Due to the present state of the economy, I wanted to take a moment to share with you my perspective on the banking industry, the financial crisis, the recession, and where I think things are going.
With disastrous results, this financial crisis will put an end to both the short-term and, more significantly, the long-term boom-bust cycles. You should be planning for this occasion.
This is why, in my opinion.
First off, banks currently have the motivation to defer approving loans because they can park their cash at the Federal Reserve risk-free while earning close to 5% yield.
Overall, this will likely lead to credit rationing as banks reduce their lending portfolios in order to raise their reserve ratios.
Second, as credit becomes harder to come by and private banks are less eager to make loans, the short-term boom-bust cycle is coming to an end fast.
Deteriorating credit and lending conditions are early signs of a recession.
U.S. commercial and industrial loans currently stand at -5.9, which is in contraction zone. (See chart below.)
Next is the Recession Probability from the New York Fed, which increases from 5.5% this month to 57% in January 2024. That is higher than both 2001 and 2008, and it is the greatest since the 1980s. It’s a reasonably reliable indicator because readings over 40% are six times out of seven.
Third, there will be a recession as a result of the growing financial problem, which has, in my opinion, already begun in the tech industry.
Similar to how easy money flowed into real estate prior to the previous financial crisis, easy money has flowed into startups and technology, leading to ludicrously high values that are now bursting.
Additionally, it is not limited to technology alone. Here’s an update on the Buffet Indicator, which demonstrates that the U.S. markets are still overvalued in comparison to upcoming developments despite last year’s correction. Future events have not yet been “priced in.”
(I actually shared this with members for the first time in early 2022. Compare the 2008 and 2001 market peaks to the one from last year.)
Three things come out of it:
First, as credit availability worsens and zombie businesses are repeatedly denied loans, they default on their debt, and are ultimately forced into bankruptcy, defaults and bankruptcies will almost definitely increase this year.
Two: These startups and tech companies, which were once flush with cash, are under pressure, drawing down cash deposits and revealing banks’ liquidity issues. This is precisely what happened to Silicon Valley Bank, which collapsed as a result of its inability to process withdrawals.
Three mid-sized regional banks are most at risk because they have a high tech and ghost company exposure. There is a higher danger of regional banks failing or being absorbed into bigger banks as profits dry up due to a slowdown in lending and credit rationing and as deposits and loan losses decline. In light of these circumstances, bank consolidation is likely to be a significant tendency over the coming years. I informed SA subscribers on Wednesday that Larry Fink, CEO of BlackRock, is worried about slow, protracted financial turmoil, similar to the Savings and Loan Crisis of 1986–1995, which saw nearly a third of savings and loan institutions fail. (over 1,000 in total). Although this is a probable scenario, the worst is yet to happen.
The long-term boom-bust cycle has come to an end.
(This is the Most Important Section to Read…)
As I stated above, the current short-term boom-bust cycle will come to an end due to the financial crisis.
But it’s also probably the start of the long-term boom-bust cycle’s conclusion, when things start to fall apart on the economic, financial, and monetary fronts.
I’ll make reference to The Changing World Order and Big Debt Crises by Ray Dalio when discussing global issues.
Former hedge fund manager Dalio offers the diagram (below) that illustrates how a new global order develops as the previous one disintegrates. (the historical cycle).
According to him, this will happen at the same time as the United States’ ongoing long-term debt spiral ends.
Where I believe we are in this cycle, I’ve marked. (Note: although we haven’t yet, peak money creation is imminent.)
This marks the beginning of the end for the American Empire if I’m correct.