The recent failures of Silver Gate, Silicon Valley Bank, and Signature Banks, coupled with the near collapse of First Republican Credit Suisse, have drawn widespread attention. The stark reality is that banks are currently navigating precarious terrain, teetering on the edge of a potential financial collapse that could surpass the impact of the 2008 crisis. Surprisingly, the looming figure behind this collapse is not BlackRock or Blackstone, not J.P. Morgan or Morgan Sachs, and not even Joe Biden or Vladimir Putin. Instead, it is attributed to Jerome Powell and the Federal Reserve.
This situation began years ago, coinciding with the onset of lockdowns due to the COVID-19 pandemic. The economy was stimulated with trillions and millions of dollars, initially downplayed as a measure that wouldn't lead to inflation. However, inflation became a significant problem, prompting the Federal Reserve to tighten monetary conditions. Despite their efforts, inflation continued to rise, and interest rates underwent the sharpest rate-hiking process in history, reaching five percent.
As the Federal Reserve aimed to curb inflation, unemployment remained dangerously tight, leading to a paradoxical situation where jobs were available, yet inflation persisted. The author emphasizes the critical importance of watching job figures, stating that until employment falls and the Fed breaks the job market, inflation will remain high. Meanwhile, a larger problem was emerging in the bond market.
The bond market became a focal point as the Federal Reserve tightened market conditions, causing bond yields to rise significantly. The U.S. 10-year treasure yield surged from 0.7 during the initial lockdowns to over four percent by the end of 2022. This rise in bond yields resulted in a substantial decline in bond values, illustrated by the nearly 40 percent fall in the value of TLT, an ETF tracking U.S. treasure bonds.
The narrative shifts to the aftermath of the crisis, highlighting the banking sector's vulnerability. Banks, holding substantial amounts of bonds, faced potential massive losses, with Silicon Valley Bank collapsing due to losses incurred from selling bonds. The author contends that investors, fixed on the Federal Reserve's actions in relation to employment, failed to recognize that the banks had broken before inflation and the job market.
The discussion then delves into the idea of bailouts, with the Federal Reserve potentially pivoting from its previous tightening measures. This uncertain path forward may lead to more volatility in the markets and further banking collapses. The text introduces alternative investments as a strategy for reducing volatility, citing the growing interest in alternative assets among financial advisors.
The author questions whether the Federal Reserve's pivot is already underway, pointing to the increase in its balance sheet by over 300 billion dollars during the crisis. This move, interpreted as a potential pivot, could impact inflation in the future, indicating the Federal Reserve's willingness to print money to avert a financial crisis.
The text concludes with a grim outlook, suggesting that the Federal Reserve's actions may lead to a decade of high inflation and a stagnant economy. The potential fallout from rising interest rates, banking collapses, and the economic damage incurred during the crisis could have far-reaching consequences. The author advocates for understanding the true state of the economy and suggests exploring alternative investments to protect against potential inflation and banking crises.
Post a Comment