It's official. Credit Suisse is being acquired. but uh, what does this mean for potential recession? And what are charts telling us That's probably the bigger issue? Let's look at exactly that. So First Things First Financial Conditions As of this morning here on: Monday Nice and tight.

We want these to remain tight. The tighter these Remain the less the FED has to do because the market does it for them. This is what you want. This is a combination of not only bond yields lending tightness what's going on in stocks, but other Financial assets as well.

It is the Goldman Sachs Financial Conditions index. Compare that to the five-year Break Even which is also very important because we do not want to go back to unanchored inflation expectations. What do we have here? Uh, stable drop over here? Uh, last we checked we were we had just fallen and now we're holding stable down here. You can see we're almost at the same level levels where we were right before January January Well, let's see here.

I Guess Well, no this would be this was within January This was about the second to third week in January Right here. here's your January window. there's your Fab Here's your March There we go. So right before we start getting that hot January Data: we actually hit a pretty low level here.

Now where we sit now, excuse me? Uh, where we sit now is, uh, nearly at that low level. Uh, which is good because we really want to see this. 2.18 get to somewhere around 1.6 which is around where we actually expect the Federal Reserve to cut. So think about that for a moment.

If we could get this 2.18 down to 1.6 then the Federal Reserve might actually cut. These are the two charts they're really using to drive everything Now of course, the banking crisis is driving these two charts, driving inflation expectations to come down because markets are starting to expect that a recession is more likely to occur, especially because of the banking crisis. Now more banking crisis, tighter lending standards, which means more likely hood of or a greater likelihood of recession. Now what about this Credit Suisse debacle That happened? Well, let's just say, if you want to learn how to lose 80 percent fast, the Saudis can teach you exactly exactly what to do.

Now, even though they say don't worry, we're fine. This is not a good look for the Saudi uh private investment fund or the uh. Quite frankly, the rather, the Saudi National Bank not the private investment fund, it's the Saudi National Bank. A little different.

The Saudi National Bank took a 1.5 billion dollar stake in Credit Suisse in November. They bought those shares for three dollars and 82 cents. Uh, actually, that's 382 francs. Let me be clear with that, dollars slightly higher at about five percent to convert to Dollars.

Anyway, Uh, those are now only worth 76 francs per share. or 76 Cent francs Point 76 francs per share. Here we go. That's how to say it.

That's an 80 loss in less than five months As a UBS is acquiring Credit Suisse for a bargain, the entire 1 166 year history for Credit Suisse comes to an end with this. And what's actually remarkable is even though there's an 80 loss for someone like the or an institution like the Saudi National Bank in this Credit Suisse acquisition, it's actually even more wild is the fact that usually Equity gets written to zero before you actually start seeing bondholders which are generally deemed to be senior debt holders get completely written off. But that's not what happened with the Uh Bail Inable Bonds We talked about these a few days ago, so we'll keep that discussion on these shorts since they're a little complicated, but there are these fancy things called At1 bonds. They're nicknamed bonds with a grenade attached to them I Know that doesn't really roll off the tongue, but that's kind of what people call them because they're really high yield.

but they're also potentially explosive. Now, we just had an about 17.3 billion dollar write down of those. In other words, these Bail Inable Bonds were written down from having a value of somewhere around when we last talked about this on Thursday 66 cents. Uh, for each dollar of bond.

Uh, that that existed to zero. So in other words, they were written off completely as worthless. That's 12 times larger than any other bail inable bond Extinction ever. So oopsie dupsy.

Nobody was really expecting that these would get written to zero and Equity holders would still be held up. Now there was a lot of talk that these at ones were going to get written down. that's why we covered them last week. However, usually you have to respect Capital structures and seniority on cap table.

So basically if there's a preferred Bond or an At1, usually those are supposed to see liquidation profits before Equity like the shares. That's not what happened here. and when these the institutions were asked about this by Bloomberg uh Apparently there was a big pause and everybody's kind of like a you can almost hear sort of like a gasp in the room and then response apparently from Regulators are is this justice of heavy? Do it Yeah so I I guess uh that sets a little bit of a new standard for uh, the way people lose money in Europe uh This Is Why By the way, like long and short. Out of all of this, because let's talk more about implications on how that affects us long and short.

Out of all of that, it's one of the reasons why I don't like investing in foreign countries because they do stuff like that that isn't dare I say normal like it, you know I don't know what Chinese Regulators are going to do or European Regulators at least I know and can take comfort in the fact that our Regulators in America uh are incompetent and basically can't get anything done most of the time because it's too bureaucratic. Uh, but but in general we tend to like have have a respect for at least things like that. uh, the seniority of of the way uh, that you are supposed to lose money. Uh, but anyway.

uh, it's kind of I guess the Beast that you grow up with and get familiar with uh, that you end up being most comfortable around I Don't know. some people call that a home bias I just call it ah, I I I I get the American way a little bit more even though I was born in Germany Uh, but that's not Swiss either. Anyway, all right, so people were hoping that this was going to contain some of the recessionary drama and panic and fear that's been circulating. Uh, well, apparently it's not really helping, especially since you're still seeing a run on Regional Bank stocks.

For example, look at First Republic Bank Oh no, it's down another nearly 17 percent in pre-market Here's Credit Suisse down about 57 percent in pre-market That makes sense, because that's about where it's being acquired. The acquisition price you would have to convert this is again 0.76 francs. 0.76 francs to USD works out to about 82 cents per share. It's actually trading at about 86 right now, so a little bit of a dislocation there in the pre-market Then we've got UBS UBS is actually up one percent in the pre-market Uh, this has been pretty volatile though at UBS about an hour ago was down about six percent in pre-market so the Market's still trying to digest exactly what's going on.

Well you do have to keep in mind though is UBS it sounds at least like is getting a pretty Banger deal. So listen to this. They wrote the deal expecting to take nine billion dollars in losses. Now that sounds crazy like why would you buy a deal expecting to take nine billion dollars in losses.

Potentially up to those sort of losses. Well, my opinion, it's the same reason you would buy a fixer-up or house, except there's a beautiful government guarantee that makes this even more beautiful for them. Listen to this. Imagine you buy a fixed up or house like I teach in the zero to millionaire real estate investing course, right? You buy a fixer-upper house for 400 Grand in a 600 Grand neighborhood and you're like I'm comfortable putting in 50k of work.

Okay, well, what if there's another two hundred thousand dollars of foundation work that you just weren't aware of, right? That would suck. But because the deal is having to progress so quickly to prevent Financial contagion in the entire banking sector from freaking out even more. This this government is saying: don't worry if you lose any more than that 50k in their numbers nine billion dollars. We will cover you on your next 15 billion dollars in losses.

So in other words, yes, UBS is technically picking up a toxic asset, but they're doing so knowing that they're taking a write down of up to Nine Bill, but that's that's already built into their purchase price. They know that. and then for the next 15 billion dollars in losses, they Gucci the government is picking up that tab. Which means yes, the taxpayers over in Europe are picking up that tap.

Potentially. so now they can argue. Oh, right now, taxpayers aren't paying for anything. Yeah, right, That's what they always want to do.

They always want to dress it up as no, don't worry, we didn't spend any tax money today, but for tomorrow, we may have just signed up for a lot of potential losses anyway. So that's how this is working with UBS Which is actually really interesting because if you think about it, it's probably a very opportune time to make these sort of banking. Acquisitions And think about it, a bank is about to go bankrupt and Regulators are freaking out. Much like with uh uh with the First Republic Bank the FDIC couldn't find a buyer at their first auction.

Now they're running a second auction. Bids are due Friday By the way, in case you want to put some bids in on a you know, a billion dollar Bank Uh, bids are due Friday But anyway, the FDIC is frantically looking for a buyer for this. Uh, it's actually right. about four billion dollars right now and they're hoping that they can close that sale quickly.

Same thing that happened with Credit Suisse because they want to minimize contagion. Uh, the longer it takes, the more a signal is sent to markets that these banks are extremely toxic. and the more The Regulators have to sweeten the pie. I Mean look at how much I had to sweeten the pile up high with UBS Well, same thing here with probably First Republic unless it's a really sweet deal.

why would any private institution go for it? The people who have to make up the deal to actually make the numbers make sense are probably going to be taxpayers via The Regulators Anyway, this is really important because it could affect how deep of a recession we go into. And of course, Mike Wilson Over at Morgan Stanley Being the bear that he is and that's okay, it's okay to be a bear, we could still like you. Uh, Anyway, being the bear that he is, he's very unhappy about this banking crisis and he's screaming that this banking crisis is really going to be exactly what we need to accelerate the R word: the recession. Now he starts off by trying in his latest piece.

here. he starts out by trying to make this argument that this is not quantitative, quantitative, whatever easing. Uh, and we've talked about this many times before, but in short, the idea is that quantitative easing is is a process by which we permanently expand the Mo the money supply. Whereas what's happening now is many central banks are providing liquidity via loans.

In other words, it's technically supposed to be paid back. But the reason it feels like QE right now is because then I wrote this little note on the side over here is because technically what you're doing is when you digitally print, let's do it like this: There we go. When you digitally print money. remember the FED digitally prints the treasury physically prints.

Anyway, when the FED digitally prints money, and then they transfer a loan to a bank or an institution, they're really providing the ability for that Banker institution to provide cash to depositors. That that temporarily has the effect of increasing the money supply until that money is paid back and then the money supply in theory would come back down. So really, what you have is it's technically not QE It's technically a transitory expansion of the money supply. Yeah, so in other words, uh, yes, in the short term, there is some a money printing that does end up flowing through.

Uh, However, however, there is this potential that the velocity of money actually goes down when the velocity of money goes down and people are fearful. and they invest less. They buy homes less they spend, they buy less cars, They take out less debt. Well, then you could walk into a recessionary environment and this is where Morgan Stanley's Mike Wilson suggests.

The pushback we've been receiving for our basically bearish complaining has consistently been that the hard data has been holding up and companies are not seeing the Slowdown that's being forecast. However, now we have the elusive Catalyst that should lead to the convergence of hard and soft data. In other words, basically what they're saying is hey, we think this banking crisis is finally going to lead to that earnings recession that we've been talking about. The reason we believe that is because lending standards are going to tighten and that increases the risk of an actual credit Crunch And that does not bode well for growth.

See usually when credit standards tighten like right here we could see the Blue Line This is an inverted curve so the tighter things go instead of being up, the chart is down and they do that so they can align it with GDP to show when GDP goes down. So they invert Bank tightening. But basically the lower the blue line goes, the tighter lending is. and you can pretty much see in this chart that goes back to the early 90s that every time the blue line goes down, the yellow line comes down with it.

That's real GDP Now, one of the downsides in my opinion of using real GDP in this analysis is we are in a high inflationary environment, so we could actually be at a let's say, one percent GDP next year. Uh, you know we could have a growth rate of 0.5 or 1 or whatever, and usually GDP is inflation adjusted. Okay, worth noting, but the point is, you could actually have nominal growth. But because we're in such a higher inflation and inflationary environment right now compared to what we've seen at any point in time in this chart, Notice how the 70s and 80s aren't included here? Uh, maybe maybe that quote unquote this time could be different, which is a dangerous thing to say.

We know that, but of course it's just something to consider. Uh, but anyway, their argument is here. Generally, the yield curve steepening is the painful period of time. and and it's true.

Usually stuff breaks and the yield curve steepens. and that's basically what we're seeing right now. When you look at the twos tens, you can see that the spread has actually narrowed. That's called a steepening.

And it's not the inversion of the yield curve that's generally painful. it's the subsequent rest deepening. And that's because everybody's starts panicking, stuff gets broken, all the Fine China falls off the shelves, everybody loses their poopsie dupsies and stops spending money, and then you actually end up in a recession. This is the two tens curve, by the way right now.

and you can see how inverted we got just walking into the banking crisis. ridiculously inverted. Uh, and and now you're seeing this sort of steepening and it's that subsequent up that tends to be very painful. So that does actually reiterate historically.

what? Mike Wilson argues here. So, uh, but of course you know stocks barely moved last week. In some cases, they actually rallied last week's last week. and uh, Mike Wilson argues that this is because we've now quote re-liquified the banking system and that money is going to flow into the economy for a brief period of time.

But that's not going to matter because soon enough, that is going to lead to the realization that, wait, now the banks have more debt, not more free money, and that's going to make their leverage ratios lead to even tighter lending standards. And then earnings basically come down. Mike Wilson's biggest argument is that earnings aren't going to hold up at the S P 500, and he says that over and over and over again. But it's just really entertaining to see him lash out because he's always lashing out and maybe he'll end up being right, but he's always lashing out because it seems like the more he lashes out, the more the market doesn't actually fall.

So and since obviously I tend to take the bullish position at least at this phase in the cycle, I'm taking the bullish position. I Flip-flop a lot though. Remember, you can always follow every one of my flip flops by subscribing the channel or using that coupon code that expires in two days for the Saint Patty's week sale. But anyway, look, I mean this is your QQQ right? We broke the massive downtrend we regularly bounce off the 200-day moving average from a Fib support.

Short Line If we break 311 right here after this next Fomc meeting that is, let's say we get our 25 BP that we're expecting. and then J-pal comes out and he's a little bird pecking on the floor like a dove. Uh, and and you know he's he's super sad or like concerned. risk assets will probably rally.

Uh, I mean we're already seeing that in Bitcoin but we'll talk about that in a little bit. but uh, you don't actually see despite all this banking Madness Any real pain, at least not in the NASDAQ over here. That could be because so many people are just sitting this out on the sidelines, which is fantastic for the people who are actually in the market. Uh, and then here's your spy.

Even the spy is holding up pretty decently so. Uh, somewhat somewhat remarkable that that you're seeing this sort of behavior in markets. while at the same time, you're having such a crisis in the banking sector now uh, at as all of this is happening. I Thought this was a little bit mind-blowing, but as all of this is happening Credit Suisse apparently uh addressed the concerns their staff have and are now saying quote, there are no changes to payroll.

We will pay salary and bonuses. We're outstanding. As previously communicated, employees salaries and any bonuses that are due will still be paid on March 24th per the memo. Well, that's two days after the expiration of the coupon codes.

Well, if you work for Credit Suisse and you need an extra couple days to get your final pay and then join the courses, just email me at Kevin Meet Kevin.com But otherwise price go up 22nd end of the day 1159 California time. So there's the latest on the banking crisis. It's worth noting what we'd heard about yesterday with the fad: you watch that video. Obviously that was a big deal.

seeing the FED come out on a Sunday to provide more liquidity. Don't kid yourself, it is a temporary it. I'm calling it transitory QE That's what it is. It's transitory money Printing and I'm sure because it's transitory, it'll almost certainly be permanent.