Good morning investors, and welcome to my very first newsletter on Substack. I have been motivated to start this weekly transmission for a few reasons.
Primarily, I need an outlet for my own unfiltered opinion. I write copy for a dizzying array of clients, and while I fully back the opinions given in them – whether at IG, Share-Talk, InvestingStrategy or elsewhere – I am always limited by what I can communicate.
This is for a variety of reasons.
For example, IG is a heavily regulated trading platform, and therefore I have to be extremely careful with my language to ensure I am not giving advice or overpromising potential returns.
Other clients have a tone of voice they want used to ensure that the language has a positive inflection or even for some pieces is indistinguishable from another writer. Occasionally, I’ll ghostwrite comms for PR departments at blue chip companies or write a guide of EIS for someone at the big 4.
Much of what I write is either syndicated, or else quoted in other publishers – and whether fair or not, the Guardian, Telegraph, and Financial Times are not going to publish anything that doesn’t sound like it’s been written by someone in touch with their emotions. Despite being a freelancer, I’m not completely free.
And sometimes, I want to be able to tell readers to either buy a stock like it’s the last toilet roll on a pandemic-ravaged earth, or else run as if you’re one of two male penguins racing for a spot on Noah’s Ark just as it starts to rain.
Of course, none of what I write -here or otherwise – is financial advice. If you buy or have bought a penny stock just because I said it might be a good bet, then you’re a f**king idiot.
See? Language I wouldn’t ordinarily be able to use.
Likewise, if you think my ramblings on the current banking crisis – and it is a crisis – are anything other than the opinion of one person, then you’re a fool. Whether penny stock or multi-trillion-dollar industry, everybody is thinking, writing, and acting on imperfect information.
And this can spread like wildfire on social media, where everybody has an agenda. I’m assuming readers are adults with a functioning brain, which is a luxury I do not have elsewhere, because there are a lot of fools trading stocks.
I will also note that unlike any other piece of work I do, I’ll be writing this up without any sources, and with a bottle of whisky at hand. Tonight, it’s the dregs of a bottle of Laphroiag, and next week it’ll most likely be some godawful cinnamon-infused monstrosity received at Christmas that needs to be drunk before any guests come round.
Accordingly, there may be the odd factual error, spelling mistake, or similar issues. Other than pledges, which are welcome but not expected, I won’t monetise this for some time. And I already write thousands of words a week of careful wordsmithing, so if you’re looking for perfection, look elsewhere.
With all that being said…
What the hell is going on?
The answer is actually very simple. Bankers were, are, and continue to be, idiots. Silicon Valley Bank collapsed because the morons in charge locked up most of their client funds in inaccessible long-dated securities that would become worth less in the near term if rates rose at all. Which they did.
And everyone’s so surprised that they acted so stupidly.
But to me, this is the exact same as those people who stuck to a variable rate mortgage between 2009 and 2021, or never take out a fixed deal on energy, despite the premium for these guarantees being fairly low. Just on a grander scale.
If you bet the house that rates won’t rise, you don’t get to complain when you lose it.
First Republic Bank is perhaps being unfairly targeted, as it’s only mistake was having a client base of high net worth individuals who predominantly have more than $250,000 in the bank. Anything over this limit is uninsured, so clients have panicked, are withdrawing at speed, creating its own liquidity crisis affecting the share price.
FWIW, I think it had a good business but fear is in the markets now and liquidity injections, state intervention, and political support will not be able to save it as no client wants to be the one without a chair when the music stops.
By contrast, Credit Suisse deserves this. Forgetting the humiliation of being forced to bring a begging bowl to their arch-rival an attempt their best Oliver impression, they have had so many lawsuits launched against them it’s starting to get hard to keep count.
Nazi gold, embezzlement, corporate espionage, personnel misconduct, sanctions busting, money laundering, tax evasion. As a legally trained person, it wasn’t hard to see that the next crash would see this domino fall pretty soon. Perhaps some of the customers seeking the exit have grown a conscience.
And for those saying the bank serves the international criminal fraternity – not me, that would be defamation – though their lawyers are probably too busy anyway, assuming they can afford them- back to the point – these same criminals may want at least a mirage of competence. It seems that Credit Suisse cannot even manage that.
After the Swiss National Bank came to the rescue, seemingly moments after management launched an impassioned defence of their liquidity – the new wheeze is for UBS to buy CS, but they are demanding that the Swiss state guarantees billions of dollars of the acquisition’s uselessness.
This is a system critical bank, which has ‘material fuck-ups’ in its financial controls. It needs to be rescued for the Ponzi scheme to continue, but I’m not sure that Switzerland with its system of government by referendum will be comfortable with this.
If a bank is ‘too big to fail,’ there’s a possibility they will instead consider the nationalisation possibility. And if you think it’s impossible, these are people who each have their own private nuclear bunker and will put it to vote.
And if the choices are let UBS have another bank destroying market competition, completely risk free but with the taxpayer on the hook, those chocolate-loving people will make the same decision I would.
Yellen’s dilemma
But the key problem is that ‘too big to fail’ means there is no moral hazard. American banks despite Yellen’s protestations – now know that the government will rescue deposits of customers, so they are going to start taking some insane risks, especially if they feel they are one of they 200 or so likely to go bust anyway and fancy a final throw of the dice.
Yellen herself is caught between a rock and a Homelander drunk on Stella. She can’t officially make the FDIC insurance unlimited for the above reason and also because that would involve insuring $21 trillion of customer deposits. It could be enough to destroy the US Dollar as the global reserve currency.
But if she doesn’t then most of the 4,500 regional banks will be crushed by the rush to quality. JP Morgan might be happy with that initially, but despite conspiracy theorists thinking it advances the deep state plan for a CBDC, this could create economic collapse.
Final thoughts
We have a market crash every so often- that’s life
2022 (Thanks Russia)
2020 pandemic (thanks China)
2008 credit crunch (thanks USA)
Early 1990s (to be fair, this one was probably our fault)
Early 1980s
Mid 1970s
1961
1956
And so on going back to the Great Slump of 1430-1490.
Quality international financial institutions with sufficient liquidity to weather the storm could boom when growth roars back, as it always does.
JP Morgan, Citi, and HSBC’s share prices are and may continue to be depressed by current circumstances.
But while there could be a full-blown crisis, it could also be the case that two weeks from now, all anybody remembers is that a couple of US regionals went under because of their very specific client bases, while Credit Suisse which has always been a festering buboe on the skin of the global financial sector was either treated with penicillin or thrown in the plague pit for good.
This could make the larger banks a serious opportunity on the dip – not advice.
Bottle’s finished.
Until next week.
Thanks for reading Charles’s Substack! Subscribe for free to receive new posts and support my work.
Disclaimer & Declaration of Interest
The information, investment views and recommendations in this article are provided for general information purposes only. Nothing in this article should be construed as a solicitation to buy or sell any financial product relating to any companies under discussion or to engage in or refrain from doing so or engaging in any other transaction. Any opinions or comments are made to the best of the knowledge and belief of the writer but no responsibility is accepted for actions based on such opinions or comments. The writer may or may not hold investments in the companies under discussion
