In recent months, we had emphasized that the era we are living through has some similarities, and perhaps numerous similarities, to other previous historical eras. But it certainly has a new element that has never been there: the exit from a condition of monstrous liquidity injection that lasted for 13 years.
That was the difference that we perceived, asking: what is happening differently, because of this?
Now we have found out what is different: some of that monstrous liquidity has been invested in U.S. government bonds, which banks, American and others, are holding. The asset is considered safe par excellence, since it is issued by a state judged to be certainly solvent in a world reference currency: what could be safer?
The problem is that while their solvency is certain or nearly certain, these are bonds, the price of which is subject to market and interest rate conditions. So, like all bonds, if I bought them under very low rates, at or near zero, if those rates rise the price of the bonds falls … and if I have to sell them out of necessity I accumulate and book losses.
Louses were not visible on the balance sheet, because those securities were valued on the balance sheet at book value.
Since no bank is liquid enough to be able to repay all depositors at once, if there is a rush to withdraw deposits when liquidity runs out, it is necessary to sell those securities as best you can. And the more it is necessary to sell, the more losses accumulate.
The bank that runs into such misfortune, such as Silicon Valley Bank, is forced to attempt emergency capital increases, which are not subscribed to, precisely because the bank has accumulated losses and is losing all of its deposit liquidity.
Thus, customers, the market and shareholders have doomed the bank to failure.
This is called bank run. The phenomenon by which current account holders or savers run away from a bank, or even from a more or less fancy asset (today there are many playing banks), to move money elsewhere.
It is a phenomenon that has increased exponentially in recent years. The more conspiratorial skepticism runs rampant, the more Bank Run increases: if confidence is lacking, or there is no underlying confidence, it is panic, often from irrationality, that triggers flight in an uncontrolled manner. We saw the consequences in the markets in the last two days of last week, and we will probably see them again in the coming hours.
We do not believe that this is a long-lasting crisis, but it can give rise to even painful temporary sinks. We remain, for now on a sinking of the S&P500 June future to 3850, then to 3810 and 3788.
A break of 3788 may even mean 3650, but we consider this very, very difficult. Whereas, now, 3810-3788 could be reached with a higher probability than five days ago. All values, I repeat to avoid misunderstanding, refer to the June future.
Our opinion, and please take it as such, is: despite everything, we see a real risk, but the catastrophe is not now. And this crisis will not last long.
It is a dress rehearsal for a crisis that will manifest itself later, in May or June, where the root cause could be the all-out quarrel of the opposing political parties in the U.S. Congress in expanding the U.S. debt ceiling. Or even something else, reality always outweighs any possible fantasy. It is the paper economy that relies on a derivatives market that has become frighteningly large and very short-term-it is a nice explosive mix that someone will have to find a solution to.
P.S.: Now there will be someone who will say that the crisis was predictable, given the large amount of cash invested in bonds.
Who knows why in finance after the fact everything is always predictable. But we needed the failure of Silicon Valley Bank to realize that. And also, to realize that many banks are set up the same way, in fact there is a whole banking system that is set up that way.
There was also the ever-present guru, “long-short” on SVB stock. Never the joy to tell us that before.
The problem is that, normally, it takes two concomitant elements to cause an effect in the markets: in this case, the withdrawal of liquidity from depositors and losses on securities. The first element activates the problem; the second triggers it. And no one notices the second until the first is there.
Meanwhile, Yellen has made it known that SVB will not be bailed out, that there will be attention for depositors, and that the best solution is a possible buyer … who will take the hole, perhaps in exchange for something. And that everything possible will be done to avoid contagion.