Nearly 200 U.S. Banks Are on Shaky Ground

Some observers of the banking sector say that contagion is unlikely in the wake of those recent bank failures which have been so widely reported (Business Insider, March 11):

Buy the dip in banks as the Silicon Valley Bank crisis is unlikely to spread, Goldman Sachs says

However, there may be a greater risk of more banks going under than some people expect.

Here’s news from Fox Business (March 18):

Study finds 186 banks vulnerable to SVB-like collapse

The study created a scenario where half of 186 banks’ depositors withdrew their funds

Relatedly, the following is from a section titled “Safe Banking” in the recently published March Elliott Wave Theorist:

In Last Chance to Conquer the Crash, there is an entire chapter titled “How to Find a Safe Bank.” Numerous issues of The Elliott Wave Theorist and The Elliott Wave Financial Forecast have warned that banks are vulnerable and that a bear market would reveal that fact. ….  

Have we been paranoid, or is everyone else whistling show tunes on the deck of the Titanic? I think the shock and surprise expressed over the collapse of the 16th-largest bank in the U.S., Silicon Valley Bank (SVB), answer that question:

SVB’s Lightning Collapse Stuns Banking Industry

The rapid unraveling of SVB Financial Group has blindsided the banking industry after years of stability

The speed of the SVB crash blindsided observers and stunned markets, wiping out more than $100 billion in market value for U.S. banks in two days.

And yet (of course),

We do not believe there is contagion risk for the rest of the banking sector,” said [the] CEO of an investment research firm. “The deposit base from the major banks is much more diversified than SVB and the big banks are in good financial health.”

Observe that all these people were caught off guard because they were too optimistic, yet they feel compelled to reiterate that they remain optimistic!

Nothing is going to get better in the stock market until the headlines and comments flip 180 degrees to express widespread pessimism. When that happens, you can start making your buy list.

Meta Gives NFTs the Boot

Financial crazes have a way of flaming out.

As prominent examples — meme stocks, special-purpose acquisition companies (SPACs) and non-fungible tokens (NFTs) have all seen major setbacks since their glory days during the past few years.

Regarding one of those, here’s a March 13 news item from Reuters:

Meta Platforms Inc is cutting off support for digital collectibles or non-fungible tokens (NFTs) on its platforms less than a year after rolling it out…

The flaming out of financial crazes is part of what Elliott Wave International’s Global Market Perspective calls “The Everything Bust” – a deflation of most (if not all) risk-asset prices across the board.

This chart and commentary from the March issue of the Global Market Perspective focuses on special purpose acquisition companies:

The chart shows that the IPOX SPAC Index peaked … on February 17, 2021. In March 2021, Alex Rodriguez, the former New York Yankee third baseman, joined the “Blank Check Derby” as the CEO of Slam Corp. with the promise of purchasing an unknown company in the entertainment industry. EWFF reminded readers, “When jocks and other celebrities are viewed as savvy investment professionals, an uptrend of some significance is surely ending.” We classified the deal as an “ultimate harbinger of the next bear market.” The SPAC index has declined 51% from its peak. …  [W]e called for caution when SPACs topped in 2021 and stated, “In the annals of the coming bear market many stories of SPACtacular failures will be told.” Many of those failures are rolling in now, and still there is little evidence of caution. Most of the tragedies lie ahead.

Silicon Valley Bank Failure a Sign of Deflation

By now, most everyone who keeps up with financial news has learned of the collapse of Silicon Valley Bank – the largest U.S. bank failure since 2008.

A well-known financial TV host links that bank failure with deflation (CNBC, March 10):

There’s nothing more deflationary than the collapse of a highly-indebted bank, says [Mad Money host]

Elliott Wave International agrees that the failure of Silicon Valley Bank is part and parcel of a developing deflation.

Bank runs were widespread during the deflationary depression of 1929-1933, and this quote from Robert Prechter’s Last Chance to Conquer the Crash starts off with that:

Between 1929 and 1933, 9000 banks in the United States closed their doors. President Roosevelt shut down all banks for a short time after his inauguration. In December 2001, the government of Argentina froze virtually all bank deposits, barring customers from withdrawing the money they thought they had. In 2013, banks in Cypress were ordered closed. Sometimes such restrictions happen naturally, when banks fail; sometimes they are imposed. Sometimes the restrictions are temporary; sometimes they remain in place for a long time. In 2008-2009, some U.S. banks came under pressure of insolvency, just as the first edition of Conquer the Crash predicted. Fed bailouts kept most of them open. In the next depression, bank runs and mass closings are far more probable. The first edition of CTC also noted that depositors would become concerned about bank risks and move their money from weak banks to strong banks, making the weak banks weaker and the strong banks stronger. This is just what happened in 2008-2009. A Washington Post article noted that one of the banks listed in the first edition of CTC as safer than most had received a windfall of migratory deposits. When the next wave of banking problems hits, the shift will be even more pronounced.

Many people believe their deposits are safe when they see a bank’s Federal Deposit Insurance Corp. sticker.

However, during a time of widespread bank failures, it’s highly unlikely that the F.D.I.C. will have enough resources to cover all deposits.

An important step you can take now is to make sure your deposits are with a financially strong bank (or banks). Last Chance to Conquer the Crash provides insights on this subject.

Does This Mean a Recession is Just Around the Corner?

It’s getting tougher for U.S. businesses to get loans from banks these days.

This could be a signal that a recession is just ahead.

Here’s a March 2 news items from S&P Global:

The number of banks reporting tightening standards for large commercial borrowers is close to the peaks experienced over the last four recessions… .

The March Elliott Wave Financial Forecast provided more insight with this chart and commentary:

The chart shows [a] classic sign of a credit squeeze. In the Federal Reserve Board’s latest bank lending survey, 43.8% of responding institutions said they are tightening standards on commercial loans to small firms. Four times from 1990 to 2020, banks tightened their lending standards to the same extent or more; each time, a recession was approaching or already underway as shown by the grey shaded areas.

Job Offers Rescinded (Reminder of Past Financial Downturns)

Sorry – your services will not be needed after all.

In a nutshell, that’s the message increasing numbers of the newly hired are receiving.

Here’s a Feb. 22 headline from the Los Angeles Times:

People are losing jobs before they even start, throwing lives into chaos

Rescinded job offers were more common during the bust of 2000 and the 2007-2009 financial crisis.

Perhaps a financial downturn is unfolding which is on par (or worse) with those two episodes.

Here’s a perspective from the February Elliott Wave Financial Forecast (commentary below the chart):

The steep decline shown on this chart is the year-over-year change in temp help hiring. In December, the yearly change went negative for the first time since the aftermath of the recession of 2020. Negative readings on this indicator foreshadowed all three of the most recent recessions. There was one false signal, a brief negative reading in 2016. But that episode saw little in the way of an accompanying bear market, so the current case is more like those of 2000, 2007 and 2020.

Economists view the temp sector “as an early warning indicator,” although Bloomberg reports that many now say “a plausible interpretation is that temp work is simply normalizing” in the wake of pandemic-related hiring quirks. But the modern equivalent of the help-wanted advertising index suggests the current hiring freeze is more than temporary. Long-time readers will recall that years ago, help-wanted ads were a very dependable harbinger of economic change. In December 2007, when help-wanted advertising was still a thing and was the top Internet site for job postings, [The Elliott Wave Financial Forecast] cited sharp declines in both areas and stated they signaled that “a recession is at hand.” The biggest economic contraction since the Great Depression was in fact already underway.

Record Consumer Debt: Just One Risk to the Financial System

The average Joe (or Jane) has been borrowing like never before.

Here’s a Feb. 16 CNBC headline:

Consumer debt hits record $16.9 trillion as delinquencies also rise

As you might imagine, if a deflationary depression occurs, the rate of the rise in delinquencies will likely accelerate.

And just know that the possibility of a deflationary depression developing is very much real.  

You see, consumer debt is but a part of the bigger debt picture which poses a risk to the financial system.

This is from an Elliott Wave Theorist which published in 2022:

Many national and international banks still have sizeable portfolios of “emerging market” debt, mortgage debt, consumer debt and weak corporate debt.

Some of the biggest banks also have a shockingly large exposure to leveraged derivatives. The estimated representative value of all OTC derivatives in the world today is $610 trillion, about half of which is held by U.S. banks. Many banks use derivatives to hedge against investment exposure, but that strategy works only if the speculator on the other side of the trade can pay off if he’s wrong.

Although many banks today appear to be well capitalized, that condition is mostly thanks to the great asset mania, which is ending. Much of the credit that banks have extended, such as that lent for productive enterprise or directly to strong governments, is relatively safe. Much of what has been lent to weak governments, real estate developers, government-sponsored enterprises, stock market speculators, venture capitalists, cryptocurrency investors, consumers, and so on, is not. One expert advised, “The larger, more diversified banks at this point are the safer place to be.” That assertion will surely be severely tested in the coming depression. In my view, local, conservatively run banks — a few of which exist — will prove to be safer.

There are four conditions in place at many banks that pose a danger: (1) exposure to leveraged derivatives, (2) optimistic safety ratings of banks and their debt investments, (3) inflated values for the property that borrowers have put up as collateral for loans and (4) the substantial size of the mortgages that their borrowers hold compared both to the underlying property values and to the clients’ potential inability to make payments under adverse circumstances. All these conditions compound the risk to the banking system of deflation and depression. [emphasis added]

Honk if You’ve Fallen Behind on Your Car Payment

If that were a bumper sticker and motorists complied with its request, there’d be quite a bit of honking heard on the roadway.

Yes, increasing numbers of people are not making their car payments on time.

Here’s a Feb. 4 CNBC news item:

The share of borrowers who are 60 or more days behind in their auto loan payments was 26.7% higher in December than it was a year earlier.

Relatedly, the January Elliott Wave Theorist showed this chart and said:

Households are suddenly having difficulty making car-loan payments, as shown in [the chart]. With new and used car prices at all-time highs, people have likely taken on more debt than they can handle.

As a side note, that issue of the Theorist provides an even broader perspective on debt:

Household debt has risen to $16.5 trillion. Most of it is mortgages; some is auto loans; the rest is credit-card debt. The Fed has created $9 trillion since its founding in 1913. So, households owe 1.8 times as many dollars as dollars exist.

The anticipated contraction of this debt will spell deflation.

Disinflation Underway – Even with Robust Jobs Report

The big economic news on Feb. 3 was the strong January jobs report: 517,000 jobs were added during the first month of 2023.

Economists who say that this, along with wage gains, are signs that inflation is set to roar back are off the mark, says a long-time financial journalist.

Here’s the title of the article he pens (CNBC, Feb. 3):

Ron Insana says even with the big jobs report, there are signs of disinflation

Insana says the reason for the robust jobs report is a demographic issue, not an economic one, and goes on to say that the main trend is disinflation, not inflation. This is evidenced by falling prices for goods and energy, as well as a global deceleration in economic growth.

As Elliott Wave International sees it, outright deflation may be in the cards.

This is from the December 2022 Elliott Wave Theorist:

[A]bsolute M2 has been declining on a month-by-month basis for the first time in many decades, probably since the 1930s or 1940s. This trend is deflationary.

In the same issue of the Theorist, Robert Prechter also points to the property market:

Do you know what the underlying problem in the property market is? It is that people have been investing in property. … Houses are ultimately consumption items, like food, although they perish at a slower rate. “Investing” in houses causes their prices to rise beyond normal consumption value. When the investing stops, the trend reverses. That’s what happened this year. It is early in the downtrend, but if you can’t get out, it may as well be later.

A Big Bargain in the Land of La La

Just down the road from Beverly Hills, Calif. is the enclave of Bel Air, which is just about as posh.

Even though a major recession has yet to hit, a swath of Bel Air real estate is already being offered at a big discount, which may be indicative of what’s ahead.

Here’s a Jan. 24 Bloomberg headline and subheadline:

Land in Bel-Air Hits Auction Block at 70% Discount. Bids Start at $39 Million.

It’s a ‘last shot’ to find a buyer for property that was listed in 2013 at $125 million.

If Elliott Wave International’s analysis of the economy is correct, there will be many more bargains in real estate – not only in the luxury sector or California, but across the country.

Here’s a quote from Robert Prechter’s Last Chance to Conquer the Crash:

The worst thing about real estate is its lack of liquidity during a bear market. At least in the stock market, when your shares are down 60% and you realize you’ve made a horrendous mistake, you can swiftly get out (unless you run a mutual fund, pension fund, insurance company or other institution with millions of shares, in which case, you’re stuck). With real estate, you can’t pick up the phone and sell. You need to find a buyer for your house in order to sell it. In a depression, buyers just go away. Mom and Pop move in with the kids, or the kids move in with Mom and Pop. People start living in their offices or moving their offices into their living quarters. Businesses close down. In time, there is a massive glut of real estate.

In the initial stages of a depression, sellers remain under an illusion about what their property is worth. They keep a high list price on their house, reflecting what it was worth at the peak. This stubbornness leads to a drop in sales volume. At some point, a few owners cave in and sell at lower prices. Then others are forced to drop their prices, too. What is the potential buyer’s psychology at that point? “Well, gee, property prices have been coming down. Why should I rush? I’ll wait till they come down further.” The further they come down, the more the buyer wants to wait.

… At the bottom, buy the home, office building or business facility of your dreams for ten cents or less per dollar of its peak value.

Record Global Debt May Mean a Horrendous Financial Crisis

As mentioned before in these pages, every major deflationary episode in the past has been preceded by a buildup of excessive debt.

This ties in with a Jan. 17 headline (CNN):

The world has a major debt problem. Is a reset coming?

As of June 2022, the amount that governments, households and corporations owe is $300 trillion. When that staggering figure is divided by the world’s population, it equals $37,500 in debt for every person.

Yet this super huge amount of debt is just one of the factors which portends a historic financial crisis.

This quote is from a 2022 Elliott Wave Theorist:

Pervasive Top Conditions

A stock market peak of Grand Supercycle degree hasn’t occurred for 302 years. Completed wave patterns, throw-overs of multi-year channels, euphoria among investors, confidence among consumers and economists, an expanding economy, low unemployment figures, record debt and a record-low quality of debt all indicate a historic positive extreme in social mood, greater than those of 1720, 1835, 1929, 1937, 1966-1968, 1999-2000 and 2007. The stock market is spectacularly overvalued. Stock ownership is the broadest in the history of humanity, both in the U.S. and abroad. Research is derided, while passive investing is lauded as the road to riches: Just buy funds comprising indexes and ignore the relative health of component companies. A hundred years ago there were only two stock indexes, one for every 1000 stocks. Now there are 70,000 indexes for every 1000 stocks. In 2009, there was one cryptocoin. Now there are thousands of them, mostly just clones of the original. Finance has intoxicated the public. The number of types of vehicles with which to speculate is unprecedented. The number of derivatives is unprecedented, and the aggregate value of those derivatives is unprecedented. The complexity of the investment marketplace is unprecedented. The number of investment manias in the past quarter century is unprecedented. Credit spreads are the lowest in history, and in some cases negative. European junk bonds recently had lower yields than U.S. Treasuries. Similar conditions have appeared in a few rare instances in history and — although past episodes have been far smaller in scope than at present — they have always led to a substantial crisis in the financial system. [emphasis added]

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