The Banking Crisis Evolves | The Fed Bails Out China!

now we've got a banking update that we

gotta talk about First Citizens Bank a

bank out of North Carolina is now going

to be buying Silicon Valley Bay now this

is really interesting and we've got to

talk about how China is related to

Silicon Valley Bank and some of the

stresses that we're seeing from this

banking crisis as estimated around the

world we're going to take a peek at some

of these but let's understand this

Silicon Valley Bank has taken a lot

longer to find a buyer New York

Community Bank for example bought

Signature Bank almost immediately after

it was taken over by the FDIC the FDIC

how dare you say worked all weekend but

they've worked multiple weeks in a row

now to try to sell Silicon Valley Bank

and basically when the Bank closed on

Friday to Sunday night they finally got

a sale coordinated Silicon Valley Bank

will be sold to First Citizens which

means anybody who's actually still a

customer at Silicon Valley Bank will

automatically become a customer of First

Citizens Bank out of North Carolina

starting Monday now the FDIC is going to

retain about 90 billion dollars of

Silicon Valley Bank assets about 160

billion dollars of which just to make

sure the transfer goes smoothly First

Citizens will be taking 72 billion

dollars of assets at a discount of 16.5

billion dollars that is because they do

expect to absorb some losses that was a

way to sort of negotiate this purchase

some losses will also be shared by the

FDIC we're expecting about 20 billion

dollars of losses to be shared by the

FDIC and guess what happens when the

FDIC shares and losses they end up

raising the fees at all banks which

means all banks end up raising their

fees it's basically like corporate

socialism when one person loses lots of

money everybody helps bail them out and

that's essentially what's going to

happen with the FDIC now keep in mind

that Silicon Valley Bank has been in a

little bit of drama recently because

Silicon Valley Bank has also had Chinese

subsidiaries and this is now really

pissing off some people in Congress

because they're thinking wait wait wait

wait we not only had normal people

backstop the bailout facilities with

taxpayer money for Silicon Valley

depositors who are mostly tech companies

and startups

but we're also bailing out Chinese

depositors now

yes yes to to some extent yes Silicon

Valley Bank established their first

Chinese subsidiary in 2005 their second

in 2010 so they've had branches in China

for a while they also entered in 2012

into a joint venture Bank in China

called

SPD Silicon Valley Bank that was in

partnership with the Shanghai podong

Development Bank and a Nationwide

commercial bank that was listed on the

Shanghai stock exchange in 1999. so this

is this created new banking

opportunities for Silicon Valley Bank it

got them into some banking licenses via

this partnership uh and so now House

Republicans are demanding that Joe Biden

answer to Chinese ties with a Silicon

Valley Bank Janet Yellen said that under

the current agreement the Chinese

Communist Party linked to Silicon Valley

Bay essentially their depositors are

also being made whole as a result of the

United States bailouts this makes sense

uh and this is what's leading essential

usually

a Congress to send letters to Biden

saying hey man how is bailing out

Chinese depositors actually benefiting

us obviously the response to them would

be systemic banking crisis risks fan

contagion risks but a lot of people are

scratching their head going wait a

second

Silicon Valley Bank at a branch in

Shanghai that was a 50 50 partner with

China and now where's China why isn't

the Chinese government stepping in and

bailing out 50 of those depositors

what's up with that

it's a fair question it's probably

unlikely to go anywhere but it's a

question that's absolutely quite

interesting keep in mind that what

you're finding is these Bankers want to

do whatever they can to increase profit

and not necessarily hedge against risk

we saw the same thing happen at First

Republic although First Republic has a

balance sheet that is substantially

stronger than the likes of Credit Suisse

or Silicon Valley Bank however even

their co-founder gets lots of money for

example in 2021 the co-founder of First

Republic Bank made

17.8 million dollars before jumping into

the executive chairman role that's when

he was a CEO and that's the most out of

all CEOs of similar sized Banks the CEOs

now chairpersons

brother-in-law runs a consulting company

and that consulting company also

happened to earn 2.3 million dollars for

advisory work for First Republic Bank so

doesn't even end there okay the lunacy

of what's coming out with the these

these Banks is pretty wild First

Republic also paid the CEO now

chairperson's son 3.5 million dollars to

oversee the lending unit at First

Republic First Republic was the 14th

largest bank in the United States at the

end of 2022 obviously it's now uh shrunk

a little bit uh and now executives are

agreeing to take no bonuses and

potentially forego some of their prior

stock rewards as a way of uh signaling

their commitment to the banking industry

and to the bank itself but let's be real

banks are a fantastic way for executives

to make lots of money and there's no

surprise that you're seeing you know

lack of risk mitigation procedures now

obviously the big deal now is what kind

of global impacts are we seeing from

this banking crisis and I'll tell you

NatWest has a phenomenal piece that goes

into some of the recent imbalances and

credit stresses as well as looking into

specifically exported inflation from

China since we've been talking about

Silicon Valley Bank in China we may as

well talk about exported inflation from

China as well but first let's look at

that banking stress and funding stress

everybody keeps talking about from the

point of view of NatWest now keep in

mind Morgan Stanley Goldman Sachs Bank

of America they all think we're going to

see a hit to GDP in the long term that

is like Q3 Q4 Q5 that really plays into

what the FED is saying but what about

the near term what's happening right now

well here you go Nat West is telling us

following the collapse of a few banks in

the United States we were curious to see

whether any material funding stress

would materialize in the aftermath

somewhat surprisingly so far we have not

seen any signs of any issues or

challenges no funding stress at all

following the collapse of these Banks

admittedly Banks don't rely that much on

short-term wholesale funding anymore and

the issuance volumes over the past week

dried up to a large extent so in other

words

hey short term we're not really seeing

any stress could the other analysts be

correct that come Q3 Q4 q1 of next year

maybe we're going to see some sort of

recessionary impacts that is a forced

recession from the Federal Reserve

squeezing us into recession maybe but

listen to this NatWest thinks the

banking problems now appear to be

localized so far despite all the usage

of the discount window and the term

funding facility now that uh you can

actually see uh charted by I believe it

was Bank of America yet here it is this

is the change in the beds lending and

you can see that yes we had two large

weeks of drawing money out of the FED

discount window first and then the bank

term funding program which some people

are calling buy the FED pivot facility

but we expect that next week this could

drop substantially and then really this

hiccup here dare I say could end up

being transitory

which is insane because I know in the

moment it's like no way there's no way

it is possible now I look to look at the

bear case and the bull case but this

NatWest piece is really interesting

showing little short-term funding pain

although I do I will say that credit

spreads on mortgages are rising that's

keeping mortgage rates up as treasury

yields are falling uh it's basically the

way to think about that is let's say the

spread between the 10-year and uh

mortgage rates is two and a half percent

let's just say Okay so the 10-year let's

say is at four percent then mortgage

rates might be at six and a half percent

right well what happens if the 10-year

Falls one percent well technically then

mortgage rates should go from six and a

half to five and a half right but if

credit spreads widen while the 10-year

treasury goes down 10 mortgage rates

might only come down 20 basis points to

6.3 that means you had an increase of

credit spreads of 80 basis points that

was sort of like it's almost like you

inflated a balloon between the two and

you're like stress right that's kind of

the way to think about it and that's

actually how in a weird way you could

see treasure yields go down and

mortgages not go down although these are

very volatile so it'll we'll see what

happens over the next few weeks where

things actually stabilize my guess is

treasury yields will come up at the same

time as that credit stress spread goes

down and we'll find a new equilibrium

somewhere TBD if I had to guess I'd say

that equilibrium's probably not over

four percent for the 10-year it's

probably somewhere around 3.7

and mortgage rates of around six and a

half if I had a guess uh but that's a

total guess so we talked about China

with Silicon Valley Bank and I thought

well that would be a perfect opportunity

to talk about Chinese inflation as well

because if Chinese are now involved in

our banking crisis and there are some

arguments being made that the Chinese

Communist party was pressuring Joe Biden

to bail out Silicon Valley Bank along

with Gavin Newsom who had Accounts at

Silicon Valley Bank and didn't disclose

that fact uh despite begging uh Janet

Yellen to bail out Silicon Valley Bank

gee no wonder but anyway it's also worth

thinking about this concept of hey wait

a minute everybody was saying when China

was going to reopen we would see this

this massive burst of inflation

and oil would go over a hundred now

obviously since December which is when

these predictions were being made when

covet zero was basically dropped in

China I made the argument that we're

probably not going to see a hundred

dollar oil uh and we made I made the

argument that we're probably not going

to see massive exported inflation from

China now my base is for making that

argument then was look China was fully

open before the pandemic just because

they reopen doesn't mean we're going to

all of a sudden have the surge of

inflation or oil prices because we

didn't have that before now some people

were making the argument that but wait a

minute aren't they going to strain

Supply chains and the argument the

counter argument is well that assumes

that Supply chains haven't already

loosened substantially and they're not

ready to welcome more sales I'll tell

you most Auto and Chip manufacturers

would welcome more sales right now

because they've built themselves up for

demand levels that we saw in 21 that's

when we had massive supply chain

stresses and now we're not seeing those

supply chain stresses anymore and we're

kind of like all right where's the

business so let's take a look at what

NatWest has to say about that China

exporting everything

except inflation

China's recovery will likely be mildly

inflationary to the rest of the world at

most at most mild inflation why well is

China exporting inflation no supply

chain disruptions and goods supply side

price shocks of 2021 and 2022 look

essentially over import price inflation

for the U.S import of Chinese Goods is

falling it has yet to return to the

deflationary depths of the 2010s

remember folks in the 2010 cycle we were

facing deflation like people think

that's nutty but I want I want to just

remind you I want to take the liberty of

reminding you for a moment what happened

in 2018 okay I really want you to think

about this for a moment right after I

mentioned you could use buy now pay

later to check out the programs on

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estate even though more people might

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the next year here so get yourself

educated so what happened in 2018 well

basically for a decade we had inflation

sitting around 1.5 percent we were

running under our two percent Target and

as soon as the Federal Reserve tried

quantitative tightening what ended up

happening

markets freaked in December of 2018 and

the FED folded folded faster than

somebody who gets a two and a seven

playing five-card poker

they folded so fast that's because we

were facing deflation at the time that

is if we run too far below a two percent

Target what happens if we end up having

to go to negative interest rate policies

like Europe remember before the pandemic

folks remember Germany was offering you

they were offering you folks they were

offering you negative

0.2 percent on your savings account so

if you put your money in your savings

account you had to pay them

negative point two percent

so for every thousand bucks you had

deposited at a bank you ought to pay

them two dollars just to have the money

there with negative interest rates uh so

yes will we probably return to these

sort of deflationary depths of the 2010s

probably and right now we're actually

trending in that direction we're seeing

price growth falling from China which is

great because we don't want that

inflationary impetus

uh it's not clear that manufacturers are

passing on costs this is actually really

good as well you don't want to see pmis

fly up purchase manager's Index this is

where there's a survey of people who buy

stuff from manufacturers and they tell

you if prices are going up or down and

they also have a producer price index

which is just a measure of a basket of

goods from a producer side and the

manufacturing costs in the consumer

goods PPI

has remained low at under two percent

year over year and PMI data shows that

firms have reported output prices

growing almost consistently below input

prices since 2016. so despite all this

inflation of the last few years we're

still seeing pmis and ppi is very soft

in China suggesting very little

inflation actually being passed on to

the people paying for the goods

unit export values have risen 10

year-over-year since June of 2022 and

this could represent the higher value of

exports or Price inflation though it's

difficult to break this up because you

could be buying more expensive items

from China right so that's why they're

saying here it's difficult to say is

this price is going up or business is

taking it in the margin but the point is

import prices are falling look at this

chart here you can see electronic import

prices uh and uh U.S Imports overall

both of them plummeting from China

export uh prices rising but uh PPI low

so yes year over year you do have some

price increases and that potentially is

because we're exporting more valuable

goods from China so you do have a little

bit of a red flag here but at least on

PPI sort of a basket measure rather than

a mixed-based measure right this doesn't

the bottom one PPI does not change for

mix you have the same mix every time the

top one could change if people are

buying and exporting different things

and so that could be an explain station

there so when you look at this combined

with shipping costs this is what

transitory looks like I wrote this this

is what transitory inflation looks like

folks look at that chart

shipping costs out of China plummet I

mean basically everything is back to

2019 lows some items are slightly

elevated if I look at the green line

over here we're still slightly elevated

it looks like the red line is back the

blue line is back uh the purple line

over here is actually lower so the only

one that's higher right now is China to

the Mediterranean uh that's the only one

that's slightly higher on a shipping

point of view for Chinese shipping

inflation so that's fantastic

PMI supplier times are finally falling

this is excellent as well quicker to get

goods and services this is fantastic uh

stimulus and local demand will it

trigger another Commodities rally sorry

Steve that is unlikely from China at

least infrastructure and real estate

most important surface sources of

commodity demand will recover but

constraints on the budget from policy

signals and household demand mean the

recovery will not turn into a runaway

recovery or rally for Commodities at

least not from China

now uh what's worth noting here is that

they expect the biggest winners in China

to be uh Services service-based

expenditures this is why I've been I've

been somewhat tempted to buy Starbucks I

haven't pulled the trigger but Starbucks

has a massive massive amount of

Starbucks uh facilities that they

basically built during the coveted

lockdowns like they basically doubled

the amount of stores they have in covid

or during covid when nobody was buying

Starbucks now everybody's spending money

on traveling and consumer spending and

hotels uh Chinese tourists that's where

the money is going tourism import

inflation that that'll be the biggest

source of import inflation for us from

China uh tourism so I find that quite

interesting uh so we talked about the

funding stress that never happened

talked about China we could briefly take

a peek at the beginning here we had some

interesting notes as well markets should

worry less about Global Financial

instability as systemic risks are low

and they believe the FED is done hiking

now that's interesting too because it

goes back to the uh this idea of uh this

Bank funding stress not being a big deal

and we're seeing sort of this Full

Throttle move towards uh EVS which is

just sort of another little note that

they throw in here they do talk about

how the average cost of EVS is a little

higher than the average cost of an ice

vehicle I wrote It's about ten thousand

dollars per vehicle higher so how do you

sum that up well really if you sum it up

you can look at natwest's forecasts that

the funding stress is not happening in

the short term it doesn't appear to be

systemic and this is potentially why

banks are rallying yesterday we analyzed

Deutsche Bank versus Credit Suisse and

the numbers were much better at Deutsche

Bank and First Republic wasn't half bad

either get a look at that video uh

yesterday where we compared those uh

those uh fundamentals

we can also see that China doesn't seem

to be exporting inflation to us which

should take some pressure off of the

Federal Reserve along with uh maybe some

slight impact to tightening credit

standards but beyond that this whole

China risk uh being involved with

Silicon Valley Bank doesn't seem to be

that big of a deal because we're not

really getting exported inflation from

them and potentially if we have a a low

impact to funding stresses maybe we have

just enough of an impact to soften

inflation here in America but it doesn't

seem like things are that bad

in other words let me sort of summarize

this in English

funding stresses don't seem to be that

big of a deal at this moment maybe Q3 Q4

q1 maybe but right now it doesn't seem

to be that bad Chinese inflation doesn't

seem to be that bad the fed's probably

gearing up for a pause uh in May you've

got about a 62 chance of a pause in May

right now and then cuts at the rest of

the year so far things are really

aligning with the idea of a Nike Swoosh

style recovery now if you're nervous you

could always get life insurance in as

little as five minutes by go to

metcaven.com life but I personally think

this is so far pretty good news that

when we look at the fundamentals they

don't tell us we need to be that worried

about the banking crisis do we really

need to worry that some depositors were

also guaranteed for the benefit of the

entire U.S banking system probably not

it's good political drama for Fox News

to cover but is it a big deal no so

short-term banking issue not a big deal

long term

probably transitory inflation based on

these reports this is all good news

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