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Banking Crisis Update

The safest place to keep savings is at a federally insured bank, the largest one you have access to. In most developed countries, the largest banks by market capitalization and revenue are deemed too big to fail, so in the event that such banks face more withdrawals than they can handle, they are almost certainly to be bailed out by one or more entities.

Small to mid-size community and regional banks in the States have had an exodus of over 1 trillion dollars in customer deposits since the blowup of Silicon Valley Bank about two weeks ago. People who have deposits totaling more than 250K per bank are rational to transfer excess funds to JP Morgan Chase, Bank of America, Citi, or Wells Fargo, all deemed systemically important banks.

Credit Suisse, suffering from massive losses and imminent bankruptcy, was bailed out via an emergency purchase by the Union Bank of Switzerland (UBS), facilitated by the Swiss Government and backstopped with a guarantee of 100 billion francs from the Swiss National Bank.

Looking at the GDP of Switzerland, it is rational to assume that the European Central Bank and the U.S. Central Bank were behind much of this guarantee of 100 billion francs, as failure of Credit Suisse would become the entire world's problem in short order due to counterparty risk.

For those who wish to have a direct sense of which banks are in trouble, this can be tracked to some degree by looking at the price of credit default swaps, which represent insurance that can be purchased to protect against a default on debt.

Credit default swaps are now quickly rising on Deutsche Bank, the largest bank in Germany. With well over a trillion euros in assets, failure of Deutsche Bank would also become the entire world's problem, so I expect an emergency bailout via a facilitated acquisition if needed to avoid outright bankruptcy.

Why is all of this happening?

In order to combat inflation that was created by excessive money printing, the U.S. Central Bank raised interest rates from near 0% to near 5% over the past year.

This led to long dated bonds crashing, as long bonds that are paying 1% interest are highly unattractive when money can be parked in money market accounts or U.S. T-bills generating 4 to 4.5%.

Due to the enormous wipeout in bond prices, many banks are sitting on eye-watering losses of depositor money that they thought would be safe sitting in long bonds.

The saying goes: he who panics first panics best - this is how bank runs happen, and in today's digital age where money can be transferred from a community bank to Bank of America with a few clicks on a laptop or phone, banks of all sizes can go bankrupt over a weekend.

As I've written about periodically over the past couple of years, basic math dictates that there are only two choices ahead for the U.S: declare bankruptcy or print trillions of USD while cutting interest rates.

U.S. Central Bank chairman Jerome Powell said this past week that his base case does not include interest rate cuts this year. He will have no choice but to do so, and do so quickly. If not, we will see more regional bank failures, a wave of bankruptcies in the commercial real estate market, and finally, governments on all levels failing to make payments on their debts.

They've already started printing hundreds of billions of dollars to prevent a systemic collapse of the global banking system and debt markets, but they're doing this in ways that most people outside of finance don't understand - thus far, the primary route has been through settling of daily swap lines with other central banks around the world, which amounts to printing and sending billions of USD to other central banks to keep the global credit markets solvent. Make no mistake about this: hundreds of billions will morph into multiple trillions of monopoly-like money entering the system in the coming months and years.

I continue to expect volatility in the short to medium term, but eventually, as it becomes clear that there is no path forward but to print trillions, the assets that are most likely to preserve and grow our purchasing power are the highest quality technology stocks and Bitcoin. For the short term, I believe it is prudent to keep a solid cash position. Thinking more long term, I want to be dollar cost averaging into tech and Bitcoin, balanced with more conservative assets including deep value stocks that Warren Buffet and Mohnish Pabrai tend to favour, and dividend paying utilities and quality energy companies. Demographics tell us that the world will need much more nuclear energy, not less, so it's rational to have some allocation to the uranium space.

With all investment and money management decisions, it's essential that everyone does their own research and takes into account personal circumstances, time horizon, risk tolerance, and goals. For those who don't regularly study finance, it is rational to consult with a professional financial expert, someone you trust with the well-being of your loved ones.


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