by Dave Kranzler, Investment Research Dynamics:
The Fed and U.S. Treasury have made to decision to back-stop depositors at U.S. banks – a liability that could potentially hit $2 trillion. More interestingly, there must be a considerable amount of counter-party default risk embedded in the banking system because several Too Big To Fail U.S. banks have agreed to commit as much as $30 billion in capital to rescue First Republic Bank, which would next to collapse. The Swiss National Bank is ponying up $54 billion to prop up Credit Suisse, which is teetering on the brink of collapse. My bet is that $54 billion won’t be enough. The Central Banks have signaled that bank bailout 2.0 is a go. However, the scale of the problem this time, compared to 2008, is multiples larger. Furthermore, the legislation after the great financial crisis that was pimped as preventing another banking crisis served only to make it easier for the banks to hide their indiscretions.
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The following commentary is an excerpt from the latest issue of my Short Seller’s Journal. For the record, I pegged Silicon Valley Bank as a short about 18 months ago. How? Because I spend most of my time analyzing public financials filings in the footnotes to those disclosures, where the good stuff is buried.
Aside from what the Fed is doing, the stock market is ignoring several event risks that could potentially trigger a stock market crash. First is the debt ceiling issue. Second is the conflict in Ukraine, which is a de facto war between Russia and the U.S. Third is the U.S. economy, which is in far worse shape than is reflected by the stock market. And finally, and perhaps foremost, is what could be the start of a series of bank and financial firm blow-ups.
Janet Yellen says the Treasury, at the current cash burn rate, will run out of cash by September or October. Everyone just assumes that Congress will go through the mating dance required to reach enough support to raise the debt ceiling. But right now the one-year credit default swap spread is 80 basis points. This means that the cost to buy insurance against the Government defaulting on its debt payments is close to 1% on the principal amount of the Treasury bond being insured. The cost of Treasury default insurance is at its highest level since 2011, when a previous debt ceiling impasse led S&P to downgrade the Government’s debt rating from triple-A to AA+.
Another risk the market is ignoring is the escalation of the de facto war between the U.S. and Russia being fought in Ukraine. The U.S. has rejected Russia and China’s call for peace talks. By all indications this conflict could take a turn for the worse, the potential of which is not remotely priced into the stock market.
And the economy is in much worse shape than indicated by some of the economic reports – particularly the major reports conjured up by the Government. A prime example is the employment report, which is statistically manipulated to show a much higher rate of employment than reality. As an example, the report for January purported the economy added 517k jobs, comprised of 894k new jobs less 377k jobs lost. However, 810k jobs were created using a statistical gimmick the BLS refers to as “population control effect:”
The “population controls” are statistical hocus pocus that uses the latest decennial population survey and adds an estimate of births and deaths and estimates of net international migration. It’s basically a statistical sausage grinder fed with dubious statistical ingredients to produce a highly unreliable statistical estimate of new jobs created. Per the graphic above, the “population control effect” manufactured 810k new jobs. We already know (as detailed in a prior issue of SSJ) that most of the jobs created since March have been part-time and most of those part-time jobs are people working multiple part-time jobs. I literally cringe when I hear “experts” like Jerome Powell say that the labor market is strong…
Nevertheless, not only is the economy much weaker than is reflected by some economic reports like the employment report but it is starting to look like the rate of inflation is heating up again, as some of the price measurement metrics are trending higher again and energy prices are starting to rekindle, led by the price of gasoline futures which are up 32% since mid-December. Additionally, Wall Street 2023 corporate earnings estimates have been trending lower and are expected to be cut further in the coming months. While P/E ratios on stocks have fallen over the last year, if earnings head south, P/E ratios will head south, which means stock prices head south.
In another indication of economic stress and soaring costs, General Motors is offering voluntary buyouts to a majority of its 58,000 salaried workers in an effort to cut $2 billion in structural costs over the next two years. It is encouraging as many as possible to take it. I would bet those who don’t will be forced to “retire” at some point in the future. This to me is a “realignment” of costs in response to the expectations of higher manufacturing costs and lower sales volume over the next couple of years.
Finally, the collapse of Silicon Valley Bank (SIVB – $0.00) may be a signal that a financial system melt-down is beginning. But SIVB is not the first indicator. Credit Suisse has been on death watch for several months. FTX blew up and appears to have taken down Silvergate Capital with it. And now SIVB has been taken into receivership by the FDIC. How does anything go bankrupt? Slowly then suddenly – this shows just how inefficient the NYSE is in terms of discounting risks – largely because of stupid retail money and hedge fund/CTA algo trading programs. It was known by those who bother to take the time to analyze fundamentals that SVB was a ticking time-bomb of asset/liability mismatch – a socially correct way to say that SVB was egregiously mismanaged:
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