Hunting Icebergs

Looking for trouble, the Feds get just what they're after...

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina...

“The ship is sinking! To the lifeboats!”

“I’m sorry, Lady. Just the first-class passengers!”

The feds are going to bail out the banks and their high-end customers. California governor Gavin Newsom’s wineries will have a place in the lifeboats. So will billionaire Mark Cuban’s drug company. But down on the lower decks, they cross themselves, put on life-vests and hope for the best.  

Silicon Valley Bank…Signature Bank…and now…CNN Business reports:

Global markets mixed as Credit Suisse accepts $54 billion lifeline

And here comes a San Francisco bank, First Republic, racing to the public trough.  Wall Street Journal:

Stocks Close Higher on Hopes for First Republic Rescue

The Swiss bank was rescued by the central bank of Switzerland. The American bank got $30 billion from fellow US banks. 

Banks are in trouble because they got caught up in the spirit of the Fed’s bubble.  They made risky loans. They bought risky assets. And when interest rates rose…and real risk reasserted itself…the seas turned rough and boats began to sink.   

So let’s rehearse.

Disappearing Money

…the feds lowered rates to below zero, adjusted for inflation; they kept real rates negative for more than 10 years.

…people borrowed…US total debt is now over $90 trillion.

…consumer prices rose; inflation is now at 7% on a 2-year ‘stacked’ basis.

Then, to fight inflation, the Fed raised the cost of debt. Homeowners now face mortgage payments up 30% from last year. And banks find that their collateral and reserves have fallen so much they can no longer meet withdrawals.  

What happens next?  

A lot of investors, speculators, banks, and businesses are in a tight spot. Many cannot pay their debts. They default…money disappears.

Silvergate was worth nearly $6 billion in November ’21. That was $6 billion of wealth that people thought they had. Then, 16 months later, almost all of that ‘wealth’ has vanished. Poof!  

And the electric truck maker, Rivian, is down 90%...another $100 billion – gone. 

The middle class stores much of its wealth in its houses. Solid. Bricks-and-mortar wealth…that won’t go away in a crisis.  

But what’s this? The house doesn’t go away…but the equity disappears. House prices have been falling for 6 months in a row, according to the Case Shiller 20-City Index. Only 20% of the homes sold last year were “affordable” based on median income/home prices.

Outflanked

The middle class is getting attacked on both flanks. Its wealth falls along with house prices. And its real income falls as consumer prices rise. Adjusted for inflation, wages have fallen for 23 months in a row; for nearly 2 years, ordinary households have gotten poorer. MarketWatch:

‘Net worth of median household is basically nothing,’ says Carl Icahn. ‘We have some major problems in our economy.’

And now, the middle class will pay for the bank bailouts too. If the feds won’t allow the correction to continue – with bank failures, defaults, bankruptcies, and market crashes – the only plausible way out of the debt burden is inflation. Ordinary households will pay for it – in the form of higher consumer prices.

In the meantime, the money supply itself is falling. Over the last year, it dropped 1.7%. That doesn’t sound like much, but it is the biggest drop ever recorded.

And our guess is that the situation is going to get a lot worse before it gets better.

What we’ve seen so far is just the beginning of the correction. Based on the traditional relationship of debt/GDP, we figure the economy should have about $40 trillion in debt, not $90 trillion. This means that there’s a lot of bad debt still to be reckoned with.

And despite all the blah-blah…about Republicans vs. Democrats…conservative vs. liberals…blacks vs. white…there are only two groups that really matter. There are the deciders. And there is everyone else, those who don’t decide.

In an honest, free economy, Mr. Market puts the losses where they belong. You make a bad bet; you lose. And you serve as a moral lesson for everybody else. ‘We won’t do what that dumbbell did,” they say to each other.

In a dishonest, un-free economy, the deciders put the losses onto whomever they want. Who pays? Would it surprise you if they put them on the un-deciders? 

And reserve the lifeboats for themselves?      

Regards,

Bill Bonner     

Joel’s Note: Speaking of lifeboats, gold seems to be holding up rather well as skittish passengers look anxiously for the egress, Titanic-style. The “barbarous metal” shot up another $40 yesterday and now trades at around $1,960/oz.

The Midas Metal also made new all time highs in Australian dollars (AUD$2,937/oz) and in pound sterling (£1,615/oz) in trading today. That’s good news for BPR members who have been following along with Tom and Dan’s “Maximum Safety Mode” strategy… i.e, sitting on a healthy stash of precious metals.

Tom sent over a couple of charts earlier in the week. The first shows gold breaking out to a new ATH in GBP… the second shows the FTSE 100’s dismal performance (down ~89%) over the past few decades when measured in real money: AU.

The message here is pretty obvious. If you like the look of the first chart… but not so much the look of the second… you might like to get on board with a membership to Bonner Private Research today. Find a subscription that suits you, here…