This Week’s Top Headlines

i) Bitcoin’s volatility is astounding. The world’s largest cryptocurrency slumped to $20,000 in early March, but quickly rebounded and soared to its July high of $28,000, representing a 39.9% increase in just one week.

ii) Three US banks have collapsed in the past seven days as financial institutions continue to struggle under tighter credit conditions. Joe Biden attempts to put out fires while the Federal Reserve injects emergency loans to other banks to stem the contagion.

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Bitcoin miraculously turns bullish

As previously covered, the collapse of Silicon Valley Bank (SVB) sparked a global panic that spread like wildfire. In the first week of March, investors fled from almost everything - bonds, bank stocks, crypto, and more - which saw Bitcoin plummeting to the crucial support level of $20,000.

The crisis only continued to unfold this week, as two more US banks succumbed to the same fate as SVB. A not-so-new narrative began circulating among investors, suggesting that these giant financial institutions were built upon a house of cards. The sentiment towards anti-fiat assets such as gold, silver, and Bitcoin suddenly flipped bullish, causing Bitcoin to soar to a 10-month high of $28,000.

The world's largest cryptocurrency has surged an impressive 39.87% in the past week and a remarkable 67.48% since the start of 2023. The crucial support levels to defend now are the $25,000 and $20,000 marks.

The crypto fear and greed index proves that this month has been extremely volatile, with the indicator swinging to fear during the collapse of SVB but quickly pivoting to greed as Bitcoin rallied.

Banks are dying like flies

In a world where banks go to great lengths to scrutinize their customers' backgrounds and meticulously monitor their transactions, even going so far as to fine an elderly woman for overdrawing $3 from her checking account, you might assume that these same financial institutions would apply a similar level of effort and attention to their own management.

But we’ve seen quite the opposite.

Three US banks have crumbled this week:

• Silvergate bank - crypto focused lender founded in 1988, $16 billion in assets.

• Silicon Valley Bank - 16th largest bank in the US, founded in 1983, $209 billion in assets.

• Signature bank - another crypto friendly bank, 29th largest in the US, founded in 2021, $110 billion in assets.

These events posed a significant threat to the global economy, with the potential to trigger a recession similar to the one experienced in 2008. Had it not been for the intervention of the central bank and the government, the economy may have already slipped into a recession.

But what exactly happened here? How could these institutions (which are supposedly known for their prudent risk management) disintegrate in a matter of days?

The answer is remarkably simple - greed, poor risk management, and the lack of diversification.

Imagine it's a bull market, and you decide to invest in crypto, stocks, or securities. Without paying attention to any downside risks, you put a large portion of your savings into these assets. For a while, everything seems to be going smoothly - but suddenly, the situation changes.

Negative sentiment and unforeseen black swan events begin to bring down the markets, wiping out the value of your investments and resulting in significant losses.

This is exactly what happened to these banks: they went all-in on certain assets without factoring in the potential downside risks.

During the height of the Covid pandemic from 2020 to 2021, interest rates were near zero while the US Fed printed over $3 trillion. This resulted in a massive increase in money supply, and prices soon followed suit.

Not only did food prices increase, but the stock market, Bitcoin, oil, and other assets rose as well. Tech companies posted record quarterly earnings due to cheap loans spurred by near-zero interest rates, leading to more deposits flowing into these tech-friendly banks.

Many of these banks, in turn, invested the deposits in long-term treasuries like bonds and other interest-bearing accounts created by the Federal Reserve.

If you could borrow money (from depositors) at almost 0% and lend it to the Fed at 3%, wouldn't you do it?

But everything changed in 2022.

Inflation was roaring at multi-decade highs due to the increased money supply, prompting the Fed to raise interest rates by over 425 basis points in less than 9 months.

As rates rose, the prices of these older bonds fell, and the banks that had invested heavily in them a year ago were left with huge unrealized losses.

Another problem that the majority of these banks did not anticipate was that tech companies became increasingly strapped for cash as the economy slumped. Many clients began to request withdrawals, and when banks could not honor them (such as SVB), they had to sell their bonds at a huge loss.

This eventually led to a spectacular bank run, which we have witnessed in the past week, and the demise of these poorly managed institutions.

The event was so contagious that it led to a global sell-off in banking stocks

Malaysian banks such as Maybank, Public Bank and CIMB bank, experienced a 6.5% drop on average.

Meanwhile, Credit Suisse, the second-largest lender in Switzerland founded in the mid 1800s, saw its shares nosediving by over 30% on Wednesday.

The bank is considered a "global systemically important bank," a classification shared by only 30 other major financial institutions worldwide such as JP Morgan Chase, Bank of America, and the Bank of China.

Credit Suisse has already been struggling throughout 2022 due to its own series of scandals, missteps and compliance failures that have steadily undermined the confidence of investors and clients.

The banking contagion was the last straw that would topple this giant and spur an economic crisis.

On Thursday, an emergency loan of $50 billion was offered by Swiss National Bank to temporarily increase the struggling bank’s liquidity, but investors are still unsure if this will prevent it from collapsing.

Joe Biden assures citizens that America’s banking system is “safe” while the Fed restarts the money printer

Following the market turmoil, Joe Biden sought to reassure Americans that they can have utter confidence in the US banking system. His comments came after US authorities worked on a plan over the weekend to regain the public’s trust on the financial system while preventing further spillover effects.

To ensure that banks remain liquid during times of crisis, the Federal Reserve launched the "Bank Term Funding Program," offering loans of up to one year and additional funding to eligible depository institutions. This program aims to stabilize the banking system and safeguard deposits and credit.

There is also a “discount window” to allow any banks to borrow money from the Fed against a range of bank-held collateral to meet temporary shortages of liquidity.

In simple terms, the Fed is pumping money into the economy.

Over the past week, the Fed has lent $300 billion in emergency funds to banks, causing the total assets held by the Federal Reserve, a key indicator of the current money supply, to surge by an equal amount.

The central bank’s year-long effort to tighten credit conditions has been wiped out in just one week.

The sudden decision to inject more money (ie. quantitative easing) into the economy is the main reason why we saw anti-fiat assets (like Bitcoin and gold) shoot up by a huge margin this week.

By examining a chart showing the Fed's total assets and inflation, it becomes apparent that these two factors are closely correlated.

This begs the question: if the Fed is switching to quantitative easing to save the US banking system, could this cause inflation to roar back?

If that is the case, then we might just see even more aggressive rate hikes from the Federal Reserve, but we’ll have to see what happens during its upcoming decision on 22nd March.

That’s all for this week’s newsletter!

Disclaimer: I am not a financial advisor. This newsletter is based on my own analysis and research. Do not take any of it as financial advice.

*This newsletter was written at 10.30 AM on 19 March 2023 and completed at 3.30 PM the same day. To get early access to our newsletter, be our patron for as little as $1/month!