Now we've got a banking update that we gotta talk about: First Citizens Bank A bank out of North Carolina is now going to be buying Silicon Valley Bay Now this is really interesting and we've got to talk about how China is related to Silicon Valley Bank and some of the stresses that we're seeing from this banking crisis as estimated around the world. We're going to take a peek at some of these, but let's understand this: Silicon Valley Bank has taken a lot longer to find a buyer. New York Community Bank for example, bought Signature Bank almost immediately after it was taken over by the FDIC. The FDIC how dare you say worked all weekend.

but they've worked multiple weeks in a row now to try to sell Silicon Valley Bank. And basically, when the Bank closed on Friday to Sunday night, they finally got a sale coordinated. Silicon Valley Bank will be sold to First Citizens Which means anybody who's actually still a customer at Silicon Valley Bank will automatically become a customer of First Citizens Bank out of North Carolina Starting Monday Now, the FDIC is going to retain about 90 billion dollars of Silicon Valley Bank assets about 160 billion dollars of which just to make sure the transfer goes smoothly, First Citizens will be taking 72 billion dollars of assets at a discount of 16.5 billion dollars. That is because they do expect to absorb some losses.

That was a way to sort of negotiate this purchase. Some losses will also be shared by the FDIC. We're expecting about 20 billion dollars of losses to be shared by the FDIC And guess what happens when the FDIC shares and losses? They end up raising the fees at all banks. Which means all banks end up raising their fees.

It's basically like corporate socialism when one person loses lots of money. Everybody helps bail them out, and that's essentially what's going to happen with the FDIC. Now keep in mind that Silicon Valley Bank has been in a little bit of drama recently because Silicon Valley Bank has also had Chinese subsidiaries. and this is now really pissing off some people in Congress because they're thinking wait wait wait wait.

We not only had normal people backstop the bailout facilities with taxpayer money for Silicon Valley depositors who are mostly tech companies and startups, but we're also bailing out Chinese depositors now. Yes, Yes, to to some extent yes. Silicon Valley Bank Established their first Chinese subsidiary in 2005, their second in 2010. so they've had branches in China for a while.

They also entered in 2012 into a joint venture Bank in China called SPD Silicon Valley Bank that was in partnership with the Shanghai Podong Development Bank and a Nationwide commercial bank that was listed on the Shanghai stock Exchange in 1999.. So this is this created new banking opportunities for Silicon Valley Bank. It got them into some banking licenses via this partnership. Uh, and so now House Republicans are demanding that Joe Biden answer to Chinese ties with a Silicon Valley Bank Janet Yellen Said that under the current agreement, the Chinese Communist Party linked to Silicon Valley Bay.

Essentially, their depositors are also being made whole as a result of the United States bailouts. This makes sense. Uh, and this is what's leading essential usually a Congress to send letters to Biden saying hey man, how is bailing out Chinese depositors actually benefiting us? Obviously, the response to them would be systemic banking crisis risks, Fan contagion risks, but a lot of people are scratching their head going. Wait a second.

Silicon Valley Bank At a branch in Shanghai that was a 50 50 partner with China And now, where's China Why isn't the Chinese government stepping in and bailing out 50 of those depositors? What's up with that? It's a fair question. It's probably unlikely to go anywhere, but it's a question that's absolutely quite interesting. Keep in mind that what you're finding is these: Bankers want to do whatever they can to increase profit and not necessarily hedge against risk. We saw the same thing happen at First Republic.

although First Republic has a balance sheet that is substantially stronger than the likes of Credit Suisse or Silicon Valley Bank. However, even their co-founder gets lots of money. For example, in 2021, the co-founder of First Republic Bank made 17.8 million dollars before jumping into the executive Chairman role. That's when he was a CEO and that's the most out of all CEOs of similar sized Banks The CEOs now chairpersons brother-in-law runs a consulting company and that consulting company also happened to earn 2.3 million dollars for advisory work for First Republic Bank.

So doesn't even end there. Okay, the lunacy of what's coming out with the these these Banks is pretty wild. First Republic Also paid the CEO now Chairperson's son 3.5 million dollars to oversee the lending unit at First Republic First Republic was the 14th largest bank in the United States at the end of 2022. Obviously, it's now uh, shrunk a little bit.

Uh, and now executives are agreeing to take no bonuses and potentially forego some of their prior stock rewards as a way of uh, signaling their commitment to the banking industry and to the bank itself. But let's be real: Banks are a fantastic way for executives to make lots of money. And there's no surprise that you're seeing, you know, lack of risk mitigation procedures. Now, obviously the big deal now is what kind of global impacts are we seeing from this banking crisis? And I'll tell you, NatWest has a phenomenal piece that goes into some of the recent imbalances and credit stresses, as well as looking into specifically exported inflation from China.

Since we've been talking about Silicon Valley Bank in China, we may as well talk about exported inflation from China as well. But first, let's look at that banking stress and funding stress everybody keeps talking about from the point of view of NatWest Now keep in mind Morgan Stanley Goldman Sachs Bank of America They all think we're going to see a hit to GDP in the long term that is like Q3 Q4 Q5 That really plays into what the FED is saying. but what about the near term? What's happening right now? Well, here you go. Nat West is telling us.

Following the collapse of a few banks in the United States we were curious to see whether any material funding stress would materialize in the aftermath. Somewhat surprisingly, so far, we have not seen any signs of any issues or challenges. No funding stress at all following the collapse of these Banks Admittedly, Banks don't rely that much on short-term wholesale funding anymore, and the issuance volumes over the past week dried up to a large extent. So in other words, hey, short term, we're not really seeing any stress.

Could the other analysts be correct that come Q3 Q4 q1 of next year, Maybe we're going to see some sort of recessionary impacts that is a forced recession from the Federal Reserve squeezing us into recession? Maybe. But listen to this. NatWest Thinks the banking problems now appear to be localized so far, despite all the usage of the discount window and the term funding facility. Now that uh, you can actually see Uh charted by I believe it was Bank of America Yet here it is.

This is the change in the beds lending and you can see that. Yes, we had two large weeks of drawing money out of the FED discount window first and then the bank term funding program which some people are calling buy the FED pivot facility but we expect that next week this could drop substantially and then really, this hiccup here dare I say could end up being transitory. which is insane because I know in the moment it's like no way. There's no way it is possible now.

I Look to look at the bear case and the bull case. but this NatWest piece is really interesting, showing little short-term funding pain. although I do I will say that credit spreads on mortgages are rising. That's keeping mortgage rates up as treasury yields are falling.

Uh, it's basically the way to think about that is. let's say the spread between the 10-year and uh, mortgage rates is two and a half percent. Let's just say Okay So the 10-year let's say is at four percent, then mortgage rates might be at six and a half percent, right? Well, what happens if the 10-year Falls one percent? Well, technically then mortgage rates should go from six and a half to five and a half, right? But if credit spreads widen while the 10-year treasury goes down 10, mortgage rates might only come down 20 basis points to 6.3 That means you had an increase of credit spreads of 80 basis points. That was sort of like it's almost like you inflated a balloon between the two and you're like stress, right? That's kind of the way to think about it and that's actually how in a weird way, you could see treasure yields go down and mortgages not go down.

although these are very volatile, so it'll We'll see what happens over the next few weeks where things actually stabilize. My guess is treasury yields will come up at the same time as that credit stress spread goes down and we'll find a new equilibrium somewhere. TBD If I had to guess I'd say that equilibrium's probably not over four percent for the 10-year it's probably somewhere around 3.7 and mortgage rates of around six and a half if I had a guess. Uh, but that's a total guess.

So we talked about China with Silicon Valley Bank and I thought, well, that would be a perfect opportunity to talk about Chinese inflation as well because if Chinese are now involved in our banking crisis and there are some arguments being made that the Chinese Communist party was pressuring Joe Biden to bail out Silicon Valley Bank along with Gavin Newsom who had Accounts at Silicon Valley Bank and didn't disclose that fact uh, despite begging uh Janet Yellen to bail out Silicon Valley Bank Gee, no wonder. But anyway, it's also worth thinking about this concept of hey, wait a minute. Everybody was saying when China was going to reopen, we would see this: This massive burst of inflation and oil would go over a hundred now obviously since December which is when these predictions were being made when Covet Zero was basically dropped in. China I made the argument that we're probably not going to see a hundred dollar oil.

Uh, and we made I made the argument that we're probably not going to see massive exported inflation from China Now my base is for making that argument. Then was look, China was fully open before the pandemic. Just because they reopen, doesn't mean we're going to all of a sudden have the surge of inflation or oil prices because we didn't have that before. Now some people were making the argument that, but, wait a minute, aren't they going to strain Supply chains And the argument.

The counter argument is, well, that assumes that Supply chains haven't already loosened substantially and they're not ready to welcome more sales. I'll tell you most: Auto and Chip manufacturers would welcome more sales right now because they've built themselves up for demand levels that we saw in 21. That's when we had massive supply chain stresses and now we're not seeing those supply chain stresses anymore and we're kind of like, all right. where's the business? So let's take a look at what NatWest has to say about that.

China Exporting everything except inflation. China's recovery will likely be mildly inflationary to the rest of the world at most at most. mild inflation. Why well, is China exporting inflation? No supply chain disruptions and goods supply side price shocks of 2021 and 2022.

Look essentially over import price inflation for the U.S import of Chinese Goods is falling. It has yet to return to the deflationary depths of the 2010s. Remember folks, in the 2010 cycle, we were facing deflation Like people think that's nutty. But I want I want to just remind you I want to take the liberty of reminding you for a moment what happened in 2018.

Okay, I Really want you to think about this for a moment Right after I mentioned you could use buy now, pay later to check out the programs on building your wealth. In terms of all of these, you get beautiful lifetime access to people are loving them. People are joining them. they're seeing the archives.

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even though more people might like fundamental analysis because we like doing stuff at home, getting out, and actually Building Wealth in real estate, it's going to be a big opportunity over the next year here, so get yourself educated. So what happened in 2018? Well, basically for a decade we had inflation sitting around 1.5 percent. We were running under our two percent Target and as soon as the Federal Reserve tried quantitative tightening, what ended up happening. Markets freaked in December of 2018 and the FED folded folded faster than somebody who gets a two and a seven playing five-card poker.

They folded so fast that's because we were facing deflation at the time. that is if we run too far below a two percent. Target What happens if we end up having to go to negative interest rate policies like Europe Remember before the Pandemic folks, remember Germany was offering you. They were offering you folks.

They were offering you negative 0.2 percent on your savings account. So if you put your money in your savings account, you had to pay them negative point: two percent. So for every thousand bucks you had deposited at a bank, you ought to pay them two dollars just to have the money there with negative interest rates. Uh, so yes.

Will we probably return to these sort of deflationary depths of the 2010s? Probably. And right now we're actually trending in that direction. We're seeing price growth falling from China which is great because we don't want that inflationary impetus. Uh, it's not clear that manufacturers are passing on costs.

This is actually really good as well. You don't want to see Pmis fly up Purchase manager's Index This is where there's a survey of people who buy stuff from manufacturers and they tell you if prices are going up or down. And they also have a producer price index which is just a measure of a basket of goods from a producer side. And the manufacturing costs in the consumer goods PPI has remained low at under two percent year over year, and PMI data shows that firms have reported output prices growing almost consistently below input prices since 2016.

So despite all this inflation of the last few years, we're still seeing Pmis and Ppi is very soft in China suggesting very little inflation actually being passed on to the people paying for the goods. Unit export values have risen 10 year-over-year since June of 2022, and this could represent the higher value of exports or Price inflation. Though it's difficult to break this up because you could be buying more expensive items from China right? So that's why they're saying here. It's difficult to say is this price is going up or business is taking it in the margin, but the point is, import prices are falling.

Look at this chart here. You can see electronic import prices uh and uh, U.S Imports Overall, both of them plummeting from China export. uh, prices rising, but uh, PPI low. So yes, year over year you do have some price increases and that potentially is because we're exporting more valuable goods from China.

So you do have a little bit of a red flag here, but at least on PPI sort of a basket measure rather than a mixed-based measure, right? This doesn't the bottom one. PPI does not change for mix, you have the same mix every time. The top one could change if people are buying and exporting different things. And so that could be an explain station there.

So when you look at this combined with shipping costs, this is what transitory looks like I Wrote this: This is what transitory inflation looks like folks. look at that chart. Shipping costs out of China plummet. I Mean basically everything is back to 2019 Lows: Some items are slightly elevated.

If I look at the green line over here. we're still slightly elevated. It looks like the red line is back. the blue line is back.

Uh, the purple line over here is actually lower. So the only one that's higher right now is China To the Mediterranean Uh, that's the only one that's slightly higher on a shipping point of view for Chinese Shipping inflation. So that's fantastic. PMI Supplier times are finally falling.

This is excellent as well. quicker to get goods and services. This is fantastic. Uh, stimulus and local demand.

Will it trigger another Commodities rally? Sorry Steve That is unlikely from China at least infrastructure and real estate. most important surface sources of commodity demand will recover, but constraints on the budget from policy signals and household demand mean the recovery will not turn into a runaway recovery or rally for Commodities At least not from China now. Uh, what's worth noting here is that they expect the biggest winners in China to be uh Services service-based expenditures. This is why I've been I've been somewhat tempted to buy Starbucks I haven't pulled the trigger, but Starbucks has a massive, massive amount of Starbucks uh facilities that they basically built during the coveted lockdowns.

like they basically doubled the amount of stores they have in Covid or during Covid when nobody was buying. Starbucks Now everybody's spending money on traveling and consumer spending and hotels. Uh Chinese tourists. That's where the money is going.

Tourism Import inflation. That that'll be the biggest source of import inflation for us from China uh. tourism. So I find that quite interesting.

Uh, so we talked about the funding stress that never happened. Talked about: China We could briefly take a peek at the beginning here. We had some interesting notes as well. Markets should worry less about Global Financial instability as systemic risks are low and they believe the FED is done hiking.

Now that's interesting too, because it goes back to the Uh. this idea of uh, this Bank funding stress not being a big deal and we're seeing sort of this. Full Throttle move towards Uh EVS which is just sort of another little note that they throw in here. They do talk about how the average cost of EVS is a little higher than the average cost of an ice vehicle I Wrote It's about ten thousand dollars per vehicle higher.

So how do you sum that up? Well, really, if you sum it up, you can look at Natwest's forecasts that the funding stress is not happening in the short term. It doesn't appear to be systemic, and this is potentially why banks are rallying. Yesterday we analyzed Deutsche Bank versus Credit Suisse and the numbers were much better at Deutsche Bank and First Republic wasn't half bad either. Get a look at that video uh, yesterday where we compared those, uh, those uh, fundamentals.

We can also see that China doesn't seem to be exporting inflation to us, which should take some pressure off of the Federal Reserve along with, uh, maybe some slight impact to tightening credit standards. But beyond that, this whole China risk, uh, being involved with Silicon Valley Bank doesn't seem to be that big of a deal because we're not really getting exported inflation from them. and potentially if we have a a low impact to funding stresses. maybe we have just enough of an impact to soften inflation here in America, but it doesn't seem like things are that bad.

In other words, let me sort of summarize this in: English funding stresses don't seem to be that big of a deal at this moment. Maybe Q3 Q4 q1 maybe, but right now it doesn't seem to be that bad. Chinese Inflation doesn't seem to be that bad. The Fed's probably gearing up for a pause.

Uh, in May, You've got about a 62 chance of a pause in May right now and then cuts at the rest of the year. So far, things are really aligning with the idea of a Nike Swoosh style recovery. Now, if you're nervous, you could always get life insurance in as little as five minutes by go to Metcaven.com Life. But I Personally think this is so far pretty good news that when we look at the fundamentals, they don't tell us we need to be that worried about the banking crisis.

Do we really need to worry that some depositors were also guaranteed for the benefit of the entire U.S banking system? Probably not. It's good political drama for Fox News to cover, but is it a big deal? No. So short-term banking issue, Not a big deal. long term, probably transitory inflation.

Based on these reports, this is all good news. Oh oh, foreign.