The Banking Crisis Is Not Over. In Fact, It’s Just Getting Started.

It’s a mistake to believe that the banking crisis that began on March 10, 2023, with the collapse of Silicon Valley Bank is over.

In response to a cascade of bank failures from March to May, regulators took extraordinary and unprecedented actions. The Federal Reserve opened a facility that makes loans against U.S. Treasury securities delivered by member banks as collateral.

What’s unusual is that the loans are equal to 100% of the par value of the securities, even if the market value is only 80% of the par value. The Fed is lending more than the securities are worth. This facility could result in a trillion dollars or more of newly printed money to make the loans.

This money printing spree comes at a time when the Fed claims to be reducing the money supply as part of its inflation-fighting. So, the Fed is tightening and easing at the same time. That’s the kind of public policy incoherence that results from free-form intervention in the markets.

The FDIC is offering potentially to guarantee every deposit in the banking system without regard to the statutory limit of $250,000 per deposit. They justify this using a “systemic risk” exception to the insurance limit. But systemic risk is undefined, and every bank in the system poses a potential systemic risk if a run on the bank creates panic leading to contagion and runs on other banks.

The FDIC insurance fund is also running low because of the $40 billion or more of claims paid out due to the failures to date. Treasury Secretary Janet Yellen has destroyed confidence in the FDIC system by blurring the limits on insurance offered and depleting the insurance fund. Again, the heavy-handed intervention has its costs in terms of uncertainty and lost confidence.

It’s also critical for everyday Americans to realize that there are long lags between the time a crisis actually begins and the time it reaches an acute stage that comes to everyone’s attention. For example, the 2008 global financial crisis hit an acute stage on September 15, 2008, when Lehman Brothers filed for bankruptcy. But it began 18 months earlier in the spring of 2007 when HSBC warned about losses on subprime mortgages.

The Russia-LTCM crisis reached an acute stage in September 1998, but it began 15 months earlier in June 1997 when Thailand devalued its currency against the dollar.

In six major financial crises between 1974 and 2010, the average time between the origin of the crisis and the acute stage was 13.5 months, and the shortest time was 6 months. If we use those benchmarks and date the crisis from March 2023, it could become acute by this September. If we use the 13.5-month average and date the crisis from November 2021 (Bitcoin crash), then we’re already past due.

Under any historic method, a major crisis is imminent. As described in this article, the watchlist of banks waiting to fail includes PacWest, Western Alliance, First Horizon, Comerica, and KeyCorp.

In short, the system is blinking red. The bottom line is that we are facing a severe recession, a financial crisis worse than 2008, de-dollarization, lost confidence in the Fed and the U.S. dollar, political repression through the rise of central bank digital currencies (CBDCs), and extreme social unrest.

The winners in this scenario are gold, silver, land, energy, agriculture, and U.S. Treasury notes. The losers are stocks, corporate bonds, and commercial real estate. You should position your asset allocations accordingly to survive the storm. Don’t wait until it’s too late.

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