Posted May 24, 2023
By Jim Rickards
Hurricanes are a threat if you live in certain areas. Yet, hurricanes are reliably confined to a hurricane season that runs from June to November in the Northern Hemisphere.
Likewise, wildfires are a threat, but they’re usually confined to periods when dry conditions and high winds combine to make forests predictably combustible.
Put differently, the exact timing of some catastrophes may be unpredictable but they’re usually associated with certain seasons and conditions.
Right now, we’re in the heart of banking crisis season. Even worse, we could be on the brink of a financial crisis worse than 2008.
A global financial crisis is as big a threat to your net worth and well-being as any hurricane or wildfire. Here are some of the warning signs and factors investors and savers need to consider…
Tremors in Crypto-Land
Investors looked at the failure of Silicon Valley Bank on March 10 as the start of a new banking crisis. But a closer look reveals the crisis may have begun over a year earlier in November 2021. That’s when Bitcoin started an epic meltdown.
The price of Bitcoin fell 77.5% from November 2021 to November 2022, from roughly $69,000 per coin to $15,000 per coin.
You might say, “So, what?” if you don’t own any Bitcoin. The problem is that financial systems are densely connected even if the problems arise in crypto-land. One major failure leads to another until the wolf is at the door.
The Bitcoin collapse led to a series of related crashes.
In May 2022, the so-called stablecoin TerraUSD and the related Luna coin lost $40 billion in value. In June 2022, the crypto-exchange Celsius froze all account withdrawals. In June 2022, a crypto hedge fund called Three Arrows was ordered to liquidate. In July 2022, another crypto exchange named Voyager faced a run on the bank and filed for bankruptcy.
In November 2022, came the biggest crypto meltdown of all. FTX filed for bankruptcy. It may be the largest fraud in history. Liquidators and auditors are still sorting out the web of lies and fraudulent account transfers. At least $5 billion is missing and the final total may be much more.
The crypto meltdown continues to this day. A crypto-exchange named Genesis filed for bankruptcy as recently as January 2023. In March, another crypto stablecoin called USDC fell in value well below $1.00 per coin. That’s a disaster because the whole idea of a stablecoin is that the value of $1.00 per coin is maintained at all times.
Crypto Contagion Spreads to Mainstream Banking System
Finally, the virus of financial contagion jumped from the crypto world to the world of mainstream banking.
The carrier was Silvergate Bank, which announced its insolvency on March 9.
Silvergate is a regulated bank, FDIC insured, and a member of the Federal Reserve System. It is also a crypto-bank that made loans against crypto-currencies and offered to buy or sell crypto-currencies for dollars.
Now the liquidity virus was infecting the U.S. banking system. From there, the dominos continued to fall. Here’s a brief chronology of the mainstream banking failures since early March:
March 9: Silvergate Bank announces insolvency, shuts-down.
March 10: Silicon Valley Bank put in receivership by FDIC.
March 12: Signature Bank placed in receivership by FDIC.
March 19: UBS takes over Credit Suisse in a shotgun wedding.
May 1: First Republic placed in receivership by FDIC.
The Current Incoherence of Fed Policy
In response to this cascade of failures, regulators took extraordinary and unprecedented actions. The Federal Reserve opened a facility that makes loans against U.S. Treasury securities delivered by member banks as collateral. What’s unusual is that the loans are equal to 100% of the par value of the securities even if the market value is only 80% of the par value. The Fed is lending more than the securities are worth.
This facility could result in a trillion dollars or more of newly printed money to make the loans. This money printing spree comes at a time when the Fed claims to be reducing the money supply as part of its inflation-fighting. So, the Fed is tightening and easing at the same time.
That’s the kind of public policy incoherence that results from free-form intervention in the markets.
The FDIC is offering potentially to guarantee every deposit in the banking system without regard to the statutory limit of $250,000 per deposit. They justify this using a “systemic risk” exception to the insurance limit.
But systemic risk is undefined and every bank in the system poses a potential systemic risk if a run on the bank creates panic leading to contagion and runs on other banks.
The FDIC insurance fund is also running low because of the $40 billion or more of claims paid out due to the failures to date. Treasury Secretary Janet Yellen has destroyed confidence in the FDIC system by blurring the limits on insurance offered and depleting the insurance fund. Again, heavy-handed intervention has its costs in terms of uncertainty and lost confidence.
Lag Time for Crisis
It’s also critical for everyday Americans to realize that there are long lags between the time a crisis actually begins and the time it reaches an acute stage that comes to everyone’s attention.
For example, the 2008 global financial crisis hit an acute stage on September 15, 2008 when Lehman Brothers filed for bankruptcy. But it began 18 months earlier in the spring of 2007 when HSBC warned about losses on subprime mortgages.
The Russia-LTCM crisis reached an acute stage in September 1998, but it began 15 months earlier in June 1997 when Thailand devalued its currency against the dollar.
In six major financial crises between 1974 and 2010, the average time between the origin of the crisis and the acute stage was 13.5 months, and the shortest time was 6 months. If we use those benchmarks and date the crisis from March 2023, it could become acute by this September.
If we use the 13.5-month average and date the crisis from November 2021 (Bitcoin crash), then we’re already past due.
Under any historic method, a major crisis is imminent.
The System Is Blinking Red
There are always warning signs of a crisis, which are mostly ignored. The warning signs today include a dollar shortage, high-quality collateral shortages to support derivatives (made worse by the debt ceiling, which prevents net new issuance of Treasury bills), inverted Treasury yield curves, negative swap spreads, auctioned Treasury bills yielding less than the Fed overnight reverse repo facility and the flight of cash from banks to Treasury bills and money market funds.
Admittedly these indicators are highly technical and I’m not going to get into them here. Still, they are publicly available and the extreme conditions they show were last seen just ahead of the 2008 meltdown. The watchlist of banks waiting to fail includes PacWest, Western Alliance, First Horizon, Comerica, and KeyCorp.
In short, the system is blinking red.
The bottom line is that we are facing a severe recession, a financial crisis worse than 2008, de-dollarization, lost confidence in the Fed and the U.S. dollar, political repression through the rise of central bank digital currencies (CBDCs) and potentially, extreme social unrest.
The winners in this scenario are gold, silver, land, energy, agriculture and U.S. Treasury notes. The losers are stocks, corporate bonds, and commercial real estate.
You should position your asset allocations accordingly to survive the storm. No one knows exactly when the storm will impact. I can’t give you a specific date.
But don’t wait until it’s too late. It’s better to be months early than one minute too late.