Ho-hum…Another day, and another major bank is circling the drain a bit faster.

This morning, it’s the German/E.U. flagship Deutsche Bank, whose turn it is today to see its credit default swap premiums spike skyward.

Notably, this is a continuing market reaction given the shotgun marriage several days ago between UBS and Credit Suisse. Thanks, in part, to the dingbat of a U.S. Treasury Secretary Janet Yellen’s mixed messages on the subject this week, there remains some wondering as to what extent depositors of any bank are going to be “insured” going forward. That situation is evolving; but my gut tells me that depositors in relative terms, at least, have the least to worry about.

But what is much clearer is that stockholders and many bondholders of banks that do fail/get folded into others are going to have NO reliable safety net. Those of Silicon Valley Bank and Credit Suisse have learned that quite spectacularly. And it’s the proverbial “Denver boot” that’s just been given to CS bondholders especially that is chiefly the cause of DB worries this morning, as it is possible that this major bank may officially fail before too much longer.

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As I wrote in the new issue of The National Investor sent out to our Members at the beginning of the week, the evolution of this new (and likely very long-term) deleveraging in global markets and the global economy is now underway. It will NOT be the same as we saw in 2008 for several key reasons, as I will be explaining in great detail in the very near future (on top of a few points I’ve already recently made.)

But it likely WILL result in several years’ worth of underperformance in the economy…an ongoing secular bear market for stocks, albeit punctuated by MAJOR shifts in the fortunes of some sectors…and with ALL of this affected (unlike 2008) by the acceleration in the move away from the globalization regimen and US hegemony of the last 75 or so years.

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I stated at the outset of this newest banking crisis my view that–perversely, to some extent–it would be welcomed by “Fire Marshall Jay” Powell.

And I think even more after his comments of Wednesday that–notwithstanding the current headaches and those to come over banks/markets–Powell sees this mess as doing a LOT for him (all else equal) to bring down inflation meaningfully. Whether he even understands the added risks now that tremors are spreading in the banking system–threatening an environment where EVERYTHING comes tumbling down for a while, though–is an open question.

In one of his more honest comments from his post-F.O.M.C. presser, Powell intimated that the risk-off attitude and banking system woes themselves are and will be serving as added “tightening” of monetary policy and conditions. THAT IS AN UNDERSTATEMENT, AS WILL BECOME INCREASINGLY EVIDENT IN COMING MONTHS. Just how much, we don’t yet know.

Markets–which scarcely a few weeks ago had “adjusted” (with the U.S. dollar and interest rates rebounding further northward) in belated acknowledgement of the Fed’s hawkishness, completely pricing out any chance of rate cuts in 2023–have moved even more violently now back in the opposite direction. January, 2024 Fed fund futures markets this morning now predict a FULL ONE PER CENT OF RATE CUTS from the present level. So even more than before, markets are calling Powell’s bluff that the Fed will pull off still one more 25 bp hike and then hold things there into 2024.

I suspect this time, the Fed will end up coming toward the markets, and not vice versa.

That is one reason why stock markets haven’t totally fallen out of bed…yet. As you see above, stocks have yet to decisively go back below that “Breakout vs. Fake-out” line I have been chronicling for several weeks now, though I still believe a resolution to the downside is ahead.

As I have especially commented lately in regard to the Nasdaq’s recent outperformance–as opposed to the underperformance of the last year–markets are presently of a mind that, even if he does end up getting dragged into such a thing, Fire Marshall Jay will capitulate and start lowering rates sooner than he wants folks to expect.

But the BIG question is what would justify the beginning of more overt Fed loosening. Because it’s the answer(s) to that question which will determine in what ways we’ll need to shift our portfolio allocation focus. As I wrote Monday, big and–in some ways–somewhat contradictory bets have been made on oil…gold…stocks…bonds of ALL kinds…and currencies that may be premature, if not outright wrong.

The BIG risk is that the Fed has to run up the white flag and start easing while inflation is still running hot and–if anything–getting hotter anew as the months go by. Pretty much NOBODY is acknowledging that possibility right now.

Later today I’ll be going into a lot more detail/thought on some of these things anew with Mike Fox once more, on his Prospector News podcast. Late tonight or early tomorrow, once that interview is posted, I’ll be passing it along; DON’T miss it. And by the 5:00 p.m. hour, too, we’ll have had Kitco.com post this week’s Metals, Money and Markets Weekly wrap-up as well. Be on the lookout!

All the best,

Chris Temple

Editor/Publisher

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