The banking crisis is NOT over – not even close.

Too many banks made too many questionable investments during the “funny money” period of 2021.

Those mistakes are slowly being exposed in 2023. And, so far, we’ve only scratched the surface.

That’s the problem when the world shifts from a period of easy money, where interest rates are near zero, and there’s plenty of liquidity… To a period of tight money, where interest rates spike higher, and funding sources dry up.

People do stupid things when money is free. They pay-up to buy houses in Snoop Dogg’s neighborhood in the metaverse. They spend a million dollars on a digital image of a rock. They buy cryptocurrencies because Elon Musk tweeted a picture of his dog.

Banks, even with all the regulations, sometimes also do stupid things. They are, after all, run by people.

Of course, many folks are aware of the saga of Silvergate Bank (SI) – whose venture into the world of Bitcoin and FTX propelled the stock from $15 per share in late 2020 to nearly $240 per share by late 2021.

Today, the bank is insolvent. SI trades for just over $1 per share and is likely headed to $0.

We also know the saga of Silicon Valley Bank (SIVBQ).

The bank borrowed short-term to lend long-term. That’s a profitable strategy when money is easy and interest rates are low. It was so profitable in 2021, the bank’s shares ran from $380 at the start of the year to over $750 by November.

It is, however, not a profitable strategy when interest rates rise – especially when short-term rates rise much faster than long-term rates.

The bank’s “duration problem” was exposed in March.

Silicon Valley Bank reported a large loss on the value of the long-term Treasury bonds it was holding. That led to a run on the bank. And, the stock now trades for $0.59 per share, and is likely headed to $0.

Some folks will argue that these are isolated incidences.

It’s just a couple of banks, run by misguided individuals who took on too much risk in concentrated investments. And, the stock market is already discounting the losses.

After all, U.S. banks have already lost $50 billion in market value over the past two months.

But here’s my concern…

One of the silliest things ever to happen in the world of finance has yet to unravel.

Perhaps you remember a few years ago when governments around the world were able to issue bonds with negative interest rates. Switzerland, Japan, Denmark, Germany, and a few other countries issued government bonds with interest rates as low as -0.75%.

In other words, rather than receiving income, buyers of these bonds would actually lose $7.50 each year for every $1,000 investment.

That’s insane! Yet, at one point there was more than $18 trillion in negative interest rate bonds in existence.

Who bought them?

My guess is it wasn’t mom and pop investors. People are stupid sometimes. But, when you’re making decisions with your own money, you tend to shy away from investments with a government guarantee to lose money.

But when you have access to other people’s money, you can take “stupid” to a higher level.

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My guess is that a lot of these bonds are sitting on the balance sheets of large banks. And, since interest rates are much higher today than they were even six months ago, the unrealized losses are quite large.

Banks are not required to “mark to market” the price of these securities. So, they can hide the paper losses for a little while.

At some point, though, as we saw with Silicon Valley Bank, this “duration problem” will be exposed.

That won’t be pretty. But, that’s when we’ll reach the end of the banking crisis.

Best regards and good trading,


Jeff Clark


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