Bank Crisis 2024

The Second Half of the Bank Crisis, Kicking off Now

Gee, what was it that Paradigm’s own Jim Rickards was saying earlier this month about how the bank failures that began last year were only at “halftime”?

Oh yes, here it is from our April 8 edition: “The second stage of the crisis would erupt in even more dramatic fashion sooner or later.”

Conventional wisdom has it that the bank blowups in the spring of 2023 were a one-off: Silicon Valley Bank, First Republic, et al. were a freak occurrence brought about by the Federal Reserve raising interest rates at the fastest clip in over 40 years.

The rate hikes damaged the value of the Treasury paper held by the banks — which would have been fine as long as depositors weren’t fleeing and suddenly the banks had to unload those Treasuries at fire-sale prices. But depositors did flee, and the rest was history.

And as the official narrative went — dutifully parroted by corporate media — the whole thing blew over after only two months.

Wrong: The second half of the banking crisis kicked off after the close of business Friday afternoon.

At that time, regulators swooped in and shut down Philadelphia-based Republic Bank, unloading it onto the regional lender Fulton Financial.

Republic’s parent firm had about $6 billion in assets — much smaller than last year’s headline-making blowups like Silicon Valley Bank. But it’s the first failure of 2024 and Republic Bank went under for the same reason behind the 2023 failures — paper losses on Treasuries becoming actual losses amid a severe cash crunch.

Unlike last year, the regulators saw this one coming. They had ample time to line up a buyer. As such, the feds probably won’t be stuck with deciding whether to backstop depositors over the FDIC limit of $250,000 — which the feds chose to do last year.

But as Jim said earlier this month, more and bigger failures are in store. We’re talking about banks with up to $900 billion in total assets that are at risk.

Will that be enough to drain the FDIC’s emergency reserve? And what then?

A reader of Rickards’ Strategic Intelligence wrote in with that very question earlier this month.

Answer: The coming bank failures “will deplete the FDIC reserve accounts to some extent,” Jim said.

“However, this does not mean the end of FDIC insurance, and it will not mean the freezing of bank accounts. Instead, the FDIC fund can be replenished with loans, higher premiums from the member banks or a direct infusion of reserves authorized by Congress.

“So there may be banks that fail, and temporary dislocations for depositors, but the FDIC itself will not fail (even if it is bailed out) and insured accounts at banks should be safe.

“Still, if the FDIC increases insurance premiums to solvent banks, those banks will increase fees or lower interest rates paid to customers to make up the increase. So everyday depositors will still pay in the end.”

They always get you one way or another, right? Stay tuned…

[Editor’s note: Through midnight tonight, you can still claim a box packed with an assortment of items Jim has selected to help protect you from an all-out financial war — a war he expects to break out in a matter of weeks.

It’s about the size of a shoebox, give or take. If you’re curious about the contents, our customer care director Dustin Weisbecker tells you all about it at this link.]

Perception IS Reality (The Fed and Inflation)

Wall Street is starting the new week on a calm note. Starting tomorrow, three events could set off a renewed round of volatility.

Two more of the “Magnificent 7” stocks report their numbers this week — Amazon tomorrow and Apple Thursday. In between, the Federal Reserve will issue its latest policy statement and Fed chair Jerome Powell holds a press conference.

The Fed will leave short-term rates where they are for now, the fed funds rate at 5.5%. No drama there — the Fed has telegraphed its intentions for weeks now. The uncertainty surrounds Wall Street’s ever-diminishing hopes for rate cuts before year-end, given how persistent inflation is proving to be.

It’s not just that every measure of inflation is moving in the wrong direction — as we noted last Thursday and Friday. It’s also that perceptions of inflation are moving in the wrong direction.

On Friday the University of Michigan issued its monthly consumer-sentiment numbers. The typical survey respondent expects inflation to run 3.2% over the next 12 months — up from 2.9% in March, indeed the highest reading since last November.

It seems dubious that everyday Americans would project the inflation rate down to a tenth of a percent unless prodded to do so by academic pollsters. (I mean, really?) Nonetheless, the Fed takes this portion of the survey very seriously when setting policy. Inflation expectations point to rates remaining, as the saying goes, “higher for longer.”

In the meantime, all the major U.S. stock indexes are starting the week modestly in the green — each up about a third of a percent, the S&P 500 at 5,117.

Likewise for precious metals, with gold at $2,342 and silver at $27.35. Bitcoin sits a hair below $63,000.

Crude is down, but still over $83. Copper, meanwhile, has climbed over $4.50 a pound for the first time since the summer of 2022. If a recession is looming, “the metal with a Ph.D. in economics” will be blindsided…

Inevitable Blackouts (Doubling Down on Renewables)

The power grid in Texas will be under stress this week.

The grid operator ERCOT warns that the grid might have insufficient reserves starting tonight and continuing through Wednesday night. Planned maintenance shutdowns are on hold, just in case.

“Grid conditions can be tight this time of the year,” says Bloomberg, “because early heat can increase demand while supplies are hampered by scheduled maintenance in preparation for the summer air-conditioning season.”

Longer-term, ERCOT is warning that poorly maintained renewable energy equipment could cause “immediate catastrophic grid failure.”

For all its fossil-fuel street cred, Texas has adopted much wind and solar for its power grid in recent years.

Wind, solar and batteries rely on inverters that convert direct current (DC) to the alternating current (AC) that powers homes and businesses. Conventional power generators can usually “ride through” disruptions to the grid like lightning strikes. Inverters, not so much — especially older ones.

If they fail, “this could lead to a domino effect of other generators tripping offline,” says the Houston Chronicle, “which could in a worst-case scenario result in the ‘rapid collapse of part of or all the ERCOT system,’ according to ERCOT.”

No matter: The Biden administration is plowing ahead with plans to further “de-carbonize” the power grid nationwide.

Last Thursday, the EPA rolled out new rules that “will force the nation’s current fleet of coal plants to capture nearly all of their carbon dioxide emissions — or close — by 2039,” says Bloomberg. “And it will compel similar pollution cuts for many of the new gas-fired plants built to replace them.”

Right — and at a time AI data centers and electric vehicles will only add to the load on the system. What could go wrong?

Meanwhile in the real world, 19 states are currently at risk of blackouts even under typical peak-demand conditions — like Texas this week.

“We’re already in a tough spot,” says Jim Matheson, CEO of the National Rural Electric Cooperative Association. “It creates uncertainty about how we’re going to keep the lights on.”

The Paradigm team continues to hunt for investment angles. Zach Scheidt already has one for readers of Lifetime Income Report. Other editors are also conducting their due diligence — because this issue isn’t going away…

Happy Ending for “Bitcoin Sign Guy”

One more item in our follow-up file today — remember this?

That’s Janet Yellen, testifying to Congress back when she was Federal Reserve chair in 2017 — photobombed by a fellow known at the time only as “Bitcoin Sign Guy.”

Security whisked him from the room. But as we chronicled back then, someone claiming to be his friend tweeted a Bitcoin address where cryptocurrency fans could send the man donations. He netted about $16,000 within 48 hours.

As it happens, he just got a much bigger payday: With the aid of an auction site called Scarce.City, the legal pad on which he scribbled his advice sold last week for 16 Bitcoin, about $1.027 million.

As CoinMarketCap reports, “The auction event took place at PubKey, a Bitcoin-themed bar located in New York City, adding a touch of cryptocurrency ambiance to the proceedings.

“The buyer of the sign is an individual known by the online alias Squirrekkywrath, as confirmed in a tweet by PubKey. Not much is known about the new owner, but Alex Thorn, the head of research at Galaxy, describes them as a ‘Bitcoin OG that no one has ever heard of’."

As for the seller’s identity, he turns out to be one Christian Langlais. Then, he was a 22-year-old intern at the Cato Institute. Now, he says he’ll use the money to fund a Bitcoin software startup called Tirrel Corp.

If Tirrel succeeds, he won’t have to fork over anything to venture capital. Or at least, he’ll have to fork over much less than he would have without his sign gambit seven years ago. Well played, Mr. Langlais.

Mailbag: What’s in a Name?

I had no idea my passing comment Thursday about the names of Italian cities would touch off controversy in the mailbag Friday — but it did.

And it inspired further feedback today: “I don't remember the exact date (sometime late last century),” a reader writes, “but it seemed like overnight that early wokesters in the press changed Peking to Beijing, Chunking to Chongqing and Bombay to Mumbai.

“It seems like Milano and Torino are just late to the party.”

Dave responds: At the persistent prodding of the Chinese government, “Beijing” slowly came into vogue after normalization of relations between Mainland China and the United States in 1979. The New York Times made the switch in 1986, the BBC in 1990.

Your editor was coming of age back then and didn’t give it much thought but in retrospect it makes no sense: “It was comparable to the Germans suddenly insisting that we start calling Munich München or the Russians demanding we call Moscow Moskva,” wrote Mark Higgie for The Spectator Australia in 2020.

“China’s justification was that the new names it insisted on more accurately indicated their pronunciation in Mandarin. Despite the audaciousness of the demand, the English-speaking world steadily capitulated.”

[But go figure, a renowned institution of higher education in the Chinese capital is still called “Peking University.”]

And it’s from that same place that I bristle at “Milano” or “Torino.” I still remember something James Fallows wrote for The Atlantic in 2007. At that time, he was fighting a losing battle over what to call the country with the biggest land area in mainland Southeast Asia — Burma or Myanmar.

“Since first visiting the country during the violent protests in 1988,” he wrote, “I’ve followed arguments about the twists and turns of what to call the country in Burmese…

“But when it comes to referring to the nation in English, there’s little debate. Myanmar is the name invented [in 1989] by the benighted junta... When Westerners say ‘Myanmar,’ they’re not being culturally respectful to the people of a beautiful but oppressed nation. We don’t call China Zhongguo or Germany Deutschland just because the locals do. They're bowing to the whims of the generals who still imprison Aung San Suu Kyi.”

In the ensuing 17 years, Aung San Suu Kyi was released from prison… became the head of government… lost her halo as a human-rights heroine amid the slaughter of the ethnic Rohingya peoples… and went back to prison.

And, against all common sense, the name Myanmar has stuck…

Best regards,

 

 

 

 

Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets