🎶Banks On the Run🎶(A Run on The Banks?)🎶
Sunday, 04/23/2023, 10 pm
A few weeks ago (March 10th and 12th) The US saw its second and third largest bank failures in history (Silicon Valley Bank-$209B, and Signature Bank-$110B), and recently the treasury secretary said that all was well, and that the economy is doing well. The depositors at these two banks who had accounts with more than the $250,000 FDIC insurance limit were all bailed out and made whole…but these funds came from an account all the banks have to put money into—the Deposit Insurance Fund—”so it wasn’t really the government bailing these banks out”.
But the FDIC’s Deposit Insurance Fund only has approx. $128 billion in it, and is trying to cover about 8,200 banks with about $9 trillion in assets. As long as everyone believes that that one and a half percent of cash will actually cover all the banks that could have problems, then we should be able to move forward. Indeed, no less a financial icon than Warren Buffett came out last week and said that no one will lose a penny in an insured bank account. The big question is, will uninsured depositors of banks that fail in the future also receive 100% bailout like these first two banks, or were these first two banks’ depositors a bit lucky?
Credit Suisse and Deutsche Bank
Across the pond, there is trouble in big banks also, with these two names in the lead. The Swiss government has pledged $120B to help out Credit Suisse with the forced merger with UBS, but skeptics point out that these forced mergers often don’t work out to well for the shareholders. Deutsche Bank received a $150 million fine in July of 2020 from the New York Department of Financial Services for its Jeffrey Epstein ties along with a separate failure to detect money laundering from two European banks it was working closely with. The Federal Reserve has also warned Deutsche Bank multiple times that its methods of preventing money laundering in the U.S. are insufficient.
The global financial system is closely watching Deutsche Bank’s situation, as its failure could have far-reaching consequences. Regulators and policymakers are keeping a close eye on the institution to prevent a potential worldwide crisis.
The Next Shoe to Drop (I Mean Anvil-The Next Anvil to Drop)
The trend toward working from home, or remotely, was well under way for a number of years before the covid crisis hit. But during that rough 24-36 month period, we really learned just how productive and efficient employees can be without going in to the office every day. Today, the problem is that we have many large office buildings across the country with terribly low occupancy rates. Also, as more leases come due over time, more tenants are going to demand concessions, or threaten to move nearby where they are being offered a better deal. Even more importantly, there is approx.. a $1.5T wall of commercial real estate ( CRE) debt coming due before the end of 2025. If you are struggling now, or can’t pay your note now, and your rental income is going to decline for a while, which bank is going to roll over your note, or give you a reasonable refinance?
For at least the last 50 years, Class A CRE was considered an attractive asset for banks to hold. That will not be the case going forward. If the banks are in trouble now, how will they survive the massive problems in CRE that are about to hit? They will not. There will be more bank failures and more bail outs. Where will the FDIC get the money from once they run through their whopping 1-2% coverage? They will have to get it from the government, who will need to simply print it.
Or perhaps there will be bank runs and insured depositors may need to wait through a “bank holiday” during which they cannot get their funds out ( or maybe not even cash from the ATMs). Perhaps the uninsured depositors will face a “bail in,” in which the bank simply takes their uninsured funds to save the bank. What’s that you say? They can take my money?! Why yes, they can! From Investopedia:
Are Bank Bail-Ins Legal In the United States?
Bank bail-ins are legal in the United States under the Dodd-Frank Wall Street Reform and Consumer Act. The federal government will no longer inject taxpayer dollars to prevent big bank failure. Instead, banks now have the authority to use debt capital as equity to avoid failure. This includes capital from unsecured creditors, common and preferred shareholders, bondholders, and depositors whose account balances exceed the FDIC-insured limit of $250,000.
If we are already heading into a global recession, or worse, then the tsunami of bank problems related to CRE is likely to make that recession deeper or longer. Keep in mind that we are also going to see a continuation of countless store closings across the country as we still have way too much retail real estate, and the trend of consumers no longer actually going to these brick-and-mortar locations is still growing. The banks will get walloped on this front too, and unemployment will rise quickly.
The temptation on the part of the Federal Reserve to start cutting rates and printing money (Quantitative Easing-to stimulate the economy and consumers) will be very strong if or as the stock market and/or real estate markets start crashing. If the Fed/gov’t starts printing money at this stage (when we are nearly $32 trillion in debt), inflation will become much more of a problem.
What Should You Do at This Point?
If you have not already done so, you need to get some money (5-10% of your overall liquid asset base, at the least) OUT OF THE DOLLAR, and into gold ($1,993/ounce) and silver ($25/ounce) and other non-dollar inflation hedges such as Bitcoin ($27,400), Litecoin ($86), Theta ($0.99), natural gas, timber, farmland, fine art, and other commodities. We can help you with all of this. We are particularly bullish on silver here at roughly $24-25 per ounce, and believe it may offer explosive upside over the next few years. You can (and should) own physical silver in your IRA or ROTH IRA, before you own paper silver or paper gold in these accounts. While we are not yet suggesting that we are going to see a hyperinflation here in the US (hyperinflation is generally defined as a period in which prices are rising by 50% or more in a month), we are starting to think that may be possible if the global trend of countries no longer using the US dollar for their oil and other large transactions continues to accelerate. In the meantime, make sure you have some significant cash (small denomination—nobody likes $100s in a crisis) at home, as well as some significant holdings of physical silver.