Which stocks could rise highest in this banking mess?

Friday, 17 March 2023 — Albert Park

[8 min read]

Dear Reader,

It’s 2008 all over again…except bigger, badder, and bound to be more destructive!

With years of near-zero interest rates, government stimulus packages, massive borrowing by businesses and households, and a series of lockdowns to cripple the global supply chain, these chickens are now coming home to roost.

The news cycle is now awash with stories about the fallout from the collapse of Silvergate Bank, Silicon Valley Bank [NYSE:SVB], and Signature Bank. There’re fears that the broader banking system will be affected as the contagion engulfs other institutions.

While the Biden Administration comes out to say that the financial system is safe (and obviously you should trust them given their track record), the Federal Deposit Insurance Corporation has decided to try to stem the contagion by guaranteeing ALL deposits — even if they’re not insured.

Imagine how an insurance company decides to cover your losses in a disaster even if you didn’t enter a contract with them. You can only conclude either the insurance company is nuts, the disaster was massive, or both.

In the case of this banking crisis, the FDIC recognises that the panic could spread very quickly if those who deposited cash with other banks (especially the larger ones) withdraw in a hurry and cause a liquidity crisis. And it’s the ones with the deep pockets they’re more afraid of…they’ve got their fingers in more pies.

Many have been conditioned to place their trust in banks, so much so that there’s even a saying: ‘As safe as cash in a bank’.

While the subprime crisis during 2007–09 showed that the financial system can collapse from the cascading effect of bank collapses, governments worldwide threw billions into keeping some of them alive. This brought forth the concept of TBTF or ‘too big to fail’.

Something so big and important mustn’t fall, so we’ll do whatever it takes to prevent that fate.

It’s this stupidity that brought us here today.

I could talk in detail about how this all came to be and the moral hazard of what’s unfolding, but I think you’ll find many will be writing about this.

What’s more pressing is how you can ride above this. It’s more important that your boat is afloat before you delve into the story of what’s going on. We can certainly moralise over this crisis later down the track, but from a more advantageous financial position.

No safety in banks, seek real assets

Those who understand how the financial system works realise that it’s not just money (or its counterfeit cousin, currency) that makes the world go round. It’s physical assets — land, real estate, widgets, commodities, and even us.

In the past few decades, we’ve seen a massive financialisation of the global economy. In other words, there’s been a shift from conducting the trade of goods and services to transacting in financial contracts for profit.

Just as that famous saying goes about how you can’t eat gold, we certainly can’t eat share certificates, interest rate options, government bonds, and credit default swaps.

There’s no doubt that governments are going to have to stump up cash to rescue collapsing banks. But with the exposure of scandals involving nefarious dealings with the convicted paedophile Jeffrey Epstein, and dodgy risk management or lack thereof within and between banks, governments may step aside and force these institutions to die a well-deserved death.

Or we see the central banks step in and do the mopping up. It may be the world’s lenders who end up having to bail out their own.

I see this as the more likely case.

You can imagine what that’d do to the prices of real assets.

If you thought the boom in land, real estate, commodities, and companies after March 2009 was mind-blowing, this one will take it to a new level.

You may’ve missed out back then, but I think there are opportunities for you ahead.

Mining: Phase One is coming…past performance…as we always say…is not a rock-solid guide to the future.

But if you’re a student of the markets…you’ll know that mining stocks can perform very well at junctures just like this one.

Last month, some of you may have watched our event ‘The Gold Power Play Summit’, where Woody and I discussed how the scene was setting up for a major rally in gold…and how that could deliver massive gains for gold explorer stocks.

I’m sure that some of you are looking for similar set ups in other commodities. After all, it won’t just be gold and precious metals enjoying the potential tailwinds of a post-crisis liquidity free-for-all! Think about all the rebuilding that global society needs after the last three years of debacle by the governments, the healthcare and medical establishment, and their mainstream media bullhorn.

I know in the past I’ve warned about the World Economic Forum and its ‘Great Reset’ agenda to usher in The Fourth Industrial Revolution, a nightmarish regime of control under artificial intelligence.

My view now is that they’ve overplayed their hand and are likely to be exposed (thanks to the ‘Twitter Files’ release) and dealt with when all is said and done. The future could be brighter, though not without a period of unprecedented volatility.

And this rebuilding will require a lot of commodities. That’s why you’ve noticed there are many companies seeking to find copper, lithium, cobalt, rare-earth elements (REE), and other minerals. Just because ‘The Great Reset’ is going to flop, doesn’t mean society is going to stop in its tracks towards cleaner energy.

So expect that a lot of capital will shift toward companies exploring and mining these minerals. It’s already started. Exploration expenditure in Australia is up 28% over the past year. You can bet that will continue.

But which company should you choose? You know the deal with explorers; they can hit the jackpot, or their owners could take your money for a spin, leaving you with nothing!

This is where my colleague, James Cooper, can step in and help you filter out the good from the bad.

Since launching his Diggers and Drillers service last November, we’ve encountered many happy readers who want more from James. His experience as a geologist involved in the discovery and development of several mines in and outside of Australia is just what you need to help you pick the companies that could deliver rich rewards.

He’s now about to launch a premium trading service, Mining: Phase One, where he’ll showcase his favourite commodities explorers. James will use his geological knowledge to help identify the companies with the potential to discover new deposits, obtain the funding to develop these deposits, and bring them to production.

So we’re talking the small end of the commodities market…very, very small. Companies at the most precarious but exciting point in their mining life cycle. If there’s anyone who can spot a hidden gem in this part of the market, it’s James.

Stay tuned here for more information on this brand-new trading service in the coming days.

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia

Dear Reader,

As predicted…when the fight gets tough, the Fed takes a dive.

That is what we are watching now…in slow motion.

After the crisis of ’08, the feds insisted that the banks hold more reserves. They were told to buy safe, government debt — T-bonds. The Treasuries were supposed to be financial ballast, designed to keep them safe in a market squall.

Oh, if only Mother Nature, in all her guises and disguises, would cooperate!

A storm blew up last week. Now loaded up with Treasury debt, banks are much more solid — on paper — than they were in 2008. But what happened? The ballast sank. And two banks sank with it.

Foxes in the henhouse

The California bank, Silicon Valley Bank’s CEO, Greg Becker, who is also a director of the San Francisco Fed. The New York bank, Signature, has none other than Barney Frank, who, along with Elizabeth Warren, actually wrote key parts of the 2010 bank regulations.

But neither regulators nor regulations saved them. As interest rates rose, fixed-return assets, notably bonds, were not as valuable as they had been before. Two years ago, you could get only a 1.5% yield from your 10-year Treasury. Today, the yield is 3.7%. The income stream from the old bond is now worth only half as much as it was. Which means the value of the banks’ reserves — their balance sheets — fell. As this continues, more banks can be expected to get into trouble. And the Fed will have to bail them out. Or give up its interest rate hikes altogether.

One big bank that people are watching is Credit Suisse. From Naked Capitalism: ‘Silicon Valley Bank Fallout Nudges World’s Most Troubled Systemic Lender, Credit Suisse, Closer to Edge’:

‘...despite losing over 95% of its market value since 2008, it is still too big to fail.

‘The shares of Credit Suisse Group AG, the world’s most troubled systemic lender, fell by as much as 15% on Monday (March 13) to another fresh record low, before recovering slightly in the latter hours of trading. They are down a further 4% so far today (12pm CET, March 14). This latest crisis of confidence in global banking has also fueled a fresh surge in the cost of insuring CS’s bonds against default. The five-year credit default swaps on CS’ debt surged to a new record of 453 basis points on Monday. It was the widest move of 125 European high-grade companies tracked by Bloomberg.’

Will Credit Suisse be next? Will it push investors and the Fed into a panic? Will the Fed publicly reverse course and begin cutting rates?

We don’t know…we’ll await events.

An honest day’s work

Meanwhile, our 14-year-old grandson is visiting. The boy lives in the suburbs in the US with little opportunity to get out beyond the reach of iPhones, iPads, TikTok, video games, and whatever else it is that occupies the time and attention of American youth.

His parents say he is bored by school and developing ‘a teenager attitude’.

We decided the best thing might be just to put him to work…physical work.

As long-time sufferers of our ‘blog’ know, we do not play golf…or hunt…or hang out with friends. We have no TV. And on weekends, we avoid opening our computer if we can manage it.

Instead, we find projects that require physical activity…and give us something to show for our time. Carpentry. Masonry. Painting. We do it all — badly.

A couple of years ago, down here at the farm, we began building a tiny family chapel. It’s built of adobe blocks, just as all the churches in the area are, with a cross — illuminated by the Sun — made of wine bottles.

The other odd thing about it is the roof.

We began by making four arches of reinforced concrete to form a square at the base. This is not at all traditional, but it guarantees the solidity of the structure.

‘Good idea’, said a former owner, now neighbour.

‘The old house was largely destroyed by an earthquake in the 1920s.’

Adobe walls were laid up on all four sides, about a foot outside the concrete arches.

Why the gap between the arches and the walls? We don’t remember. The plans were sketched out on a piece of paper…and then lost. Maybe the idea was just to give it, from the inside, a more complex and more interesting form.

A vaulted roof was fashioned out of barrel staves that we took from some long-abandoned oak wine barrels. The barrel wood, set on top of the concrete arches gave us the bones of the roof. The flesh of it was made from small cane, laid down on top of the barrel staves…and covered with mud. It rains very little here, so the same mud was used to make the adobe bricks as well as the roof itself.

A solid foundation

All in all, we were pleased with how it turned out. But when we left last year, it was still unfinished…so we returned this time with work still to do — the floor. There were some blocks of very hard wood — quebracho — left over from a floor in the house. The blocks are heavy and almost impossible to cut, but they make a nice surface when they are polished.

There aren’t enough of them to do the entire floor, so we will use them to make a border around the edge of the chapel floor…and a cross in the centre.

We began on Saturday, using our grandson as a ‘hod carrier’ and ‘mud boy’. We showed him how to ‘screen’ the sand to remove the pebbles. Then, he learned how to mix it with lime in a wheelbarrow, add water, and end up with a creamy consistency.

‘Grandad, can I lay down the blocks?’

‘I don’t know…it takes some real skill. The blocks are not all the same size. You’ve got to make sure they come out flat on top.’

We showed him how to put down a bed of mortar…making ridges in it to give it some squishability. And then we tapped the block down with a hammer until the top of it lined up with the other blocks.

‘I can do it, Grandad.’

The first row of blocks we laid down weren’t the best. They had to be taken up and re-done. It was a mistake, we discovered, to try to line them up with the wall. The base of the wall was made out of stone, which keeps the mud bricks up off of the ground. But it is irregular.

‘How did you learn to do this, Grandad?’

‘Oh…I’m an autodidact.’

‘A what…?’

‘It means I learned on my own.’

‘You mean by trial and error.’

‘Mostly error. But that’s the way you learn everything. Either your mistake or someone else’s. But the nice thing about life is that it corrects errors…whether you like it or not.’

‘What’s the problem in school?’, we asked.

‘Oh…it’s just boring. I want to drop out.’

‘What would you do instead?’

‘I don’t know. Nothing, I guess.’

‘That doesn’t sound very interesting. But if you want to drop out of school you could help me. We could do this kind of work every day.’

We were working inside, but on our knees. And the day was hot. After a while, the enthusiasm for manual labour began to wane.

‘How long are we going to do this, Grandad?’

‘Until they call us for dinner.’

‘But I’ve got to study my Spanish.’

‘Well, how about finishing this row, then you can go study.’

‘Okay…’

The results were so-so. But they’ll give the old man cover for his own sloppy work.

‘Yeah…they’re a little uneven’, we’ll admit. ‘I let my grandson do it.’

Regards,

Bill Bonner,
For The Daily Reckoning Australia