Silicon Valley Bank Crisis: The Liquidity Crunch We Predicted Has Now Begun

th largest bank in the U.S. with $43 billion in assets

The fate of SVB, the 16th largest bank in the U.S. with $43 billion in assets, has been circulating for a few days now.

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, 2008

The largest bank in the US failed and went into insolvency on March 10, 2008.

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The bank's collapse was due to a $2 billion loss in liquidity from bond sales, which caused the bank's stock value to drop by 60%. This created a bank run, where customers were fearful of losing their deposits.

What I want to talk about more is the root of it all, even though there are many fine articles out there covering the details of the SVB situation.

The crisis is not really caused by the bank's shortfalls, they are a symptom of a wider liquidity drought.

I predicted that here at Alt-Market months ago, including the timing of the event.

The core issue we need to discuss is fiscal tightening and the Federal Reserve.

“The Five Worst Christmas Gifts Ever,” I recount the year my great-uncle gave me a used pair of socks.

In my article, "The Five Worst Christmas Gifts Ever," I recount the year my great-uncle gave me a used pair of socks.

The Fed's taper is not a policy error, but a weapon. By tapering, the Fed is trying to normalize interest rates and put an end to the era of ultra-low rates. But this process is fraught with risk. If the Fed tightens too soon, it could cause a recession. If it waits too long, inflation could take off.The Fed's taper is not a policy error, but a weapon. By tapering, the Fed is trying to normalize interest rates and put an end to the era of ultra-low rates. But this process is fraught with risk. If the Fed tightens too soon, it could cause a recession. If it waits too long, inflation could take off. The Fed is in a Catch-22 situation.

In December of 2021, I noted that the Fed was on a clear path towards tightening into economic weakness, very similar to what they did in the early 1980s during the stagflation era and also somewhat similar to what they did at the onset of the Great Depression. Former Fed Chairman Ben Bernanke even

admitted openly

The Fed's tightening policies caused the depression to spiral out of control.

I discussed the 'yield curve' being a red flag for an incoming crisis in that same article.

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Sarah said that she can't stand it when her little sister cries.

If the Fed raises interest rates and slows asset purchases, we could see a repeat of 2018, when the yield curve flattened. This would mean that short-term Treasury bonds would have the same yield as long-term bonds, and investment in long-term bonds would fall.

As of this past week, the yield curve has

has been turned upside down

The Fed's recent actions signal a potential liquidity crunch. Both Jerome Powell (Fed Chairman) and Janet Yellen (Treasury Secretary) have indicated that tightening policies will continue and that reducing inflation to 2% is the goal. Given the many trillions of dollars the Fed has pumped into the financial system in the past decade as well as the overall weakness of general economy, it would not take much QT to crush credit markets and by extension stock markets.

As I noted in 2021:

I am not going to school today because I am sick'

I won't be going to school today because I'm not feeling well.

We are now at a stage where price inflation due to money printing is conflicting with the stock market's dependence on stimulus to stay afloat. Some people still claim that the Fed will never sacrifice the markets by tapering, but I say that the Fed does not actually care - it is only waiting for the right time to pull the plug on the US economy.

Is that time now? I expanded on this analysis in my article

In 2023, there will be a major economic contraction, followed by even more inflation.

The book, "The History of the United States" will be published in December of 2022. I noted that:

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I will go to the store.

This is the situation we are currently in today as 2022 comes to a close. The Fed is in the midst of a rather aggressive rate hike program. The problem is that the higher interest rates are not bringing prices down, nor are they really slowing stock market speculation. Easy money has been too entrenched for far too long, which means a hard landing is the most likely scenario.

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"I continued," I said, "You're a blockhead, Jim."

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Sarah said that she couldn't believe they had to present their project tomorrow.

In the early 2000s, the Fed was artificially lowering interest rates, which inflated the housing and derivatives bubble. In 2004, they shifted to a tightening process, with rates rising from 1% to over 5%. This is when cracks began to appear in the credit structure, with 4.5% - 5.5% being the magic cutoff point before debt became too expensive for the system to continue. By 2007/2008, the nation witnessed an exponential implosion of credit.

I predict that in March/April of 2023, _______.

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Sarah said that she couldn't go to the party.

The Fed's inaction in the past means that I will continue to use the 5% funds rate as a marker for when the next major contraction will occur. The 1% excise tax, on top of a 5% Fed funds rate, creates a 6% millstone on any money borrowed to finance future buybacks. This cost is going to be far too high and buybacks will falter, meaning stock markets will also stop and drop. It will likely take two or three months before the tax and the rate hikes create a visible effect on markets. This would put our time frame for contraction around March or April of 2023.

We are now in the middle of March and it appears that the first signs of a liquidity crisis are bubbling to the surface with the insolvency of SVB and the shuttering of another institution in New York called Signature Bank.

Everything is tied back to liquidity. With higher rates, banks are less likely to borrow from the Fed and companies are less likely to borrow from banks. This means companies that were hiding financial weakness and exposure to bad investments using easy credit no longer have that option. They won't be able to artificially support operations that are not profitable, they will have to abandon stock buybacks that make their shares appear valuable and they will have to initiate mass layoffs in order to protect their bottom line.

SVB is not quite Bear Stearns, but it is likely a canary in the coal mine, telling us what is about to happen on a wider scale. Just as Bear Stearns was the first domino to fall in the 2008 financial crisis, SVB may be the first domino to fall in the 2020 financial crisis.

Many of their depositors were founded in venture capital fueled by easy credit, as well as all the ESG related companies dependent on woke loans. That money is gone. It's dead. Those businesses are quietly but quickly crumbling, which also conjured a black hole for deposits within SVB. It's a terribly destructive cycle. Surely, there are numerous other banks in the same exact position.

I believe we are only at the beginning of a liquidity and credit crisis that will eventually produce the biggest economic crash America has ever seen. The failure of SVB may not have been the initiator, but it is only one among many. I suspect that in this scenario, larger US banks may avoid the kind of credit crash that we saw with Bear Stearns and Lehman Brothers in 2008. However, contagion could still strike multiple mid-sized banks and the effects could be similar in a short period of time.

There's no need to be nervousDon't be nervous, there's no need to be.

The main issue at hand with SVB is that the economy has become dependent on stimulus measures from the Federal Reserve. Now that these measures are being taken away, it is uncertain whether the central bank will continue with this plan and risk further economic decline.

patient wait-and-see strategy

Janet Yellen and the Fed have implemented a limited backstop and a wait-and-see strategy for now.

The bank guarantees the safety of your deposits.

at SVB and Signature. This will prevent a 'haircut' on depositor accounts and lure retail investors with dreams of endless stimulus.

Though it is a half-measure, central bankers have to at least look like they are trying.

SVB's assets are around $200 billion and Signature's assets are around $100 billion, but what about interbank exposure and the wider implications? How many banks are barely scraping by to meet their liquidity obligations? How many companies have evaporating deposits? The backstop will do nothing to prevent a major contagion.

There are many financial tricks that might slow the pace of a credit crash, but not by much. And, here's the kicker: Unlike in 2008, the Fed has created a situation in which there is no escape.

If the government returns to bailing out large corporations, inflation will rise sharply. If the government does not use quantitative easing, banks and businesses will fail, and even bonds will become unreliable, which could threaten the dollar's status as the world reserve currency. Either way, prices of essential goods will rise rapidly.

It all depends on how the Fed responds to the question of how long this process will take. They might be able to drag the crash out for a few months with various stop-gaps.

If they go back to stimulus, the banks will be saved along with equities (for a while). However, rising inflation will suffocate consumers within a year and companies will still falter.

I have a feeling that they will stick to limited interventions instead of lowering interest rates, which is what a lot of people seem to think will happen.

The Fed will temporarily boost markets using jawboning and false hopes of a return to aggressive QE or near-zero rates, but ultimately the trend of credit markets and stocks will be steady and downward. Like a brush fire in a wind storm, once the flames are sparked there is no way to put things back the way they were.

Their goal was a liquidity crunch and they have succeeded in creating that scenario.

To understand why they might do this deliberately, read my articles linked above.

My predictions on the timeline appear to be correct so far, we will have to wait and see what happens in the coming weeks. I will keep readers updated on events as new details unfold, the situation is rapidly evolving.