Hey There Income Hunters,
Our fearless policy leaders will do everything they can to sweep the banking crisis under the rug.
And it may work in the short-term.
However, smart money is selling as all roads lead to a much larger banking crisis later in the year.
Toronto-Dominion Bank (Ticker: TD) leads the list of biggest bank shorts; sellers have increased their bearish bets to $3.7bn in short exposure according to S3, a leading financial data firm.
TD is getting crushed because it faces a double dose of headwinds based on its 10% stake in Charles Schwab (Ticker: SCHW), which recently lost $47bn in market value due to its unrealized bond losses …
Plus, there are also fears around Canadian housing, which may become a much bigger issue as recession unfolds.
Today, we will look at the warning signs that show the Banking Crisis will get much worse and when the markets may reflect this reality.
Top Ten Bearish Bank Bets
The list below ranks the largest bank shorts, with TD in first place …
Loan Demand is Falling and the Outlook is Bearish
Not only is loan demand declining, but credit standards and terms are tightening sharply.
As banks become more restrictive, a drop in loans follows:
If borrowers are unable to get new money due to tightening standards, they’ll have less money to pay old loans. This triggers another doom loop in the financial system:
Not enough new money to pay old loans → repeated liquidity crisis at banks → contraction in money supply → increase in Lay-offs and insolvencies → loan defaults
The dangerous double whammy for banks is this:
Increases in loan defaults due to a weakening economy, while assets (Bonds) lose value due to rising interest rates.
The Wall Street Narrative May Trigger a Market Short Squeeze
This week we had Fed talking heads once again talking about higher rates for longer.
Then there was this headline from BlackRock:
Markets Are Wrong on US Rate-Cut Bets, BlackRock Says … Bloomberg
Now, think about why they would say that … could it be that they’re holding a massive amount of securities that may get crushed if the market believes the Fed will need to lower rates?
Of course that’s why!
We will be bombarded with the Fed, the banks, and the media saying everything is fine until they succeed in brainwashing enough shorts to trigger a market squeeze higher.
Just remember: the immediate goal of the Fed and the banks is to create this rosy scenario so they can sell their assets and get short before unleashing the truth.
What does this mean for the S&P 500 Index (Ticker: SPX)?
Market maker option positioning is long gamma, which fuels a consolidating to grinding higher market. And that’s exactly what we have gotten since trading about 4000.
Notice the gold dashed line below, which is the volatility trigger or gamma pivot. While the market is above here (4055), trade with a bullish bias.
We may grind higher and test 4200, but notice the lower volume on this recent move.
The rally does not have any power and until we close above 4200 we are still in this 4000 – 4200 range.
I do still have a sneaky suspicion that the banks will get what they need in the short-term, which is a rally in both stock and bond markets.
And it may be worth jumping on … if we break above 4200.
Stay tuned and enjoy the weekend!
Live and Trade With Passion My Friend,
Griff