Devaluation Ahead
Beware of the Ides of March
"Caution yourself on the Ides of March!" warned the soothsayer in William Shakespeare's play Julius Caesar, as he tried to alert the Roman leader of an imminent threat.
Despite the warning, Caesar proceeded to attend the Roman Senate on that fateful day, where he was brutally killed by a group of senators who feared his authority. The attack resulted in Caesar being stabbed 23 times on the Senate floor.
Caesar’s assassination marked the downfall of the Roman Republic and the rise of the Roman Empire. It took place on the Ides of March, the 15th day of the month exactly 2066 years ago in 44 BC. “Beware the Ides of March” has since become a metaphor for warning someone of impending doom or danger.
In the Roman calendar, the Ides marked the middle of the month during the time of the full moon. "Ides" is an Etruscan word meaning "to divide." The Ides of each month were considered an important day for the settling of debts and making financial payments.
Two millennia later, we at Brentwood Research offer a similar warning.
Beware the Ides of March!
A dire situation is occurring in our banking sector. Over the course of the last week, the United States has witnessed the failure of three major banks. It’s a warning that we should all pay great attention to. Our fateful day could very well be upon us.
Last Wednesday, Silvergate, a bank that primarily served the cryptocurrency industry, was shut down by banking regulators. Two days later, it was revealed that the FDIC had taken control of Silicon Valley Bank (SVB), one of the top 20 largest banks by holdings, that focused on providing financial services to the technology sector. Then, two days later, on Sunday, it was announced that Signature Bank had also failed and would be seized by regulators.
Each of these banks was forced into receivership and suffered a "run" by its depositors. Although bank runs may be more familiar to modern-day man through depictions in movies and popular culture, they remain a real and potent force that can impact the stability of financial systems.
“You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can...”
George Bailey - It’s A Wonderful Life
It’s why we should all be alarmed.
The panic that happens during a bank run is called contagion. Contagion occurs when a crisis or disruption in one area of the financial system creates panic and uncertainty, causing investors and market participants to sell off assets or withdraw funds from other areas of the system, even if those areas are not directly affected by the initial crisis. Today, contagion can break out faster than at any other time in human history with just a click of a button.
“Clicks” have put our banks under tremendous pressure over the past week.
Yesterday, trading in First Republic Bank, PacWest Bancorp, Western Alliance, and Signature Bank were all halted for volatility after sharp declines in early trading. First Republic stock fell as much as 50%. PacWest and Western Alliance each fell more than 30%. Signature Bank, by then under the direction of the regulators, fell 25%.¹ These stock sell-offs yesterday coincided with depositors attempting to move their money away from these institutions into larger banks.
Why are investors dumping bank stocks and banks suddenly failing?
Silicon Valley Bank’s story is one that may surprise you. It all began with what might be considered an enviable problem: its clients were flush with cash in a big way. SVB, which makes loans to the technology sector, was a major beneficiary of the easy money offered by the Federal Reserve. According to data compiled by Bloomberg, the bank’s total deposits exploded higher over the last year from $62 billion to about $124 billion.
This is a familiar narrative for thousands of regional banks across the country. It wasn't just Silicon Valley Bank that had plenty of cash on hand. In 2021, all banks benefited from the $5 trillion in stimulus funds that were distributed to American citizens. As a result, banks received a massive influx of deposits. It’s why the story of SVB is one we will all want to be aware of. It may apply to thousands of other banks as well.
What did SVB (and many other regional banks) do with all of the newly deposited cash?
They did what the Federal Reserve, the SEC, the CFTC, the Consumer Protection Bureau, and the FDIC, via a mandate of Dodd-Frank legislation told them to do: they bought treasuries and mortgage-backed securities.
In an ironic twist of fate, the bank failures we are witnessing are not the result of aggressive bets made due to liar loans and other risky banking tactics. No, today’s existential threat comes directly from banks to their depositors and is a result of losses incurred by investing in what is considered the “safest” assets to own: U.S. Treasuries.
The contagion is an unintended consequence of the extreme policies of our central banks over the last decade and the rules on how our banking system is capitalized.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010. It contains several provisions related to bank capital requirements and the use of government securities. One of these provisions is the Liquidity Coverage Ratio (LCR), which requires large banks to hold a minimum amount of high-quality liquid assets, including U.S. Treasuries, to ensure that banks have enough liquidity to meet their obligations during a financial crisis.
The rule specifies that U.S. Treasuries and other government securities are considered Level 1 HQLA, which means they are the highest-quality assets and can be used to meet the full 100% LCR requirement. The exact amount of U.S. Treasuries that a bank must hold to meet its LCR requirement will depend on its individual balance sheet and risk profile, as well as market conditions and other factors. However, the LCR rule ensures that banks have a minimum level of liquidity and high-quality assets on hand to weather a financial crisis.¹
To steal another Shakespearean expression, “Therein lies the rub.”
Dodd-Frank forces banks to hold treasuries, long considered the “safest asset” a bank can own.
It’s a moniker, however, that defines liquidity, not value. Treasuries, despite being very liquid, have lost a significant amount of value in the last year while the Federal Reserve has raised interest rates in their fight against inflation. This means that the very assets that the Federal Reserve has mandated that banks own, are the exact same assets that are causing bank losses and leading to bank runs.
Keep in mind that banks are not required to “mark to market” losses on their balance sheets. SVB was holding longer-dated treasuries which they didn’t mark to market. If they were forced to, they would lose a lot of money. Because investors can now get close to a 5% return by putting their cash in money market funds and by investing in shorter-dated treasuries, many depositors have withdrawn their cash and transferred their money into higher-yielding securities.
Bank runs begin with depositor withdrawals that unexpectedly come all at once. In SVB’s case, the rush to exit was so fast that the bank quickly became insolvent. On Thursday, due to a tweet which caused a banking panic, SVB suffered attempted withdrawals of $42 billion in one day.
The FDIC was left with no choice but to declare the bank insolvent and take them over.
The panic that happens during a bank run is called contagion. Contagion occurs when a crisis or disruption in one area of the financial system creates panic and uncertainty, causing investors and market participants to sell off assets or withdraw funds from other areas of the system, even if those areas are not directly affected by the initial crisis. Today, contagion can break out faster than at any other time in human history with just a click of a button.
How could this happen without consent from Congress, you may wonder?
The Federal Reserve is granted certain emergency powers during times of crisis, which enable it to take actions that it might not be able to take under normal circumstances. These emergency powers include, but are not limited to, lending to banks and other financial institutions, buying assets such as government bonds and mortgage-backed securities, and setting interest rates. These powers are intended to provide liquidity to the financial system and help stabilize markets during times of economic stress.
Voila! Emergency circumstances!
With zero oversight and in just a few hours over the weekend, the Federal Reserve seemingly replaced the FDIC maximum insurance amount of $250,000. The new BTFP program seemingly offers insurance against all bank deposits regardless of limit. If we were to take it all at face value, we might conclude that we will never have another banking crisis again in our lifetime.
If you believe that I’ve got some Federal Reserve notes I’d like to sell you. I’ll take gold as my payment.
Beware the Ides of March!
The Etruscans also believed in the "saeculum" which means "long life" and defines the ninety-year supercycle. They believed that mankind was bound to make the same mistakes every 90 years because there would be nobody left alive to remind them of their past mistakes. They were so committed to the idea that their calendars were 90 years, not 100.
They even planned their wars according to the schedule of the saecula.
Eerily, it was precisely 90 years ago this week, during the Ides of March in 1933 that the FDIC was initially established. It was put in place as a part of FDR’s New Deal program to address the severe financial crisis in the United States today known as the Great Depression. At that time, our economy was suffering numerous bank failures and panic among depositors trying to withdraw their funds.
It forced the Roosevelt administration to take emergency measures.
President Roosevelt responded to the banking crisis by declaring a "bank holiday" that lasted four days and started on March 6th, 1933. During this period, all banks in the United States were temporarily closed to halt further withdrawals, giving the government an opportunity to evaluate the condition of the banking system. The media coverage at the time reflected these concerns, with headlines such as "Nation Faced with Banking Crisis," "All Banks in Nation Closed to Public," and "Roosevelt Orders Bank Holiday." There were also reports of long lines of depositors trying to withdraw their funds from banks before they closed. ⁴
While the banks were closed, the government implemented a series of measures to stabilize the banking system, including the Emergency Banking Act of 1933, which provided federal support to solvent banks, and the creation of the Federal Deposit Insurance Corporation (FDIC), which insured deposits in banks and helped restore public confidence in the banking system.
The initial coverage of FDIC insurance emphasized its key features, such as the coverage limit of $2,500 per depositor per insured bank, the requirement that banks pay premiums to the FDIC to fund the insurance, and the fact that the insurance covered only deposits and not other types of bank investments. Because of the new program when the banks reopened, they were able to meet any and all redemptions.
The crisis, however, was not avoided.
It wasn’t until FDR signed Executive Order 6102 weeks later, on April 5th, 1933, that the banking system regained its footing.
The order required all persons in the United States to turn in their gold coins, bullion, and certificates to the Federal Reserve in exchange for paper currency at a fixed price of $20.67 per ounce. It also meant that U.S. citizens could no longer transact in gold and would be forced to use Federal Reserve Notes.
The purpose of the order was to help stabilize the U.S. economy during the Great Depression by providing the government with a large supply of gold that it could use to support the dollar and expand the money supply. The order also made it illegal for individuals and businesses to hoard gold or to use gold in contracts and transactions. FDR’s order was effective.
FDR’s order also had the effect of driving the price of gold higher. It created a black market for precious metals. Many Americans who did not want to turn in their gold to the government turned to the black market to buy and sell gold, often at inflated prices well above the $20.67 promise of the Federal Reserve Notes.
Order wasn’t fully restored until January 30, 1934, when President Franklin D. Roosevelt signed the Gold Reserve Act which changed the value of the dollar in terms of gold from $20.67 to $35.00 per ounce.
This action devalued the dollar by 40% with the swipe of a pen.
The confiscation of gold under Executive Order 6102 was controversial at the time and remains a topic of debate among economists and historians. Some argue that the order was necessary to prevent a collapse of the financial system, while others contend that it was an unnecessary infringement on individual property rights and an example of government overreach.
It’s precisely what has occurred over this past weekend. The Etruscans themselves couldn’t have scheduled this any better. Exactly ninety years to the week, we find ourselves inside of Joe Biden's new New Deal. All made possible by the emergency measures of the Federal Reserve, an organization that apparently needs no oversight or Congressional approval.
Beware the Ides of March!
Gold prices have skyrocketed by roughly $100 in the wake of recent turmoil.
What the Fed won’t tell us, but that gold inherently understands, is that while the authorities may claim there is no more deposit risk left in the banking system, and therefore, no reason for us to pull our money out of the banks, it’s not the truth. There is only one way they can guarantee deposits; with newly created money.
Today there is no gold from the citizens to confiscate. It’s why we expect that gold prices will continue to surge higher in value in the coming months, particularly as the specifics of the new FDIC monetary guarantee program are memorialized.
Consider it the following way. The insurance covered by the FDIC was $2500 in 1933 when the program was first announced. As of Friday last week, the FDIC deposit insurance covered amounts up to $250,000, a one hundred times increase from when the program was initiated. You may find it compelling that the price of gold has risen ninety-two times since that moment.
Now consider that we have unlimited deposit insurance coverage and ask yourself a question, “how high can gold prices go from here?”
Currently, there are $19.56 trillion in banking deposits in the United States.⁵ As of December 31, 2022, the balance of FDIC's Deposit Insurance Fund had a balance of $128.2 billion.⁶ This means that just 1 out of every 152 people who have deposits in the bank are currently fully covered.
The new BTFP lending program has effectively made deposits of all sizes 100% backed by the Federal Reserve. It’s a program that can only be maintained by devaluing the dollar. While the Biden administration will argue that the program doesn’t cost the taxpayer, the only way it can be funded, just as it was 90 years ago, is through the printing of more dollars.
It’s why we believe a 40% devaluation of the dollar today is imminent.
This would amount to a gold price of approximately $3200 per ounce.
Just as Julius Caesar was murdered over two millennia ago marking the downfall of the Roman Republic, it’s only a matter of time before a central bank digital currency assassinates the U.S. Dollar and marks the downfall of the American capitalist system.
One last warning…Beware the Ides of March.
Written by Adam Baratta
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