How Will Biden Inflame the Bank Crisis?

  • Biden administration inches toward calamity
  • The definition of insanity? (Short selling ban)
  • A good quarter for three of four giant tech stocks
  • The Fed’s contortionist act (Ta-da!)
  • ESG and a deep copper deficit… Off-target messaging: “Honk if you love TV”… Socialism Scandy-style… And more!

The White House is tiptoeing toward a fateful action that would make the bank crisis much worse.

From the front page of today’s New York Times: “The Biden administration was closely monitoring the markets, ‘including the short-selling pressures on healthy banks,’ the White House press secretary, Karine Jean-Pierre, told reporters on Thursday.”

As you might already know, short sellers aim to profit from falling stock prices. They borrow shares from a broker, then sell those shares on the open market. The idea is that eventually they can buy the shares back (at a much lower price), return them to the broker and pocket a handsome profit.

To be sure, the short sellers have had a field day this week with two more regional banks based out West — PacWest (PACW) and Western Alliance (WAL). PACW ended yesterday down 51%.

And so there’s growing chatter in the Beltway about a ban on short selling — a step that’s sure to backfire badly, because it always does.

“Short selling bans never work because fund managers will sell what they can if they can’t sell what they want,” says colleague Sean Ring of our sister e-letter The Rude Awakening.

“This leads to wider sell-offs, not smaller ones. Politicians should learn, as King Canute did, that they can’t hold back the tide.”

Professional money manager Barry Ritholtz expanded on this theme in 2015 — when China banned short selling during a stock market panic: “Ultimately, this kind of action removes a source of buying in a rout.

“Short sellers are typically the first to buy during a crash,” he explained. “Why? They have no risk in making the buy, as they are closing out an existing position. Thus, they act as a floor under a falling market.

“The strongest collapse in U.S. equities took place after the SEC banned short selling in September 2008.”

For now, a new short-selling ban is just talk. But for how long?

Even this morning’s NYT story gently suggested that “it’s not clear whether such bans worked as intended” in 2008.

But if the wave of selling continues, it won’t matter whether a ban “works” or whether there are unintended consequences: If the powers that be need a scapegoat, they’ll create one. “How dare these short sellers profit off the misery of others!” and all that.

And it’s the powers that be who made this mess in the first place.

After three major bank failures in seven weeks, it’s apparent what the playbook is now: Bank depositors will be covered no matter what. But bank shareholders and bondholders can go hang.

As you’ll recall, the FDIC agreed to cover all deposits — including those over the $250,000 insurance limit — when Silicon Valley Bank and Signature Bank failed in March.

Hoping to avoid a rerun of that situation with First Republic last weekend, the feds arranged for JPMorgan Chase to take over all of First Republic’s deposits, insured and uninsured. First Republic shareholders, meanwhile, saw their investment go to zero.

Maybe that was the right decision, maybe it was the wrong one. The point is that going forward, “All bank bond- and stockholders in any ‘shaky’ bank now have to worry they can lose everything, and lose it quickly in a vicious cycle of falling prices,” tweets Jim Bianco of Bianco Research.

“Deposit panic is not the problem. Financial market panic is now that the specter of 100% losses has been introduced.”

But the time still isn’t right for everyday folks to shadow the short sellers by buying put options on the regional banks.

You’ll recall on Wednesday, Jim Rickards’ senior analyst Dan Amoss told us most banks are still profitable — low loan losses, high-net-interest profit margins. Yes, depositors are still making their way toward the exits in search of higher yields on money market funds or Treasury bills. But crunch time for the regional banks is still a good three months away, maybe as much as six.

“Short sellers look overextended in the bank stocks,” Dan said on Paradigm’s internal chat yesterday.

Today’s price action underscores that point: PACW was up 49% in the first couple hours’ trading, WAL 29%. When the time comes to short the banks, Dan will let us know.

As the week winds down, the stock market is rallying strongly on the back of quarterly numbers from the biggest company of them all.

Apple logged its second straight quarter of declining sales… but traders are instead zeroed in on surging sales of iPhones in emerging markets, especially India. AAPL shares are up nearly 5% as we write.

And so it’s been a good quarter for three of the four giant tech-adjacent stocks — Apple, Microsoft and Google parent Alphabet (Amazon, not so much). While much of the S&P 500 struggles, good results from those three companies plus Facebook parent Meta have put a floor beneath the index overall.

Paradigm trading authority Alan Knuckman is quick to remind us the S&P has held over 4,000 every day since March 29 — bank troubles and Fed policy jitters notwithstanding. This morning it’s up 1.5%, vaulting easily above 4,100 again. The Dow is up 1.25% to 33,550 and the Nasdaq up 1.75%, back above 12,000.

Alas, precious metals are another story: Sellers emerged en masse as soon as the monthly job numbers came out.

The wonks at the Bureau of Labor Statistics conjured 250,000 new jobs for April — way more than expected, although it was offset by a downward revision for March. The official unemployment rate fell to 3.4% — equaling the lowest reading since 1969. (The real-world unemployment rate from Shadow Government Statistics held steady at 24.6%.)

No sign of a “cooling” labor market here — which makes it less likely the Federal Reserve will pause its interest-rate increases at the next meeting on June 14.

All else being equal, rising rates make gold less attractive… and so the Midas metal is down $41 to $2,009. Silver’s down 57 cents to $25.44.

Crude is recovering huge from its beat-down earlier in the week — up nearly three bucks to $71.50 a barrel. Copper just barely in the green at $3.88 a pound.

“The Fed is trying to thread the needle between an ongoing banking crisis and looming recession on the one hand and continuing inflation on the other,” Jim Rickards wrote his Countdown to Crisis readers yesterday.

That’s not exactly new… but the conundrum is becoming even clearer to see after this week’s Fed meeting.

And while today’s job numbers reinforce the case for raising rates once more in June, the fact remains that unemployment is a lagging indicator. The Fed relies on it as a signpost to set policy, but it shouldn’t.

As Jim explains it, “When businesses see declining sales, lower profits and bulging inventories, they will do everything possible to cut costs including cancelling new orders, dumping goods, holding sales and closing offices. It is only when those measures fail to stop the bleeding that owners begin to fire people. By the time unemployment goes up, the recession has already started.”

If the Fed wanted a leading indicator from the job market, it’s temporary workers. In many businesses, temps are the first to go when managers anticipate leaner times — no unemployment benefits to pay and so on.

A shrinking temp workforce is usually a reliable sign of an impending recession. Note well: The temp workforce has been shrinking every month since December.

The mainstream is waking up: The world will run out of copper long before the “green” transition can be completed.

Bloomberg has a long story this week about the opening of underground mining at the enormous Oyu Tolgoi site in Mongolia, just north of the Chinese border.

I perked up because way back in 2012, old friend Chris Mayer ventured all the way to Mongolia to scope out investment possibilities there. At that time, open-pit mining was just about to get underway at Oyu Tolgoi, operated by the mining giant Rio Tinto.

Fast-forward a decade: “As demand for copper surges,” says Bloomberg, “supply is increasingly likely to come from mines like this one on the arid steppe: expensive, technically complex, outside traditional copper jurisdictions and operating under the eye of governments jealously guarding their natural resources.”

And then there’s this: “Analysts at Wood Mackenzie estimate a greener world will be short about 6 million tons of copper by next decade, meaning 12 new Oyu Tolgois need to come online within that period.”

Not gonna happen. Bloomberg also interviewed Doug Kirwin, one of the first geologists to inspect the Oyu Tolgoi site decades ago: “There’s no way we can supply the amount of copper in the next 10 years to drive the energy transition and carbon zero. It’s not going to happen. There’s just not enough copper deposits being found or developed.”

Bad news for the greenies, good news for the copper miners. If you want to go the ETF route, consider the Global X Copper Miners ETF (COPX). [Disclosure: I’ve been dollar-cost averaging into COPX for about a year now, and I’ll keep doing so into the teeth of the coming recession. I’m playing for the long haul.]

As you might have heard, Hollywood writers are on strike. But perhaps their messaging is a little off in this day and age?

Max Tweet

To the mailbag, where one of our longtimers weighs in on socialism Scandinavian-style…

“Just want to add to the gentlemen who gave perspectives on how the USA (we should really drop the U these days, which was one of his points) is different than Nordic countries.

“Going electric for a small country (not vast open expanses of tens of thousands of highways to drive) that has huge amounts of ‘free’ geothermal energy under its feet does not translate to the USA, I mean SA, at all.

“True leadership to green energy would be a Kennedy-like vision stating that the SA will commit itself to being energy independent in 10 years by breaking the fusion/cold fusion barrier rather than just destroying the Earth in a new way by the huge mining requirements of inefficient new green-energy rare earth metals. Of course, that would require the U part.”

The 5: Hmmm… I’m reminded of our own Ray Blanco’s remarks here a few weeks ago about the feds’ “Cancer Moonshot” initiative.

In short, he said curing cancer is not like putting a man on the moon. Putting a man on the moon was basically an engineering problem. Curing cancer, in contrast, requires all-new scientific breakthroughs.

So is fusion just an engineering problem, or does it require more? To be continued…

Have a good weekend,

Best regards,

Dave Gonigam




Dave Gonigam
The 5 Min. Forecast

P.S. A milestone this week for Addison Wiggin, the founding editor of this e-letter and now proprietor of The Wiggin Sessions podcast/YouTube series: A third edition of his book Demise of the Dollar was released by the venerable publisher John Wiley & Sons on Tuesday.

“Books of this genre rarely go into a second edition,” he tells me, “let alone a third.” I well remember reading the first one that was published in 2005. It was a formative experience as I was trying to get out of the TV news racket and do something else with my life that might be of greater service to my fellow humans. Addison took me on in 2007 and the rest is history.

The falling-dollar story had already caught fire by the time of the second edition in 2008 — when, for instance, the supermodel Gisele Bundchen was famously spurning payment in dollars and demanding euros instead.

The new edition brings the story up to date through the pandemic stimmies and beyond. Paradigm’s own Jim Rickards supplies the foreword. Recommended, and on sale now!

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