Hey There Income Hunter,
Banks have been hit with two waves of losses that have already caused the failure of three financial institutions in a matter of weeks.
The third wave is coming and it will be a tsunami that will test the strength of the entire banking system.
Hear me when I say: we are heading toward the greatest collapse in the not-too-big-to-fail banking sector.
This wave of bank failures could rival the S&L crisis of the 1980s, which caused more than 1,000 banks to go under.
Right now, consensus is the Fed, Treasury and FDIC have lessened the problems, but the third wave is building and when it arrives no one will know what hit them.
Where is it coming from and what’s the trade? I’ll answer that below …
The 3 Waves of Destruction
- The first wave was caused by the Fed aggressively raising short-term rates to the point they rose above long-term rates. This by itself cut-off a huge chunk of bank earnings, since for the past decade they were able to borrow funds at 0% to lend them at 3-5%.
- The second wave was the unrealized losses that built up in Treasury and Mortgage bond assets whose prices plunged as interest rates rose. This was enough to bury SVB financial (Ticker: SIVB) and Signature Bank (Ticker: SBNY).
- The third wave will wipe out hundreds of small banks and could threaten larger ones also.
The Tsunami of Commercial Property Debt
Regional banks hold ~$2.3 trillion in commercial real estate (CRE) debt according to an analysis from Trepp Inc, a CRE data firm.
That is nearly 80% of all CRE debt held by ALL banks.
The real problems are with loans for office buildings that have been left vacant since Covid.
The second half of 2023 will provide a critical test because $270 billion in CRE debt held at smaller banks must be rolled into new loans at much higher rates …
What percent of borrowers will default? … That is the multi-billion dollar question …
Because a large number of defaults could force banks to sell bonds and take losses that could put more fear into a collapse of the regional banking system.
What’s the Trade?
In order to protect against more bank failures you want to hold long strategies in the assets that money will flow to.
Below are the assets that performed the best when the news of bank troubles first hit …
Buy Short-term Government Bonds and Gold
The chart below shows the SPDR Gold Trust ETF (Ticker: GLD) and the iShares 1-3 year maturity government securities ETF (Ticker: SHY).
As you can see they both trended sharply higher when the news broke and have settled into consolidation after the Fed added some much needed liquidity.
When the 3rd wave hits the Fed will have to break out the bazooka of liquidity, while you can ride the wave for big profits being long the safest assets in the world.
The situation may calm down for a bit since the banks just received an injection of liquidity but the tsunami is building …
Stay tuned and as always …
Live and Trade With Passion My Friend,
Griff