4 CommentsBailouts, Banking, Bond Market, Debt Ceiling, Government Statistics, Interest Rates, Monetary Policy

Andy Sutton / Graham Mehl

One of the biggest problems with a lack of transparency is that, especially during times of panic, fear spreads like a contagion. This past week saw multiple banks get into ‘trouble’. This ‘trouble’ was diagnosed by looking at share prices instead of actually looking for the real symptoms.

Sadly, there is so little transparency in the Great Financial Crisis – rebooted – that it has become extremely difficult to figure out who has the most exposure, so the entire financial sector is getting creamed. A look at regional banking stocks produces a serious case of deja vu. The charts are almost identical. Does this mean that every single regional bank is overexposed? Not likely. Today we’ll discuss the actual cause of the recent troubles and forget about stock prices, charts, and the mainstream financial press for a while.

Bank Failures

As mentioned above, the entire commercial banking sector has been hammered from a market capitalization point of view. However, we have to point out strenuously that (especially now) stock prices do NOT necessarily reflect the health of banks. From a fundamental standpoint, every money center bank is already upside down, by definition. The same goes for the regionals as well. Why? Because they’re all leveraged. They’ve borrowed insane multiples against their Tier 1 capital. Again. This is what triggered the 2008 crash. Their bond portfolios were killed by the not-so-USFed’s interest rate hikes. Given that commercial banks own the fed – yes they do – it’s a curious situation. This bit of Kabuki Theater is likely going to end in the US going to a central bank digital currency (CBDC). FedNow, and other pilots have already been run.

Furthering the mess, several mainstream media outlets are now spreading the ‘news’ that the US may suspend cash withdrawals from banks. Of course when people read this there will be some kind of a mad dash to the banks to withdraw cash, therefore causing the cessation of withdrawals.

A bit of background on the money supply is in order. Most of the US Dollar supply is already digital. Not in the sense of a CDBC, but these dollars don’t exist in the form of cash. They make rounds through the economy, never being withdrawn. Roughly $800 billion is in cash and coin. The total money supply is no longer supplied by ‘official’ sources, but it can be reconstructed and it’s north of $25 trillion. Our point is that only a very small portion exists in cash. Bank deposits shrank by nearly a trillion dollars just in March. There is still plenty of cash available, so where did it go? We know precious metals dealers are getting hammered with orders. Where else did it go? Cryptocurrencies got some of it. Most of the dollars that moved out of bank deposits were digital. Thanks to the two month window in getting actual numbers we won’t have a clear picture until later this month or early June.

Points to Ponder

Be careful going into weekends. Even a cursory look back at the 2008 crisis demonstrates that most of the carnage happens on weekends for the simple reason that it gives the FDIC, etc. the weekend to clean the mess up before the markets open Monday. Midweek failures are extremely rare. That said, keep a close eye on any securities you may hold. We will not give specific advice here, other than to exercise caution, especially on Friday afternoons.

Don’t run the banks. If we (and many others) are correct, it will make matters worse and honestly, if we go to a CBDC that cash will likely be worthless. At minimum it’ll be recalled if you want to exchange it for the new token.

Deleverage. Now. Get out of debt if you can. We realize that this economy with roaring inflation has put so many marginal income households into the red. If you’re fortunate enough to have the resources to get out from under, do so. The money supply charts over the past 2 months have shown a modest deflationary (not a typo) trend. This is what put farms into foreclosure during the Depression. There wasn’t enough money for debt service. We could start seeing that here fairly soon if the trend continues. Again, we’re running two months in arrears on the data as mentioned above.

Leverage is what got the banks in trouble and it will do the same to individuals.

Until next time, stay well and well-informed,

Andy / Graham

4 comments

  1. Monte

    Last week I heard the FED was going to initiate reducing the money supply. How would they do that? Take it our of our checking and savings accounts?

    • Andy Sutton

      The last update has some charts that we’ve been keeping an eye on and – at least according to the data – they’ve been deflating marginally for a few months. The easiest and most direct way is to sell some of the $9ish trillion worth of junk assets they bought to bailout the banks between 2008 and the present. We would see that in terms of a credit crunch as banks would have less ‘capital’ to issue loans against. There have been whispers of that happening now as well. Keep an eye on the blog, we’ll be doing updates whenever there is new information available – and I owe you a LONG overdue phone call!

      • Monte

        Thanks – and yes – I have plenty to talk about. Foremost is my ordination July 22 – watch for that invite in a week or so.
        Second -there are two or three nights I will be in Clinton county coming up if you feel like a shorter road trip.
        May 14, May 15, June 23 – June 24 (morning)
        And glad to see you are still on your mission. So many of us need education on these financial matters.
        >>>Pastor Monte

    • Andy Sutton

      They’ve been doing this since late February – the data runs 2 months in arrears. The easiest way for them to do it is to sell the garbage ‘assets’ they’ve been buying from distressed banks. That would draw cash from the system, but who wants the junk ‘assets’? Hmm, three bank failures this spring – due to junk bonds? Coincidence? I’ll let people decide. The other way they can pull money from the system is to simply withdraw it from member banks. The first thing they’d pull is cash. That gets them $800 billion in deflation, but they’d have to pull all the cash. A trillion dollars left the banking system in March. Where did it go? Just pointing out these isolated occurrences for the purposes of helping people connect some dots.

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