With all the craziness going on in the banking sector, it might seem funny to start with a bitcoin chart. Many people think of this as a liquidity gage, matching the breakout in the size of the Fed balance sheet below, means liquidity injection so risk assets should rise.
On the flip side, stocks usually tank after the fed reverses policy to easing when it is in response to a big recessionary event followed by large job losses – in other words, the reason these things are moving is important. Here’s what I’m thinking:
What’s going on with Crypto?
- 3 banks went down last weekend: Silvergate, then Silicon Valley Bank, then Signature Bank. All 3 were important to the infrastructure of cryptocurrencies. Signature, for example, held billions in deposits for Circle, which runs the 2nd largest US-Dollar stablecoin, USDC.
- These were targeted for their crypto activity. The takeover of Signature was questionable, and another bank called First Bank was bailed out by an organization of 11 big banks putting deposits there to offset their digital bank run.
- Bitcoin could be rising in value from entities moving money outside of the semi-banked stablecoins into the largest and safest non-banked tokens. Etherium similarly rose in value, but the rise in the myriad of other tokens such as XRP, LTC, SOL, LINK and so on were much more muted.
How about the $300 Billion increase in the Fed’s balance sheet?
- $143 Billion was allocated to holding companies that have taken over the recently failed banks. This is to allow depositors to immediately access their funds and move them elsewhere.
- $148 Billion was borrowed through the Fed’s “discount window” program. This is a record amount of money and many banks are tapping it to meet the needs of depositors. This is the same discount window which banks were said to fear in 2008 because it showed balance sheet weakness. The Fed extended much larger loans than they would usually allow to stem the bank runs.
- $12 Billion was borrowed using the Fed’s new Bank Term Funding Program, which allows banks to take government securities, such as a mortgage-backed security paying a 3% yield, and post them to the Federal Reserve to borrow 100% of the par value of the bond (more than it would be worth today with such rates over 6%) at a rate of OIS + 10bp which was recently 5%.
In short, we just went through the fastest rate-hiking cycle in history with rates going from zero to 4.5% in a year. This has caused massive losses in the current market values of long-term loans, bonds, and other securities. The business model of all banks is to borrow at short-term rates and lend at long-term rates, and they are all hit hard by these rate hikes and are all especially vulnerable to bank runs because of this.
After the chart called “Unrealized Gains (Losses) on Investment Securities” went viral around March 9th (I led last week’s blog post with this chart), an unprecedented digital run on banks began and the Federal Reserve took the opportunity to close out three struggling banks supporting a targeted sector while quickly moving to stem the damage through their programs.
While the Fed did protect the companies who held deposits in these banks by not removing their ability to conduct business, make payroll, etc., they did not bail out any of the bond holders or stock holders of those banks who will likely get next to nothing back. The exception was the organized deposits to save First Bank, which effectively bailed out all stakeholders. Still, they made an unusual exception to their FDIC insurance limits and they had to explain this to congress.
Here it gets worse, as Janet Yellen explained to a Senator from Oklahoma that this exception was made only because these banks were large enough to be systemically important, and that if his state’s savings and loans had a similar bank run then the businesses working with them would be wiped out. Even worse, they would pay for this increased insurance by charging more fees to all banks. If you want to here nobody special railing about this situation, look here: https://www.youtube.com/watch?v=Raavjoo-eao
As you can imagine, a record number of businesses have been moving the majority of their funds out of local banks and into large too-big-to-fail banks like Bank of America and JP Morgan Chase. A lot of the money borrowed from the Fed’s discount window was by small banks such as these which had to deal with these massive transfers of deposits.
Bank runs are one of the most deflationary events that can happen. The ECB is not concerned about this, as they just rose interest rates another 50bps last week while Credit Suisse looks to become the biggest casualty Europe has ever seen. The Fed is also more worried about inflation at the moment, and they plan to try direct measures to stem the banking crises, such as their new BTFP facility, while keeping rates high to stem future inflation.
So where does that leave us with the stock market?
We had the bullish Golden Cross in February as the 50DMA crossed above the 200DMA, then it looks like we re-tested the 200DMA successfully at first on 3/2 only to lose it on 3/9 and then re-test from the downside. While we closed below the 200DMA on 3/17, we are still very close to it so we haven’t broken down yet. That expanding structure from the 2/2 top is a strange one, not a bull flag.
A lot of the rallies we recently saw in things like tech and home builders was likely short covering as funds simply reduce leverage and reduce positions. Leverage is exceptionally dangerous at a time when banks might need to change the rules to tighten margin accounts and force hedge funds to sell – and of course hedge funds can see investor outflows too. Unfortunately I tried confirming this but the monthly margin data normally available from Finra stops on Jan 31, so all we can see is that bump higher matching the latest market high and nothing later. This is important because short covering is very different behavior than risk-on.
In the short term, I am inclined to think that the markets move higher from here and consolidate a bit more before we hit a major plunge (perhaps beginning of June?) This idea fits a Twitter thread done by @GameofTrades_ where he compared our current bear market with every market going back to 1969, showing that our current bear market is closest to the 1974 and 1969 markets where that happened. Also, Dereck Coatney, the professional Elliot Wave analyst I subscribe to, holds that view: https://dereckstrades.com/
So despite all the market craziness I actually purchased some stocks last week – mainly increasing my stake in EMX which is a unique mining royalty company I’d been waiting for a pullback on. If we do see another significant jump higher then I’ll re-sell a lot of those Uranium covered calls I recently bought to close and I might even try some 1-month SPY puts if the risk/reward is there … right now it just isn’t. If things seriously drop from here then my longer term “Hedges” should catch some gains from the downside, but my main goal is to accumulate mining stocks for the multi-year bull cycle I’m expecting there.
Here are my latest allocations:
- HEDGES (9.2%)
- TLT calls (7.1%)
- AAPL puts (0.8%)
- LEN puts (1.3%)
- PRECIOUS METALS (42.1%)
- AG (7.0%)
- EQX (5.1%)
- MTA (4.9%)
- SILV (4.7%)
- LGDTF (3.2%)
- SLVRF (3.2%)
- SAND (2.8%)
- MMNGF (2.2%)
- MGMLF (2.1%)
- SSVFF (1.6%)
- BKRRF (1.5%)
- RSNVF (1.5%)
- DSVSF (1.3%)
- HAMRF (1.1%)
- URANIUM (26.3%)
- CCJ shares w/ covered calls (3.8%)
- DNN shares (3.3%)
- DNN calls (1.1%)
- UEC (3.9%)
- UUUU (3.9%)
- BQSSF (3.9%)
- UROY (3.0%)
- EU (1.7%)
- LTBR w/ covered calls (1.7%)
- BATTERY METALS (11.8%)
- NOVRF (5.2%)
- SBSW (4.6%)
- EMX (3.1%)
- PGEZF (1.9%)
- CANNABIS (11.2%)
- AYRWF (0.6%)
- CCHWF (0.7%)
- CRLBF (1.3%)
- CURLF (1.6%)
- GTBIF (2.6%)
- TCNNF (1.5%)
- TRSSF (1.2%)
- VRNOF (1.7%)
- OTHER TRADES (5.1%)
- DOCN cloud computing, w/ covered calls (2.1%)
- XRP crypto token (3.0%)
- CASH (-8.8%)