When the ranking member of the US House Financial Services Committee goes on CNBC to reassure markets about the current turmoil then one would hope we might see some calm. But when that same member refers to the disaster that is Silicon Valley Bank as ‘Silicone’ Valley Bank then there might be even more cause for concern than there was prior to her appearance.
Congresswoman Maxine Waters was on CNBC in an attempt to let markets know that the US financial system and central banks have had their warning and they are listening, but does anyone believe them? It seems that the markets are perhaps a little tired of being reassured by US officials. After all, these are the same officials who were telling us about 18 months ago that inflation was transitory and there was no need to increase rates.
This same central bank now looks like a swan trying to escape a hungry piranha – trying to look good whilst paddling like a maniac below the surface. The Fed has been forced to put in place a guaranteed facility in order to protect U.S. banks from a potential $600 billion in loss from their bond portfolios.
Everyone is asking if there really is no limit to the Fed’s balance sheet. And it seems Maxine Waters has answered this loud and clear – nope, there really isn’t. They are happy to guarantee any kind of crap in order to keep the charade going.
The Federal Reserve’s guaranteed facility would enable banks to convert their distressed assets, such as the treasury portfolio of SVB that lost $1.8 billion, into cash without incurring any losses. It appears to be a form of Fed bailout, yet in order to address inflation, it’s likely that the Federal Reserve will raise interest rates once again (tighten monetary policy), which is what caused the bond portfolio’s initial value decline.
See Jim Rickards’ reaction to the Fed’s moves:
The collapse of Silicon Valley Bank has drawn attention to the possibility that higher bond yields and lower prices may not have been adequately taken into account or hedged elsewhere in the financial system. This is despite all of the warning signs just six months ago in the UK pension crisis.
How will the ECB react? To ignore these alarm bells from across (both) ponds, would be to ignore a hammer over the head. After eight years of low interest rates, the 300 basis-point tightening since July is likely having a much more pronounced impact on the eurozone than other economies.
Europe was already heading toward recession before the pandemic, and its recovery has been slow. Additionally, Europeans are more inclined to save through bonds than stocks, so retail investors are also suffering from decreased bond values. Therefore, it might be wise to exercise caution before pushing ahead with any further 50 basis-point rate increases.