Whack-a-Mole: Checks And Balances

Banking Crises Causing A Credit Crunch, The Current Landscape, and My Top Pick

There is a new “most important thing”

Inflation has left the building, and the Banking Crisis has burst through the brick wall more dramatically than the Kool-Aid man.

There is a popular saying that, “as goes the banking industry, so goes the economy.”

This is because the financial infrastructure is such a key component to aligning checks and balances, provides funding to growing businesses, and serves as the ultimate facilitator of capitalism.

Without a solid foundation in force, every part of the ecosystem starts to shake more violently. The authorities at hand have come out with a new serving of alphabet soup in the form of government backstop program acronyms: ESF, BTFP, etc…

In this note, I’m going to walk through how the table was originally set, briefly recap which banks collapsed and why, walk through the government responses to date, talk about systematic implications, and end it off with my top pick where you can get strategic around any drastic selloffs.

In this version of the PAID Newsletter, I will cover:

• Setting The Table 👉 ZIRP, Free Money For Everyone, Inflation, Rapid Rate Hikes

• Banking Crises Onset 👉 FTX, Silvergate, SVB, Regionals

• Government Intervention 👉 BTFP, Primary Credit, Other Credit

• SIBs 👉 EU Banks: Credit Suisse & UBS takeover, Deutsche Bank

• Watch CDS 👉 Credit Default Swaps Making HUGE moves

• Shrinking Deposits 👉 Capital Flight

Setting The Table 👉 ZIRP, Free Money For Everyone, Inflation, Rapid Rate Hikes

There’s a reason so many market pros study history and philosophy instead of only financial statements. While history may rarely repeat, it definitely rhymes. Philosophy comes in handy when understanding the human element. Since a market is merely an aggregate of individuals, understanding mob mentality is important.

In the prior decade and a half, we were playing a different game. Interest rates were very near zero which funded a lot of the economic growth that we have seen in the post-GFC era. By keeping interest rates low, borrowing costs were cheap across the board which incentivized businesses and individuals to take on more risk. We saw this microcosm most amplified in the boom of technology companies. These were growth-at-all-costs business models that heavily burned cash upfront to grab market share.

A mantra that was stated by one company was adopted by the broader ecosystem: “move fast and break things.” But breaking things has consequences. In a low-cost funding environment, everyone is binging on capital. We saw it in the flood of capital to VCs, speculative assets, SPACs, and cryptocurrencies. Throughout this period, many companies with unsustainable business models were just pipe dreams. Everyone was riding high.