Markets are still well below the top of September 2021, and there are clear risks ahead. Markets may see a short-term bounce back but that should be taken as an exit opportunity if one is still invested into equities.
There are mainly three reasons for a bounce back –
- U.S. data on inflation was softer last week
- The recent banking crisis in US forced fed to slow down on its rate hike
- Some positive media news that banking crisis has been controlled
And none of these points are any reason to be positive.
These bounce-back reasons are not enough, recession is certain
Any minor slowdown in inflation is temporary, because the root cause of inflation is the past decades of easy money, it will take years to cool down (read more at – https://trikaalcapital.com/reports-2/).
A slowdown in rate hikes, combined with bailouts of banks – both will further fuel inflation. U.S. fed has already added $94 billion to its balance sheet in the two weeks of bank bailouts (this time termed as backstops!) This new printed money is further addition of money supply balloon – boosting the inflation even more. This has been going on since the 2008 crisis and this easy money has created asset bubbles in stocks, bonds, housing, and crypto. Some of these bubbles have already started deflating – crypto lost $2 trillion in 2022.
In March, US banks lost a staggering $390 billion in deposits, the biggest monthly decline in its entire history. If you compare with 2008 Great Recession, not a single decline was larger than $100 billion!
Banking crisis will re-surface and spread. Most banks invested into treasuries at near zero rates and now their prices have crashed as interest rates spiked. It is a massive unrealized loss on paper. Many banks in U.S. are literally paying about 0.01% interest on savings deposit, even as rates have jumped sharply.
As soon as people started to find that short term CDs and bonds were paying 5%, they started withdrawing money from banks – bank deposits in U.S. have gone down by nearly $1 trillion in last one year (chart below)!
If depositors withdraw money, banks have to sell some of their assets (bonds/ treasury) to arrange money for leaving depositors. The problem is that as interest rates have risen from near zero to over 5%, the bond prices have fallen severely, so if a bank sells now, they sell it at a big loss.
This is what happened at Silicon Valley Bank also, when depositors withdrew, they had to sell at loss and didn’t have enough money to repay the depositors.
All U.S. banks invest in such bonds, and all are in losses, unrealized losses till they have to sell them. If they don’t pay higher interest on deposits, depositors will start withdrawing, which will force banks to sell their bonds at losses.
And if they raise interest rates on deposits, they may be paying more than what they earn from low interest earning bonds. They are in a difficult situation, and there is no solution for this.
Bailouts are only going to pump more air in inflation and can only delay the bursting of balloon – that can never solve this problem.
The current situation is a ticking bomb, if you wait for it to explode and then start worrying about your savings and investment, that would be too late – act now and read our eBook – “The Biggest Recession is Coming – Proven methods to make money during these tough times”, available on Amazon at – https://www.amazon.in/Biggest-Recession-Coming-methods-algorithm-ebook/dp/B0BZ8LJM4V
You may also contact us for personalized solutions – info@trikaalcapital.com.