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March 20, 2023

Cracks in the Banking System | Hot Wallet Market Update

Silicon Valley Bank was just the tip of the Iceberg

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Silicon Valley Bank, Silvergate Bank, Signature Bank, First Republic Bank, and now Credit Suisse have collapsed or been under serious pressure thanks to Bad Central Banking. Here's an update on this quickly evolving situation and why Balaji Srinivasan thinks Hyperinflation is close and Bitcoin is the answer.


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I'm Scott McGregor, this is the Hot Wallet Podcast. There's so much happening in the world of banking right now. And I want it to get you up to speed in an easy to understand manner. So what's happening with the banks right now? Let's take you back... It all started when the Federal Reserve and central banks around the world tried to tackle inflation by jacking up interest rates at the fastest rate in human history. Now, this comes on the heels of them telling us and giving guidance to the opposite, saying rates are going to be low, the pandemic is here, rates are going to be low, we're going to let inflation run hot, nothing to be worried about. And so if you're a bank, and you have a bunch of money that isn't getting any return, it's not getting money back because of interest rates. One safe thing you can do is to put that money into a government-backed treasury. And that works great unless interest rates go up. And so we started seeing a run on some banks as depositors were getting their money out of regional banks. Because in a world where M2 money growth is at the lowest level and decades, everyone is fighting for dollars and going into their savings. They're not taking out loans because interest rates are high. So we saw this happen at Silicon Valley Bank in California, where depositors including venture capitalists, were taking money out at such a rate that the bank couldn't keep up and they ended up having to sell some of their US Treasuries at a massive loss. And some of the numbers are pretty staggering. From what I understand. Banks in America have unrealized losses to the tune of $600 billion because a lot of banks did the same thing. They took the guidance that the Federal Reserve was giving them, and they bought these long-term treasuries to try and get yield. But of course, we know what happens, interest rates went up. And that causes the loss on their treasuries. So the US government and the Federal Deposit Insurance Corporation or FDIC had to come in and backstop depositors at Silicon Valley Bank to the tune of $25 billion. And that's just one of three banks that collapsed in the last few weeks in the United States, including Signature Bank, and Silvergate Bank. So what has transpired most recently is that the Federal Reserve has come out to say that they will backstop depositors in the major banks. And so this kind of puts a question mark over smaller regional banks. And so what we're seeing is people taking money out of their smaller regional banks, and putting them into some of the big major banks like JP Morgan, Morgan Stanley, Bank of America, et cetera. So a further squeeze is happening on some regional banks. And it's not just banks like Silicon Valley Bank, which some could argue, took risky bets, betting on venture capitalists, et cetera, et cetera. It's over 150 other regional banks that are also in the same position and potentially could collapse. We've also seen this contagion spread to places like Credit Suisse which had to be bought out by UBS and backstopped by the Swiss government. So we're seeing central banks start to put these losses on their balance sheet. Now what can happen when Central banks increase their balance sheet, is that we can actually see a rise in risk assets, we're seeing a big move in Bitcoin, gold, and stocks. Now, why is that? Because of the correlation, there's a high correlation between federal reserve balance sheets and risk assets, from what I understand the correlation is about 97%. So every time the Federal Reserve or central banks put something on their balance sheet, what does that do? It devalues the dollars that are currently in the system. And so if your money is losing value, what happens while the same thing as when they printed money during the pandemic risk assets rise and so that's why we're seeing a bit of a bid come into crypto gold and stocks, specifically, technology stocks, a lot of which were hammered under the regime of high interest rates. Now this week, we have the Federal Reserve coming out and we are wondering what they are going to do. Are they going to raise interest rates 50 basis points like the ECB did the European Central Bank Are they going to raise 25 basis points? Like they said they're going to? Or are they going to pause? If they pause, we could see further money come into stocks and other risk assets. Now, there is some fear from market participants that if they pause, it could bring a second wave of high inflation again. And so a lot of people are looking for the Federal Reserve to at least, you know, continue their fight against inflation with a 25 basis point hike this week, basically say, yep, we're still fighting inflation. And don't worry, we'll take care of the banks as well. Now, if that happens, if they do continue to take care of the banks, that of course means potentially printing money and putting losses on the federal reserve balance sheet, and if we see that we could see potentially some hyperinflation in the US dollar and other currencies around the world. Now that has a lot of hardcore Bitcoiners looking to Bitcoin as a way to store their value and get their money out of the banking system. A well-known Bitcoiner Balaji Srinivasan.... I'm ruining his last name, by the way, has put a million-dollar bet out there to say he will buy Bitcoin at a million dollars because he believes we are entering into a world of hyperinflation and that all the banks are insolvent. Pretty scary stuff. I'm hoping this prediction of his will not come true. In January of 2020 Bellagio he tweeted out what if this Coronavirus is the pandemic that public health people have been warning about for years? And if so, it could accelerate many pre-existing trends and he goes on to list a few of them including border closures, nationalisms social isolation preppers remote work distrusting governments and face masks. And so Bellagio was right about the pandemic, is he right about hyperinflation and what could happen to Bitcoin over the next 90 days. Now, the thing that really kind of irks me about this is that central bankers knew this was going to be a problem in September of 2022. Last year, they had a report out saying, this could be a problem for some regional banks, and they kept raising interest rates anyways. It's like a car driving towards a wall and the driver going, Yeah, we're gonna hit brace yourself. And there it goes. This feels in my opinion, like a real moment like there is a shift happening underneath our feet. And we're gonna have to pay close attention to be able to protect ourselves, our families, and our savings from what could be a very scary situation. So I hope this is helpful. This of course, is my opinion only and not investment advice. Please subscribe to the Hot Wallet Podcast on Spotify, Apple Podcast, Google Podcast, or wherever you get your podcasts. Please hit follow subscribe, and leave a review. By doing that you're doing me a big solid. I'm Scott McGregor. @scottrades on Twitter. I'll see you next time.