So the Federal Reserve DF raised Interest rates by another 25 basis Points and we are now at 4.75 percent And this is going to put more pressure On an economy that's cracking and it's Going to be more pain ahead for the Markets and I wanted to recap the Disaster that happened at 4.5 percent Fat funds we had the collapse of svb Signature Bank failing and the Takeover Of Credit Suisse and all that chaos Happened just within two weeks but I Have more bad news the Federal Reserve Likely isn't done with the rate hikes Just yet because they have to fight Inflation which has become sticky Now Call inflation which strips out food and Energy is still hovering well above 6.6 Percent which tells us that inflation Expectations are still dangerously high And traditionally you need a fat fast to Go above the inflation rate which means 4.75 percent isn't nearly enough to Fight higher prices if we look at the Fomc's latest rate hike targets the Majority of the Federal Reserve is Banking on rates to hit anywhere from 5 To 5.5 percent and this isn't good news Because although power High creates by Quarter percentage point he has made one Thing clear unless there's a Catastrophic economic collapse there Will be no pivot this year according to Power unless there's some extraordinary
Event the FED is not going to cut Interest rates this year it is not Within their Baseline expectation so Understand this for the next nine months We could see interest rates either stay High at 4.75 percent or even go higher Towards five and a half percent there's Going to be more pressure on the economy And the banking problem isn't going to Stop the FED because they have it Settled they have a plan there will be More bailouts coming what they want is a Control demolition of the economy Guys Without improving the big Banks and I Need to repeat myself if we look at what Power and Yellen is doing you quickly Understand their agenda the rest of the Economy can burn but the banks must not In upload because if Wall Street topples Over the entire Financial system is Finished the entire house of cards will Come crumbling down so it's going to be Paying for Main Street and bailouts for Wall Street manufacturing jobs can go to Hell Tech layoffs can happen even Walmart can fire workers but as long as The banks don't totally collapse those Are acceptable losses and I know it's Hard to swallow but we need to Understand why banks are essentially a Protected class today why even the small Ones are becoming too big to fail Because if they won then Janet Yellen Wouldn't have built out all depositors
Including the uninsured if we look at The largest U.S bank failure since 2008 We can see something terrifying apart From Washington Mutual svb and Signature Bank had the most assets sgb had 200 Billion box signature had a hundred Billion dollars but what's really Striking is their average ratios which Means how much Capital they have versus Their assets and the higher the number The same safer the bank is now svb and Signature had leveraged ratios of eight To nine percent which means they had Nine dollars in capital for every 100 in Assets that is much higher than the Other bank failures in history and this Tells us how free job the financial System is today that even with a bigger Buffer of assets compared to the 08 Banks they still collapse but the Picture gets worse when we consider the Magnitude of the crash these two bank Failures were almost as large as the 25 Banks that collapsed in whole Aid so if Another financial crisis style implosion Happens it will be in a magnitude of Trillions of dollars and this is what Power and Yellen are trying to avoid They are trying to calm down the Positors which is the first line of Defense if the man on the street pulls Their money away from the banks Especially the Regionals will fall in a Hurry now Yellen she just revealed her
Hand which tells us that she will bail Out the depositors if things get bad Enough even if it's a a smaller bag she Said similar actions could be warranted In smaller institutions suffer deposit Runs that pose the risk of contagion and Because she will be the one defining What the contagion is a mass bailout is All but guaranteed and this is just on The treasury side yellow is officially Santa Claus to bank depositors she is Feeding into a daily moral hazard that Will continue well after this recession And on the Federal Reserve side we need To truly understand what they are doing Today power is basically fighting Inflation while preventing the banks From toppling over is as simple as that He's hiking rates up and doing QT to Bring inflation down through demand Destruction and we know this strategy by Now but on the other hand Paul is also Providing two channels of banks to Access money to fight the liquidity Crisis then that is the discount window Which is basically borrowing money from Loan sharks at a crazy five percent Interest rates and that is expensive Money it's only a 90 day Lord and the Other is the emergency backstop the bank Term funding program that gives loans at Fed funds plus 10 basis points for one Year yes the program takes in all those Toxic assets at par value by the Banks
They have to hold on to that cash they Can't really spend it around and that is The reality that we need to understand This isn't a QE of 08 or 2020 yes it is The bailout you are providing liquidity To the banks you are saving them but you Are not really injecting Capital into The Border economy and this is important Because if this is QE then we will see The money work its way into the broader Economy and the markets are in for Sustained rally plus inflation will also Continue to rise now through QE comes With the Federal Reserve either gives Stimulus checks or buys up tons of bonds In the open market to the Press interest Rates and that is a direct effect on Inflation but this is not happening yet So what does this mean it means the Overall environment is still contract Attracting the economy is still getting Clobbered and only the banks are getting Special treatment they are getting a Bailout in the form of access to Liquidity and that's why we saw the Banks borrow 164 billion from the two Backstops 110 from the discount window And 54 billion from the emergency term Funding and this is capital that the Banks are clutching tight because they Are terrified of the bank run they can't Just issue loans on those or throw them Into bonds because depositors can always Come knocking for their money just look
At First Republic share price yes Literally crash down to Hell losing over 90 percent of its value this crash is Already affecting investors of the bank All over the world we have Sweden's Biggest pension fund eating a 730 Million loss after selling all their Shares in First Republic so just imagine If more Bank runs happen across the United States especially the Regionals We will have more Pension funds Imploding around the world oh and this Is why Powell created all those Backstops to prevent further Bank runs From taking down Wall Street it is a Bailout but this isn't a traditional QE That we all know and this means that the Market still has more room to fall Because the environment is still in Quantitative tightening mode we are Still in QT the banks are not getting Cheap money to lend out to The Wider Economy but it is not good news this is Going to build up the ultimate moral Hazard that will Boomerang back to an Even bigger crisis down the road now the Federal Reserve they keep making falston Packs they love to make deals with the Devil to get the economy out of the Woods in the short term and the current Situation we are in is all because the Artificially low interest rate Environment the fat created especially In 08 and 2020 they couldn't let the
Market decide on a true level of Interest rates power had to play Superman he printed up a bunch of money And went to buy up all those bonds that Nobody wanted and by suppressing Interest rates he created a big moral Hazard for the banks and that's why we At svb a bank that's supposed to hold Deposits making risky bets on Long dated Bonds they bought a bunch of 10-year Treasuries thinking that rates were Forever stay low because the Federal Reserve they can't afford anything above Zero or one percent right but as always The devil always comes to collect you Can't fight Market forever so let's talk About the moral hazard building this Time this time it's going to be very Interesting the treasury isn't going to Bail out investors or owners in the Event of any bank failure this is going To be a depositor bailout where deposits Insured or not will likely be safe Yellen has trapped herself with the svb Bailout if she doesn't save the Regionals this will become a bailout of The VC Community saving the rich and not The man on the street even the head of Standard Chartered Bank knows that SVP Deposit guarantee is a moral hazard that The treasury can't escape from if more Banks fail especially the Regionals two Things are likely to happen the first is Depositors getting back all their money
Every single Cent insured or not and This is going to slow the effects of Tightening because people still have Money to spend there's no further demand Destruction and the second is the start Of more Riverboat gambling on Wall Street if you are ensuring all Bank Deposits and giving an unlimited Liquidity backstop to the banks why is There a need for them to play it safe if I was the bank I know the worst case Scenario is borrowing more money from The fed and near fat funds rate and There's no need to hold excess money Outside of the capital requirements I'll Squeeze every single dollar that I have And trade to Investments whether that is Writing more loans or buying more bonds And if anything goes wrong I'll just use The emergency term funding to save Myself at least in the short term it Might not be a bailout for the entire Bank but issue as hell is a bailout for My balance sheet and I think we all see Where this dark Road will end it's going To lead to yet another financial crisis After this one maybe five years down the Road or 10 years but it's going to come This show isn't over yet but let's talk About the immediate term we now have a Situation of rising interest rates plus Banks are still fighting off the Liquidity crisis and this means money is Getting locked up in a system it's more
Expensive to borrow money today and Banks are now terrified to write loans Because a bank run is always lurking Around the corner and if this credit Crunch evolves into a credit crisis the Economy is headed towards a bad Recession and JP Morgan believes that we Already passed the point of no return And that the recession is coming but What's interesting is how they describe The causes for the crash a soft Landing Now looks unlikely with the airplane in The tailspin which means a lack of Market confidence and the engine is About to turn off which means Bank Landing and here's the important part Even if Central Bankers successfully Contain the contagion credit conditions Look set to tighten more rapidly because Of pressure for both the markets and Regulators and this tells us that a Daily credit crisis is building and that The banks are about to reduce their Lending which could literally freeze up The economy and we have to understand The psychology behind the credit crisis Why are banks not keen on lending money To businesses and consumers is because The incentives are just not there if you Are Bank you know you need to be Extremely liquid and flush with capital Today you don't want to be the next svb Or First Republic if depositors come Knocking you need to pay them back and
That means you can't load out money fine To the Future five or ten years down the Road as the same rate as before you Could need money as soon as next week or Even tomorrow if a bank run happens and This is why we saw a big uptake in a Reverse repo Market with big Institutions piling almost 200 billion Dollars more into the FED because it Makes total Sans is the best place to Secure your Capital if you are Bank why Should I take the duration risk of Loaning money to consumers or companies When I can loan money to the Federal Reserve at a 4.8 percent yield I know The fact can never default because they Can just print up a bunch of money but More importantly I can get back my money Tomorrow it's an overnight repo so my Investment there is as good as cash to Help with lending money to the rest of The economy I have to protect against a Bank run and the Federal Reserve knows That the credit crunch is coming soon we Have Powell saying the banking crisis is Likely to result in tighter credit Conditions for households and businesses Which could in turn affect economic Outcomes and we can see Bank credit Growth already slowing it is dropping Below five percent and that is serious Business every time it drops below five Percent it kind of foreshadows a Recession and this credit crunch is also
Affecting companies they are losing Access to credit investors are not Lending money either you can see a huge Drop in corporate bond sales in March This year at only 53 billion dollars and That is almost five times lower than Last year now investors they see no Point in corporate debt why should I Risk it when I can get well above four Percent in U.S treasuries without any Default risk and when companies can't Borrow money they are going to shrink Which means more layoffs are gonna come Now the Federal Reserve they are trying To engineer a control demolition power Needs to destroy demand further and That's why he's still hiking rates up But he also can't afford to let the Entire Financial system crash and that's Why we have all these depositor bailouts For the uninsured and liquidity Lifelines for the big Banks and if this Was truly a free market none of these Boca schemes would exist and this is Just going to fit into a bigger model Hazard down the road and a common credit Crisis and we need to monitor the last Bright spot left in the credit markets And that is the mortgage lending rate Now U.S mortgage rates have fallen to a Five-week low under 6.5 percent and this Is interesting because Banks somehow are Still writing loans to home buyers but If another banking Panic strikes we
Could see mortgage rates Spike up Banks Could very well start selling their Mortgage-backed Securities to raise cash And this could drive housing rates Higher as well and here's the big danger If a full-blown credit crisis happens we Could go back into real quantitative Easing the Federal Reserve could start Buying bonds and lowering the FED funds Once again then we'll be back in a Zombie Market rally filled by cheap Money all over again but let me know What you think in the comments below is This banking crisis over or are things Only gonna get worse 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
