More Bank Runs Are Coming | The Fed Has Screwed The Economy

The banking crisis isn't over and we Could see another wave of bang runs Happening and this could get really Brutal so we all know what field the First wave of Bank runs in svb and Signature it was because of a liquidity Panic depositors were afraid they Couldn't get their deposits back because The banks might be insolvent and Remember the collapse of svb happen Within a dramatic 48-hour period in a Classic run on the bank it was a crisis Of confidence but now experts are saying Another daily Bank Run might be Happening we have a strategies from Barclays giving us this ominous warning Telling us that round two of bang runs Might already be here and according to Him another wave of deposit outflows is Coming for the banking system customers Will wake up to the existence of higher Interest rates available to them in Money Market funds and this run might be More daily because the deposit outflows Are now driven by pure pragmatism it Isn't some fear induced panic when the U.S treasury or the FED comes in Swooping in and guaranteeing all those Deposits then the problem lies in People's desire to get a higher interest Rate to fight inflation is as simple as That and because people are now thinking Rationally this flight away from Deposits could continue on for months

And if you look at the interest rates on Checking accounts which is liquid money You earn anywhere from 1.5 to 2 today Even savings accounts are at best only Four percent and they often come with Deposit minimums or withdrawal limits But if we look at the bond yields on the U.S treasuries you can earn almost five Percent yield especially if you Target Treasuries on a short end like the one Or three month Bill and that is what the Majority of money market funds invest in Just take a look at the yield curve Today use on short-term bonds are Elevated making money markets extremely Attractive plus treasuries are also Technically risk-free sure the US Government Can inflate the debt away but Your capital is more or less secure but If you hold more than 250 Grand in a Bank it could vanish if they become Insolvent so you can see the incentives For depositors to escape from Traditional bank accounts into money Market funds or bonds it just makes Sense and if you don't know what a money Market fund is I'll quickly go through It and let's just use the Vanguard money Market fund as an example and you can See that the yield here is around 4.8 Percent Which is higher than any Checking or savings account in the bank And if you take a look at the funds Holdings you can see they hold a ton of

Short-term bonds now the Vanguard fund Holds the majority of its debt in Treasury repos which are paying an Incredible 4.5 percent yield and above In fact the fund has over 118 billion Dollars in repos sitting in the Federal Reserve itself and because it is an Overnight rate you can get the money out Of the system in a hurry and the rest of The mixture of government agency bonds And U.S treasury bills and we have said That before it is virtually risk free Because Uncle Sam can simply print the Money to pay back the bondholders but Notice the average majority of the debt Holdings just 13 days and this is a Situation that the Federal Reserve has Created thanks to their rate hikes and Remember guys the FED has pushed Interest rates from near zero to nearly Five percent in just 12 months this is One of the fastest hiking Cycles in Modern history these Fast and Furious Rate hikes has essentially broken the Financial system especially the banks And the issue here is that the banks Have locked themselves into long-term Bonds way back when rates were low to Chase you right and this was how svb got Into a world of trouble they plowed all Their money to long-term treasuries to Get a better return and a lot of banks Did it and that's why they have trouble Offering better rate today because other

Than the higher operating costs thanks To inflation a lot of their capital is Tied up in those long dated bonds so how Bad is this deposit fly into money Market funds gonna be and according to The financial times we are seeing record Inflows into money market funds of Nearly 400 billion dollars that is a lot Of money leaving the deposits and other Assets so just imagine if the outflows Continue to rise to 2020 levels what if A trillion or two starts flowing into Money market funds how much Devastation That will rack on the banking system What the FED has done is to create a Perfect storm for credit crunch they set Things up but it doesn't make sense for Investors to leave their deposits in a Bank or even invest in the stock market Why bother when you can get a risk-free Rate of nearly five percent and guess What Goldman Sachs believes a lot more Money will flow to money market funds They're projecting an epic one trillion Dollar dump out of stocks into money Markets and this could mean additional Pressure on Equity prices to drop Further and this headline after headline Of investors plowing money into these Funds for third straight week and this Tells us that another bank run might be Coming or maybe it's already here Especially if the Federal Reserve keeps Hiking rates up and according to Barclay

Is we are now in a season where the Spread between Bank deposits and a Fed Funds rate has spiked up and every time The Federal Reserve aggressively hikes Rates the incentive for bang run Rises And we can see that today we are in the Zone where it pays to leave deposits and Put funds into a money market the spread Is almost three percent and if you're The average Joe you know that real Inflation is way above six percent but The bank only gives you one or two Percent at best if you can get either Nearly five percent from a money market Fund or treasury bond the answer is very Obvious who you're going to fly to and Because now depositors are pulling their Money out of the banks Wall Street is Terrified to land they are sitting on a Mountain of unrealized losses and to Prevent an implosion they are going to Tighten their Landing standards and even Power is preempting a credit crunch Which is likely gonna come he mentioned How the backing chaos is likely to Result in tighter credit conditions for Households and businesses which would in Turn affect economic outcomes and Remember the depositors you and me we Are the cheapest source of funding for The banks they could pay us peanuts and Leverage up for higher yields but now This is reversing they have to play it Safe because a bank run is always around

The corner and where credit flows turn Negative real GDP growth also takes a Plunge back in 2008 when credit dropped By seven percent the economy also shrank By three percent now it's not a tight Correlation but it certainly shows the Disturbing trend of how dependent the Economy is when it comes to credit if Money really stops flowing we are in Trouble and the ones at biggest risks Are the regional Banks and that's Because a bigger percentage of their Liabilities belongs to deposits which Makes them very vulnerable to a bang run And if you look at JP Morgan's balance Sheet we can see they have 2.1 trillion Dollars in deposits which makes up only 69 of their total liabilities but if you Look at the balance sheet of First Republic Bank back in 2021 the stock Story is very different their total Deposits around 156 billion dollars While their total liabilities are just 165 billion and that means 94 of their Liabilities comes from customer deposits Do you see the big difference here the Big banks are much more Diversified and If a bank run happens The Regionals they Are in a tougher spot than the big Banks Sure there are calls for the smaller Banks to raise their deposit rates but That is very tough to do especially After the svb collapse they are in a Catch-22 because if they don't raise

Rates depositors are going to rush to Those too big to fail Banks right but It's quite tough to do so as well Because stricter regulations might be Coming real soon and their costs are Going to head up because now you have to Beef up their internal compliance they Have to beef up their risk management Teams and those cost a lot of money and Even if they do raise deposit rates the Safest place for them to store their Customers money will be the reverse repo Facility that pays for 0.8 percent the FED has created this weird feedback loop That no one can escape from if you're a Depositor the highest yield comes from Either money market funds that invest in Treasuries or U.S treasury bonds Directly they are risk-free the Government isn't going to run away and If you are Bank looking to compete for Depositor money the safest way you can Guarantee a return while staying liquid Is to park your money at the Federal Reserve as well this is why we are Seeing the reverse repo Spike up to Nearly 2.4 trillion dollars in assets Just look at a move up of over 300 Billion dollars and that happened in Just two weeks and this tells us all Types of Institutions the banks the Money markets they are all dumping Dr Cash into the Federal Reserve power has Created an incentive for cash to be

Sucked out of the system because of all These rate hikes this is as good as Another quantitative tightening so if The smaller regionals can't weather the Storm we're going to see more Consolidation in the sector and the big Banks will grow even bigger which means More more build outs more assistance From the U.S treasury and ultimately the Public will be left with the bill but Obviously this state of affairs can't Continue forever right or money will Completely leave the banks and hide in The vaults of the Federal Reserve and if The Regionals stop lending money the Economy is screwed according to Goldman The stress on the Regionals is going to Slow down the economy any Landing impact Is likely to be concentrated in a subset Of small and medium-sized Banks and Check out these statistics this is how Much smaller Regional Banks lend to the Communities 50 of commercial industrial Lending 60 of residential home lending And 80 of commercial real estate landing And just because a bigger Bank buys over Original doesn't mean they'll start Lending more money to the community Tomorrow so the only way to reverse this Situation is for the FED to drop rates They need to lower the fat funds rate to Push out all this cash in hiding back Into the economy right they need to get The banks eager to land to make a bigger

Profit and consumers happy to borrow Because now the overall rates are lower But they can only do this if inflation Comes back down so we are in a race for Time there's a lot of hidden pressure in The financial system that's building That's the threat of more treasury Positions imploding and God knows what Is on the books when it comes to all Those derivatives so hang tight because This banking crisis likely isn't over Yet but let me know what you think in The comments below will inflation come Down fast enough for the Federal Reserve To lower rates or will this credit Crunch evolve into a credit crisis and Take down the economy let me know in the Comments below stay safe be sure to Smash the like button and subscribe as We navigate through these crazy times