Banking Failures & Massive Market Moves

Traders could be forgiven for having whiplash over the past week as we've seen a monumental shift in markets on both the macro level and specific (banking & crypto) markets.

The information contained here is for general information only. It should not be taken as constituting financial advice. Stormrake is not a financial adviser. You should consider seeking independent financial advice prior to making any personal investments.

A timeline of the major events

Below are the key events over the past days. The expected FED interest rate hike/cuts are included with each day to demonstrate the shift in expectations. (Courtesy zerohedge)

March 8th

Jerome Powell met with congress as part of the semiannual testimony on monetary policy. He commented that interest rates are "likely to be higher" than previously anticipated.
Markets react and price in a 80% chance of a 50pt interest rate hike
Crypto friendly bank Silvergate Announces "Voluntary Liquidation"
Silicon Valley Bank (SVB) sells ~ $21b USD worth of securities to strengthen its balance sheet.

March 9th

Silicon Valley Bank (SVB) projects a $1.8b USD loss in the first quarter. and its shares plunge 41%

March 10th

Users start withdrawing large amounts of funds from SVB based as speculation and fear quickly spreads within the interconnected tech sector. This became a bank run and forced the Californian regulator to take SVB into receivership. Silicon Valley Bank is the 16th largest bank in the US.

March 11th.

97% of deposits are above the $250k FDIC insured limit, and 40,000 companies that bank with SVB may not be able to make payroll on Monday.
Fears of massive bank contagion are rife, with runs starting in other regional banks.
Stable coin USDC drops from $1 as Circle reveals that $3.3 out of ~$40 billion of USDC reserves are at Silicon Valley Bank

March 12th

With much debate and panic, solutions are desperately sought prior to the start of business Monday.
In a joint statement, the FDIC, Treasury, and the Federal Reserve Bank, guarantee to protect all deposits at SVB.

March 13th

Signature Bank is closed by state regulators. Barney Frank, a Signature Bank board member and former congressman stated: “I think part of what happened was that regulators wanted to send a very strong anti-crypto message,” adding
“We became the poster boy because there was no insolvency based on the fundamentals.”
Crypto markets jump up in response to expectations on a pivot in the FED interest rates, as well as the possibility of further turmoil in the traditional banking system.

March 14th

Is this the Pivot?

Per the charts above, the rapid shift in the implied overnight rate & number of rate hikes/cuts suggests the weekend's drama might quickly put an end to dreams that Jerome Powell had of further rate hikes. It will at least ensure that rate cuts will occur sooner than previously anticipated.

But if the FED pivot happens too soon, we could see a rush to risk assets as inflation once again surges. Could the clamping down on crypto banking rails be an attempt to prevent the inevitable capital flight from traditional systems? Time will tell but many of us use this as an opportunity to buy the dips, per our last article which played out well for those that did.

Major Market Shock

Regional Banks are seeing immense stock pressure due to fear of contagion

Bond volatility is extreme, only surpassed by the Global Financial Crisis of 2008.

How did this happen and what comes next?

We are living through an unprecedented monetary experiment. Extreme changes in FED rates has triggered massive shifts in markets and prices, including your home and daily groceries.

If you have a mortgage and were lucky enough to fix the interest rate, then you have done well by betting that interest rates would rise higher. Many banks took the reverse bet, (such as Silicon Valley Bank), and without a FED pivot or assistance might find themselves in similar trouble.

https://www.fdic.gov/news/speeches/2023/spfeb2823.html

Faith in the US Banking System

It is too early to say if this is just a speed bump or the start of Armageddon for the US Banking system. Most likely, somewhere in between.

One quantitative measure of the risk in a sovereign default is the "Credit Default Swap" market. If you are unfamiliar with this market then it's worth investigating as it effectively prices in the chance of a government bond/currency default.

Notice that the market currently prices the US financial markets as being 3 times more likely to default than Germany.

If you've ever heard the term "Risk free rate" then you've been lied to. Sovereign currencies do have "risk" and this can be evaluated with the credit default swap rates.

It now costs $44.31 to insure $10,000 of 5 year United States treasury bonds. Or you can buy bitcoin.

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No Advice Warning

The information in this newsletter is general only. It should not be taken as constituting professional advice from the author - Stormrake PTY LTD.

Stormrake is not a financial adviser and does not provide financial product advice. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances. Stormrake is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by this newsletter.

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