobbered as interest rates rise.
Credit Suisse’s CDS (credit default swap) is soaring!
And on the “it ain’t over till its over” news from Credit Suisse, the US Treasury 2-year yield plunged -40.4 basis points.
And the US Treasury 10-year yield plunged -24.8 basis points.
The official logo of the Federal Reserve should be Munch’s The Scream.
Well, the banking fiasco CREATED BY THE FEDERAL RESERVE is still with us. Why? Because the FDIC guaranteed deposits above $250,000 for the first time in history, bailing out millionaires/billionaires. I call this Crony Socialism (but I repeat myself).
Congress doesn’t understand banking, only how to spend money.
The Federal Reserve is some hard thinking to do. Inflation came in hotter than expected, so raise rates to fight inflation or lower rates to prevent bank contagion. Similar to Kevin Malone’s “Double fudge brownies or Angela” debate.
While headline inflation (CPI) came in a 6% (considerably higher than The Fed’s 2% target), core inflation came in at 5.5% year-over-year (YoY), which was expected.
The truly nasty number is today’s inflation report is that weekly earnings YoY remained the same at a terrible -1.9%. Meaning that inflation is higher than nominal wage growth. This is the 23rd straight month of negative real weekly earnings. Well done, Fed and Biden!
Food is up 10.2% YoY. Electricity up 12.9%, shelter up 8.1%.
On the news, the US Treasury 2-year yield rose 34.3 basis points.
Somehow I doubt that Biden’s press secretary will tout 23 straight months of negative weekly earnings growth as one of Biden’s economic accomplishments.
The Fed (Bernanke, Yellen, Powell) kept rates too low for too long (their new moto?), and hell is now being paid.
US financial conditions index collapsed on the 3 bank failures … so far.
Despite what Resident Biden said about banks, bank stocks fell again today.
The Silicon Valley Bank failure (along with NY’s Signature Bank) are sending shock waves through the global economy. Not because of the incompetence of bank regulators, but because of the reaction function from the FDIC and Fed.
The 10-year Treasury yield is down -26 basis points in the AM. And the Fed Funds Target Rate is expected to drop to 4.7%.
Its not just the US Treasury yield that declined -26 basis points. European sovereign yields are down too (Germany 10-year is down -32.9 basis points).
Look at the 2-year Treasury yield. Its down -54.6 basis points.
On a sad note, Resident Biden is calling for stricter regulations for the banking industry, already one of the most regulated sectors of the economy. How about less politics and just make them do their ^*T^R jobs!
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!
Silicon Valley Bank (SVB), the nation’s 16th largest bank, got caught in Ben Bernanke and Janet Yellen’s bear trap, the trap set when Bernanke/Yellen kept interest rates 25 basis points for too long (from December 2008 through December 2015) and then raising rates only once during Obama’s Presidency, only to raise rates 8 times after Trump was elected President. Then Covid struck in early 2020 and Powell dropped rates to 25 basis points again until inflation struck and Powell started raising rates at the fast pace in history.
Of course, banks got clobbered with interest rate increases, such as Silicon Valley Bank.
SVB’s collapse into Federal Deposit Insurance Corp. receivership came suddenly on Friday, following a frenetic 44 hours in which its long-established customer base of tech startups yanked deposits. But its fate was sealed years ago — during the height of the financial mania that swept across America when the pandemic hit.
US venture capital-backed companies raised $330 billion in 2021 — almost doubling the previous record a year before. Cathie Wood’s ETFs were surging and retail traders on Reddit were bullying hedge funds.
Crucially, the Federal Reserve pinned interest rates at unprecedented lows. And, in a radical shakeup of its framework, it promised to keep them there until it saw sustained inflation well above 2% — an outcome that no official forecast.
SVB took in tens of billions of dollars from its venture capital clients and then, confident that rates would stay steady, plowed that cash into longer-term bonds.
In doing so, it created — and walked straight into — a trap. Set by Fed Chair Ben Bernanke and now US Treasury Secretary Janet Yellen. To be sprung by current Fed Chair Jay Powell.
Becker and other leaders of the Santa Clara-based institution, the second-largest US bank failure in history behind Washington Mutual in 2008, will have to reckon with why they didn’t protect it from the risks of gorging on young tech ventures’ unstable deposits and from interest-rate increases on the asset side.
Outstanding questions also remain about how SVB went about navigating its precarious position in recent months, and whether it erred by waiting and failing to lock down a $2.25 billion capital injection before publicly announcing losses that alarmed its customers. Investors and depositors tried to pull $42 billion on Thursday, leaving the firm with a negative cash balance of almost $1 billion, regulators said.
The KBW Bank index shows the slaughter of most banks on Friday.
Of course, the notorious Too Big To Fail (TBTF) banks JP Morgan Chase and Wells Fargo actually rose in value on Friday while regional banks got clobbered like Signature Bank, First Republic and Western Alliance Banks all losing over 10% in price on Friday.
How did this happen? Well bets placed during Covid with The Fed keeping rates at 25 basis points got clobbered when The Fed finally started raising rates again. Modified duration, a risk measure indication the weighted-average life of a bond and mortgage-backed securities (MBS), has been increasing steadily since the initial Covid shock.
SVB’s management’s solution appears to have been to seek out yield through a lot of long-duration bonds. The bank started to lose deposits as VCs pulled cash/burnt through operating capital. Whoops!
Unrealized losses killed SVB, thanks to their long duration bet as The Fed tightened.
The most terrifying thing was when former Treasury Secretary Larry Summers and current Treasury Secretary Janet Yellen went on TV to exclaim “Remain calm! All is well … in the banking sector.” You know when they wheel out Summers and Yellen that all is NOT well.
Confounded Interest - Anthony B. Sanders 
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