Be Angry. Yes, This is a Bailout. Yes, You’re Paying for It.

The Fed, Treasury, and FDIC have bailed out Silicon Valley Bank depositors. [The Rude Awakening] March 13, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Be Angry. Yes, This is a Bailout. Yes, You’re Paying for It. - The Fed, Treasury, and FDIC have bailed out Silicon Valley Bank depositors. Or… - The Fed, Treasury, and FDIC have thrown the US taxpayer under the bus. - No matter how you slice it, the tax parasites in DC are making you pay for this. [New Biden Bucks Follow-Up Available Now]( Hey, it’s Jim Rickards. Since posting my original Biden Bucks presentation online, millions of people have viewed it. Snopes and the Associated Press have even attempted to “fact check” me and claim my warnings are false: [Click here to learn more]( Point being, my message has raised a storm and caused a lot of controversy. But in the time between my message and now, a lot of new developments have come to light. That’s why I’ve just released an update to my original prediction… one which will likely be even more controversial. [>> Click here now to access my new 2023 Biden Bucks follow-up](. [Click Here To Learn More]( [Sean Ring] SEAN RING Good morning on this overcast morning in Northern Italy. To paraphrase Popeye, I’m utterly disgustipated on your behalf. [SJN] Whether by inflation or bank fees, you’re about to get poorer through no fault of your own. Jerome “Transitory” Powell, Janet “There won’t be another crisis in my lifetime” Yellen, and the FDIC - from now on pronounced “F-DICK” - have conspired to make you bail out Oprah, Meghan and Harry, and Nancy and Paul Pelosi. Yes, they’re all going to be fine, thanks to the unholy tripartite alliance, much to your detriment. In this piece, I may commit the sin of oversimplifying things. But it will make it easier for you to understand the overall concepts. That’s more important than getting caught in the weeds of detail. For more detail, I can’t encourage you enough to read my friend and colleague Dan Amoss’s report “It’s Not A Wonderful Life In Silicon Valley.” If you’re a Strategic Intelligence subscriber, it’ll already be in your inbox. In today’s Rude, I borrowed liberally from Dan’s work. Thanks, Dan! What Happened? First, let’s establish why even Treasury bonds are a risky investment in a rising rate environment. US treasury bonds are default risk-free, not price risk-free. That is, the US Treasury can print whatever money it needs to make its investors whole. So it will never default on its debts. But USTs certainly have price risk! Just look at the ETF known as the TLT, which holds long-dated Treasury bonds: [SJN] Just eyeballing this chart, you can see the TLT fell from a peak of about $150 to a trough of about $92.50. That’s a 38% loss! Not very risk-free, is it? But that’s what too many investors think. And that leads to enormous problems. Let’s look at an example of how bond prices move. In this case, we’ll use a 2-year bond with a coupon of 0.25% to match the initial upper bound on the fed funds rate. At issue, the bond will be priced at “par.” That means the issue price will be $100 (left-hand side). I’m using 100 as the principal instead of 1,000 - the usual UST face value - so you can see the percentage changes more easily. [SJN] Now let’s raise rates to 4.75%, as our dear chairman did. All else equal, our bond is now worth $91.60, a loss of $8.40. (Of course, that didn’t happen all at once. But we’re keeping this simple.) That loss feeds directly into the income statement, which feeds into the equity section of the balance sheet. But that’s only a two-year bond. What happens with a ten-year bond? [SJN] It’s much worse of a loss! Why? Because the bond is of a longer duration. Longer-dated bonds are far more susceptible to interest rate hikes than short-term bonds. The loss is now $35.17 when we go from a 0.25% upper rate bound to a 4.75% upper rate bound. The mathematics are deceptive. Powell didn’t raise rates by 4.50% (4.75% - 0.25%). He raised rates 18x (4.75% / 0.25% - 1). You must look at the change, and not the difference, to grasp how much he’s increased rates. These banks - most US banks - are loaded with Treasury paper thanks to [Basel III’s requirement to hold HQLA (high-quality liquid assets)](. “But Sean,” you say, “what else could they have done?” And the answer is easy - or should be - with CFOs. Buy interest rate swaps (payer swaps) to hedge your interest rate risk. And it’s amazing, but Silly Valley Bank didn’t do that! [Over 62 And Collect Social Security? Take Action Immediately!]( [Click here to learn more]( [If you’re over the age of 62 and currently collect Social Security, you need to prepare now](. Because Biden has given our country the worst inflation in decades – and many warn things will only get worse from here. Worse yet, the Social Security check you receive now may not keep pace with inflation… [Which is why, if you don’t act now, you could fall behind in the months ahead](. Is your retirement at immediate risk? [Click here now to get the simple, step-by-step actions to survive inflation](. [Click Here To Learn More]( Why Were These Losses So Needless? Because big banks will charge only a small spread to trade interest rate swaps. This should have happened: every time the SIVB CFO bought a long-duration, low-coupon bond, she should’ve immediately called JP Morgan, Goldman Sachs, or Bank of America to do a swap. The entire package would have looked something like this: [SJN] Credit: Sean Ring Ok, the UST is paying SIVB a 0.25% coupon. It’s fixed. There’s nothing you can do about that. But… you call up one of the big banks and swap out that 0.25% for a floating rate (either SOFR or USD LIBOR nowadays). The 0.25% “legs” cancel each other out, and SIVB would’ve been left with receiving a floating rate (minus the small spread). In this standard, everyday scenario for most banks worldwide, they’re now protected from rising rates. What they would inevitably lose on the bond will be made up by the SOFR/LIBOR leg of the swap. That’s how you immunize yourself from interest rate risk. It’s so damn simple what little hair I had on my head just fell out! It’s so common that according to the [Bank of International Settlements]( there are about $10 trillion in net notional interest rate swaps outstanding. Fancy Some Whine? Greg Becker, the CEO, was a member of the San Francisco Fed. Daniel Beck, the CFO, is a Freddie Mac veteran. Phil Cox, the COO, was at the bailed-out RBS for 23 years. Oh, it gets better: [SJN] Credit: [The Daily Mail]( That’s not so much a Board as a “Rogue’s Gallery.” But with no head of risk for that long, who’s minding the bond book? Answer: No one. And who’s paying for these boneheads’ mistakes? You are. Why? Because people like Bill Ackman and David Sacks scared the shit out of Biden’s government. The Bailout [SJN] [Ackman tweeted]( The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake. By allowing @SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank. Absent @jpmorgan @citi or @BankofAmerica acquiring SVB before the open on Monday, a prospect I believe to be unlikely, or the gov’t guaranteeing all of SVB’s deposits, the giant sucking sound you will hear will be the withdrawal of substantially all uninsured deposits from all but the ‘systemically important banks’ (SIBs)... It’s ridiculous. Sure, there would have been fallout. But sometimes, that’s exactly what you need to fix the system. Of course, the government says there will be no taxpayer-funded bailout. Well, it’s not direct, but it’s a bailout. And it’s taxpayer-funded. The [Joint Statement reads]( (bolds mine): After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer. We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer. Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law. Ok, so the owners aren’t getting protected. So it’s technically not a bailout in the traditional sense. But depositors’ funds over $250,000 are getting bailed out. And how? By a “special assessment” on banks. And who ultimately pays for that? You. With your fees and commissions and anything else you pay your bank. And you are a taxpayer, are you not? As James Bond said in Goldeneye, “Governments change, but the lies stay the same.” Wrap Up Gold is up. Bitcoin is up. Oddly enough, stock futures are flat to down as I write. Bailouts have unintended consequences. This one will be no different. In your spare time, I can’t encourage you enough to read our [2023 Daily Reckoning Gold Buying Guide](. I hope it helps you in times like these. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening In Case You Missed It… Jobless Claims, Banks, Cryptos, and Staley: What a Mess! - Jobless claims weren’t high enough. - Silicon Valley Bank gets crushed, down over 60% on the day. - Bitcoin gets hammered under $20,000. [Sean Ring] SEAN RING Happy Friday! Or at least I wish you one. And I hope it’s better than yesterday. Disclosure: I’m a few short energy stocks, so yesterday was perfectly enjoyable for me. Yesterday morning, I wrote about how this morning’s nonfarm payroll report is critical. If the number comes in too strong, Chairman Pow will have a better case to hike rates higher and for longer. I briefly mentioned the initial jobless claims report, but honestly, I didn’t think it was as important. Alas, it was. I also missed the banking sector. Since Credit Suisse has been such a mess for so long, I haven’t been looking elsewhere in the banking system for any issues. Well, yesterday, those problems came home to roost. To cap it all off, Bitcoin got slammed as well. BTC just doesn’t seem to be able to keep a rally going. Let’s take them one by one, so we can see what happened. Yesterday’s Jobless Claims and Today’s Nonfarm Payrolls When the market opened yesterday, not that much was happening. In fact, after about two hours, I stopped watching and did something else—my mistake. [SJN] As you can see, after about two hours was when all the fun began. It was as if the market got increasingly upset over a jobless claims number that wasn’t incendiary in and of itself. [SJN] Initial jobless claims came in at 211,000. The expected number was 195,000, and the prior was 190,000. You’d think the Fed would be happy with more people looking for work than expected. It’s just that the number wasn’t high enough for the market’s liking. The SPX proceeded to swan dive from 4,000 to 3,910 at one point before finishing the day at 3,918.32. And we’re not out of the woods yet. We’ve got the nonfarm payroll number this morning. [SJN] If we come in much higher than the consensus 225,000 number, we’ll sell off hard into the weekend. If we’re under 225,000, Powell won’t be as keen to hike rates vigorously. But the jobless claims number wasn’t the only thing weighing down on the market. [Covid Was Trial Run to Control Americans – This Is Next]( [Click here to learn more]( If Biden’s Executive Order 14067 comes to pass, a former advisor to the CIA and Pentagon is predicting legal government surveillance of all US citizens; total control over your bank accounts and purchases; and indefinite Democrat control past 2024. He says Covid was a trial run for how to control a population. Dems will use their “pandemic playbook” to silence any dissent. [Click here to see exactly what to do before it happens](. [Click Here To Learn More]( I think we were more surprised than anything else. And what a pleasant surprise it was! So shocking that I decided to write about it for you. But before I dig into the yellow metal, some housekeeping. On January 26th, I wrote a column for the Morning Reckoning titled, “[Give Up on the Idea of a Free Society]( My good friend and Libertarianism.uk podcast host, Andy Duncan, liked it so much, he interviewed me about it. If you’ve got a spare thirty minutes, feel free to watch it [here](. According to Andy, my t-shirt stole the show. Next bit of housekeeping: I will be hosting this Friday’s Rickards Uncensored session. The star of the show will be none other than Byron King, our ace geologist, lawyer, ex-Naval aviator, and Rickards precious metals and energy expert. Byron and I will talk about his favorite gold picks for 2023. I encourage you to attend so you can hear Byron’s best. Ok, with the housekeeping out of the way, let’s get to today’s piece on the yellow metal… and why it’s back in favor. James Bond and Goldfinger Although I think From Russia with Love is a better movie, Goldfinger is undoubtedly the archetypal Bond film. From Bond’s Aston Martin DB5 to “No, Mister Bond, I expect you to die!” Goldfinger started many of the traditions and tropes we’ve come to expect from Bond films. After Auric Goldfinger murders Bond’s girlfriend by suffocating her skin with gold paint, M is concerned whether Bond can go on with the mission. M asks, “What do you know about gold, (not paint, bullion)?” Bond coolly and inimitably replies, “I know it when I see it.” Don’t we all, Commander Bond? And that’s the thing. Most people intuitively understand that gold, the yellow metal that never rusts, is something special. But no one really explores gold beyond that point. So let’s quickly review why it’s a good idea to own at least some gold. Why Own Gold at All? Gold shines like the sun – is malleable and divisible and never rusts. It was the perfect metal from which to make coins. It also has a natural supply constraint. No more than 2% of the global gold supply has ever been mined in a single year. Gold is also no one’s liability, unlike dollars. That is, if you own gold, you don’t owe anyone anything. But the USD is often referred to as a liability because it is a debt-based currency, meaning that it is backed by the full faith and credit of the US government. When the US government issues dollars, it is essentially creating a liability for itself, as it is obligated to honor the value of those dollars by providing goods and services in exchange. Of course, the difference between what it costs to produce one hundred dollars (about 17 cents) and the value of goods producers need to provide to acquire one hundred dollars is called seigniorage ($100 - $0.17 = $99.83). It’s a huge profit for the USG, which is why the French coined it “the exorbitant privilege.” There are five big reasons to own gold, especially in times like these: - Store of value: Gold is often seen as a hedge against inflation and currency fluctuations. It’s been used as a store of value for thousands of years and has maintained its purchasing power over time. - Diversification: Gold is a tangible asset that isn’t directly tied to the performance of other investments, such as stocks and bonds. This makes it an attractive option for investors looking to diversify their portfolios. - Safe haven: During times of economic and political uncertainty, gold is often seen as a safe haven asset that can help protect wealth from market volatility and systemic risk. - Potential for appreciation: While gold doesn’t generate income like stocks or bonds, it has the potential to appreciate in value over time. This makes it an attractive option for investors looking to take advantage of price fluctuations in the gold market. - Cultural significance: Gold has a long history of cultural significance and has been used for ornamental, ceremonial, and religious purposes for thousands of years. Owning gold can therefore hold sentimental value for some individuals. So owning even a bit of gold always makes sense. But right now, it makes even more sense because of recent price movements. In March 2022, an ounce of gold traded up to $2,043.30. Then the price fell to November’s low of $1,626.65. It started to rally hard from there to reach about $1,970 at the beginning of February. For some reason – probably the realization that the Fed will continue to hike – gold fell to its present price of roughly $1,836. But far from thinking there’s more downside, nearly all my colleagues are looking at the upside. What’s the Upside? Well, if you use the unadjusted high from 1980, that price is $850. But adjusting that $850 to 2023 dollars gives you $3,074. That’s 67% upside. And that’s if you just buy physical gold. If you trade gold futures, ETFs, or gold mining companies, your upside can be much higher. Why Would Gold Head to $3,074? My friend and colleague Dan Amoss put together a great chart for Strategic Intelligence readers. Speaking of Strategic Intelligence… My colleague Jim Rickards just predicted the end of the U.S. dollar… He’s seeing something coming on the horizon – where the government will confiscate your cash… or your cash will simply become worthless paper. There’s a way to sidestep this government-backed invasion into your bank account, however. He’ll give you the roadmap to protecting yourself… including how to use [gold]( to safeguard your wealth. [Click here to learn more.]( Now let’s continue with this chart… Silicon Valley Bank, the BKX, and JPM’s Jes Staley Issue Silicon Valley Bank ran into trouble because it parked its deposits in US Treasuries. Thanks to Chairman Pow’s hiking policy, USTs aren’t the safe investment they used to be. Note: when we say USTs are “risk-free,” we mean default risk-free. That is, the US Treasury will never default on its bonds because the Treasury can always hit CTRL-P to print the interest payments and principal repayment. Of course, they aren’t price risk-free. As they say in the City of London, they’re “whore’s drawers.” Up and down, up and down. Since banks have to mark-to-market their securities positions daily, those losses directly and immediately affect the income statement (profit and loss), which feeds into the balance sheet through the equity section. Though those financial statements are reported quarterly, information like this allows the market to “price in” the damage. That’s why stock prices occasionally nosedive in between quarterly releases. From [The Wall Street Journal]( Thursday’s rout is another consequence of the Federal Reserve’s aggressive campaign to control inflation. Rising interest rates have caused the value of existing bonds with lower payouts to fall in value. Banks own a lot of those bonds, including Treasurys, and are now sitting on giant unrealized losses. Large declines in value aren’t necessarily a problem for banks unless they are forced to sell the assets to cover deposit withdrawals. Most banks aren’t doing so, even though their customers are starting to move their deposits into higher-yielding alternatives. Yet a few banks have run into trouble this week, sparking fears that other banks could be forced to take losses to raise cash. [SJN] The stock fell to $106.04 yesterday, a drop of 60.41%. Over 38 million shares traded, an enormous number compared to the weighted average of the last 20 trading days of only 2.55 million shares. But how about this big winner? Note: Buying puts gives you the right, but not the obligation, to sell a specified quantity of a specific stock at a date in the future, at a price agreed upon today (the premium). If you buy puts, you’re “buying downside” or “bearish.” [SJN] Credit: [@notmrmanziel]( Isn’t that a beautiful thing? There are always a few big winners for every loser out there. That’s derivatives for you. It wasn’t just SIVB - it was the entire banking complex. [SJN] The KBW Banking Index was down 7.70% yesterday. Ouch. The KBW portfolio includes large national money centers, regional banks, and thrift institutions traded in the US. The big bank bearing the brunt of the selling force was the US’s largest bank, JP Morgan. [SJN] Why is that? From [The Wall Street Journal]( JPMorgan Chase & Co. sued former executive Jes Staley over his ties to Jeffrey Epstein, identifying Mr. Staley as the “powerful financial executive” accused of sexual assault in a lawsuit against the bank. Late last year, an unnamed woman alleged that JPMorgan aided Epstein’s sex trafficking by allowing him to remain a client and helping him send money to the late financier’s victims. The woman, in her lawsuit against the bank, said an Epstein friend sexually assaulted her using aggressive force but said she was afraid to identify him publicly. JPMorgan Wednesday said that friend was Mr. Staley. JPMorgan’s lawsuit against Mr. Staley adds him to the woman’s lawsuit and another Epstein-related case filed by the U.S. Virgin Islands. The legal maneuver allows the bank to argue Mr. Staley should have to pay damages if the bank is held responsible. Epstein may not have killed himself, but he keeps killing all his associates! Bitcoin’s Nosedive At the time of my writing this, Bitcoin is now under $20,000. At least we’ve got some good gallows humor from the Twitterverse: [sjn] Credit: The Chart Report, via [@followtheh]( I still hold that Bitcoin, at least for now, is a tech play. It’s too correlated to the general market to be considered a store of value. Like most derivatives - although Bitcoin maximalists would bristle at that term - Bitcoin was invented for noble reasons but has become a gambling instrument. Wrap Up “My, my, my, what a mess…” said Tommy Lee Jones as he surveyed the trainwreck in The Fugitive. That’s exactly what we got yesterday. Hopefully, the payroll number today won’t be so damaging. In the meantime, have a restful and enjoyable weekend! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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