The “low interest rate” junkies ignore the US banking crisis

Last week’s stock market rally is truly something to behold.

Stock prices rose on Thursday and again on Friday, soon after the Fed raised interest rates, and not because corporate earnings are killing them, inflation has stalled or economic forecasts are so positive.

No, stocks rallied because we have a banking crisis and the possibility of interest rates coming down soon. That means traders are betting, like drug addicts, that the Fed could continue to give them their fix – pumping “heroin” in the form of low interest rates into the drug addict that is the US stock market.

Correctly. The modern stock market is an addict — and like an addict, you can’t trust it. He will lure you in with false promises. Steal from you to feed his habit, feign health and strength when he has neither. More than anything else, it needs help — a therapy center, if you will, that removes its addiction to free money and allows prices to reflect the true state of the US economy and projected corporate earnings.

The treatment is painful, as we see. They are the higher interest rates now imposed by the Fed to quell food and fuel inflation and bloated financial assets. Things like cryptocurrencies, meme stocks, tech stocks, and more have recently fallen, exposing a pernicious bubble that only free money could create and higher interest rates can cure.

Now the cure of higher interest rates is painfully exposing a similar rot in the banking system. Button-down commercial bankers as opposed to stock-pumping retail memes were taking wild bets on commercial real estate and early-stage VC firms. They are also being crushed by higher rates as asset prices begin to wean themselves off their addiction to risk.

Traders work on the floor of the New York Stock Exchange.
Many traders have jumped on the rising stock market rates.
Bloomberg via Getty Images

More banks may fold

First there was Silicon Valley Bank, or SVB, and then almost simultaneously Signature Bank went cold turkey. There will be others, as many as two dozen, I am told. All have balance sheets remarkably similar to SVB and Signature. If things continue to go south, they are poised to fold as well, guaranteeing a sharp downturn.

Then again, you don’t see that logic as much in the stock market, where the combined wisdom is the disillusioned gibberish of a junkie who just got his fix every time he hears lower interest rates are coming.

Fortunately, there are people on Wall Street who aren’t high and you can trust for the straight story – people like JP Morgan’s Jamie Dimon and Larry Fink, the head of the powerful money management firm BlackRock. They have nearly a combined century of risk management experience, and while folks in DC are bromides about the strength of the banking system and stock traders are freaking out about lower interest rates, they’re ignoring the noise.

They know that stockbrokers are not the best barometers of the long-term health of the economy or even of the markets themselves. They also know the risk taking in SVB et al. it is more endemic to the banking system than stocks signal. If we don’t get it right, we are headed for a wider meltdown, a steep recession and a market crash.

First Republic Bank
Banks and the US government are now trying to save First Republic Bank.
NurPhoto via Getty Images

Saving the First Republic

One way they are doing this is to try, possibly in vain, to save First Republic Bank and eventually sell it. The once-rock-star San Francisco-based bank is no toddler. has more than $200 billion in assets. It caters to wealthy people in technology and other big industries.

Unfortunately, it made some of the same horrible portfolio choices as SVB: loans to businesses (tech and commercial real estate) that are underwater, resulting in a tumultuous deposit base that is constantly being drained from accounts.

Dimon is looking to arrange a “club deal” to save the First Republic. This means you will sell it after making commitments to inject real capital into the bank (on top of the recent $30 billion deposit inflow). He and his people are talking to private equity firms (former Treasury Secretary Steve Mnuchin, now a PE banker, is said to be interested), other banks and some rich guys like Warren Buffett or a member of the Saudi royal family.

Fink, meanwhile, is pitching ideas to the White House on how to stop the transmission from reaching epic proportions, as it successfully did during the 2008 financial crisis, and is warning his DC contacts that we’re facing a potential crisis. the one that hit S&Ls decades ago if the government doesn’t act.

So far, it doesn’t look like the White House is taking Fink’s words to heart, given his continued silly happy talk. The deal and sale of Dimon’s club also appears to have stalled. As I first mentioned, bankers are weighing going to the federal government for a handout: Capital in exchange for warrants that would be paid off with the profit once the thing is sold.

Yes, things could get really bad, so don’t trust stock trading addicts.