Topic
The US dollar has enjoyed a post-election resurgence, based on the belief (or maybe just the hope) that President Trump will bring some economic common sense back to the federal government. Given the ill-founded, and predictably disastrous, economic policies of the Biden Administration, that shouldn’t be very hard to do.
But even if Trump can make some major inroads on addressing the problems of –
…there may yet remain some major economic threats that are pretty much beyond Trump’s control - such as a major banking crisis that has been brewing for years. Such an unexpected, and perhaps largely unpreventable, black swan event could swiftly take down the US economy and send gold prices soaring through the roof. Let’s take a look at the problem.
There are, of course, countless numbers of financial crises that can befall an economy at any time. Some are big and some are small. Some are short-lived and some are, well, not so short-lived. But among the most serious, the most threatening, financial calamities that can occur in any nation’s economy is a major banking crisis. Why? – That’s an easy one: because the banks are the middleman for everyone’s money, both individuals and businesses.
To read the financial press, it sometimes seems as if everyone has just forgotten the fact that it was only a year ago – 2023 – when we saw three of the four largest bank failures in US history – First Republic Bank, Silicon Valley Bank (SVB), and Signature Bank. Even though Silicon Valley Bank was “only” the 20th largest bank in the United States, its collapse instantly triggered a huge sell off in the stock market and jitters reverberating through the whole US economy. So, now imagine what might happen if one of the top ten or top five US banks failed.
One can’t help but shake their head and suppress a chuckle when they find out that shortly before its cave-in, SVB terminated its Risk Manager. Yeah, no need to manage risk, right? (rolling eyes) After all, as its name suggests, the bank had millions upon millions on deposit from some of the biggest technology firms in Silicon Valley.
So, what went wrong? Primarily, this: Looking to make money on all those millions on deposit, SVB had invested heavily in long-term US Treasury bonds. But – oops – interest rates began to rise sharply as the Federal Reserve tried to snuff out the growing inflation fire. Rising interest rates mean falling bond prices. All of a sudden, all those bond investments that Silicon Valley Bank was holding were losing money hand over fist.
And now for the bad news: The misfortune that took down Silicon Valley Bank could easily take down much larger, more major banks. SVB isn’t even remotely the only bank that made bad bond investments, not by a long shot. Current estimates are that the total unrealized bond portfolio losses for US banks stands at a staggering $500 billion PLUS. That’s a lot of money.
Some speculate that a major reason that the Fed has shifted to lowering interest rates – even though it failed to reach its target inflation rate of 2% - is that it’s trying to avoid a major banking system collapse. But the Fed has a problem there: the global de-dollarization push has lowered total global demand for US Treasuries, which virtually forces the US to offer higher bond yields in order to attract buyers.
Oh, I should probably also mention that there’s another major threat to the banking system, besides falling bond prices, lurking in the shadows – the massive decline in commercial real estate values. With the huge shift in the US economy to employees working remotely, it’s unlikely that all those giant office buildings in major cities will ever be filled up with tenants again – certainly not by corporate tenants anyway. (Maybe they’ll be converted to shelters for illegal immigrants, huh?) And who is it that made $20 million loans for commercial properties that are now selling for only one-tenth of that amount? Right – the answer is: major banks.
So, which one of the biggest US banks (you know, the “too big to fail” kind) might suffer the same fate as Silicon Valley Bank, First Republic, and Signature Bank? Well, one that you might not suspect, but that, in fact, might already be tilting the needle toward the “failure” red zone is none other than Bank of America (NYSE: BAC).
Bank of America? – Surely not – you must be joking.
Nope – sorry, boys and girls - not kidding.
One major hint that Bank of America may not be quite as rock solid as one might like to believe comes to us from none other than the “Oracle of Omaha”, legendary investor, Warren Buffett. Buffett has spent much of the latter half of 2024 getting out of bank stocks in a big, big way. Starting in July of this year, Buffett sold out a whopping 260 million shares of Bank of America. And, interestingly, that drops his holdings there below the 10% threshold, so he can now sell more without having to immediately report the sale.
And actually, if we look back further, we can see that Buffett’s Berkshire Hathaway (NYSE: BRK.A) holding company began exiting bank stocks all the way back in 2020. (Who knows? – Perhaps the “Oracle” had a vision of what four years of “Bidenomics” would look like for the US economy.) Over the past five years, Berkshire Hathaway has dumped sizeable investments (like, all of its holdings) in several major US banks, including JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), and Goldman Sachs (NYSE: GS).
Gee, could Warren Buffett know something we don’t? Well, all I can is that his track record in investing shows that he usually does, right?
And Buffett is far from alone in getting the hell out of major US bank stocks. Ray Dalio, for one - who, by the way, is a long-time advocate of investing in gold - has likewise had his premier asset management firm, Bridgewater Associates, shed bank sector stocks like a lice-infested overcoat.
So, what might be the reasons behind these big guns in the investing world exiting the banking sector in the market?
Lau Vegys, writing for Doug Casey’s Crisis Investing, points to a study done earlier this year by the advisory and investment firm, the Klaros Group, that found – lo and behold – almost 300 regional banks facing the exact same problems that took down SVB, Signature Bank, and First Republic –
And are the nearly 300 banks that Klaros Group looked at likely the only banks in that vulnerable position? – Probably not. Again, as a whole, US banks are currently sitting on more than $500 billion (yes, that’s “billion”, with a “b”) in unrealized securities losses. Just a glance at the graph below shows the rapid accumulation of these losses in just the past couple of years.
You may want to take note of one thing in particular that graph reveals. Compare the far left side of the graph to the far right side, and see how much larger the current unrealized securities losses are than the losses that the banking sector suffered back during the financial crisis of 2008.
Now, if everything in the economy is just breezing along wonderfully, and the banks can hold all their bond investments to maturity, then the potential problem never actually materializes into being a real problem. But let’s face it – everything in the economy isn’t just breezing along wonderfully. If worried depositors starting drawing out their money and heading for the exits, forcing banks to sell their bond investments prior to maturity in order to cover withdrawals, then those massive “unrealized” paper losses could become earth-shattering real losses virtually overnight.
And now let’s turn our focus back to Bank of America, just to take a look at the precarious situation that the second largest (by asset size) US bank is in.
Back in the good old COVID days of 2020 (ha-ha), when interest rates were around a measly 1%, Bank of America loaded up on about $500 billion worth of long-term bonds. Hey, why not? – At that point, it looked like the Federal Reserve would be forced to keep rates low, down near zero, for as far into the future as the eye could see.
But then, over the past two years, the Fed – temporarily abandoning its never-ending and always-losing battle against inflation – pushed interest rates all the way up to over 5%. And that, my friends, was a big OUCH for Bank of America. To be a bit more precise, B of A is now probably sitting on close to $100 billion in unrealized losses on those low-yield bonds.
Is there a solution for Bank of America’s underwater-in-bonds problem? Well, one tactic that the bank is using to try to manage the situation is by paying depositors next to nothing – like less than 1% - in interest rates on deposits. In order to offer customers more competitive interest rates, Bank of America would likely have to sell some of its huge bond holdings – and that would mean turning some of those massive unrealized losses into massive very real losses.
But what happens if and when a large number of depositors suddenly wise up to the fact that, “Hey, I can get much higher interest rates at a different bank”, and – like depositors did at Silicon Valley Bank – spark a massive run of withdrawals from Bank of America? The bank’s balance sheet could turn crimson red in just a matter of a few hours or a few days.
And how likely is that ugly scenario to unfold? Well, frankly, it’s more than a little surprising that it hasn’t unfolded already. These days, financially strapped consumers pay a lot more attention to bank interest rates than they used to.
Don’t get the mistaken idea that B of A is alone here. Bank of America is by no means the only major US bank in this kind of vulnerable position. It simply stands out from the pack as a good example of how pinched the whole US banking system is.
There are some who dismiss the current situation in the banking sector as being not a particularly big deal (but remember – Warren Buffett apparently isn’t one of them). After all, if worse comes to worst, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Bank will step in and take care of everything, right?
Uh, no – probably wrong.
This potential banking crisis lurking in the shadows presents a problem that neither the FDIC, the Federal Reserve, nor even smart economic policies that may be initiated by President Trump may be able to solve. If it hits, then it hits – and it could possibly shake the whole US economy (which, you’ll recall, already isn’t exactly breezing along wonderfully) to its very foundations.
So, what’s a good path for a smart investor to pursue in these treacherous economic waters? Well, like Warren Buffett and Ray Dalio, one might want to consider investing out of – rather than in – bank stocks. And gold looks like an extremely attractive alternative investment. Although gold prices have actually been managing to continue pushing higher even with the Federal Reserve raising interest rates, if the Fed is forced to cut rates in order to try to stave off a major banking system meltdown, then gold should have even smoother sailing to more new all-time highs. (And if the Fed ends up doing another “too big to fail” bailout, that could easily send gold prices into the stratosphere. The 2008 financial crisis saw the price of gold skyrocket from $850 an ounce to $1,800 an ounce.)
Gold has remained the one consistent form of money – used all over the world – throughout all recorded history, thanks to unique characteristics that make it a superlative store of value and medium of exchange. These characteristics include durability (gold is virtually indestructible), divisibility, and scarcity. Unlike paper assets, gold doesn’t carry any counterparty risk. And, unlike fiat currencies, gold resists being debased. Why? – Because, unlike fiat currencies, the supply of gold can’t be artificially inflated.
Those characteristics make gold the premier form of money. Nothing has toppled it from that perch in all of human history, so I doubt that anything is going to do so now.
In contrast, the prevalent fiat currency system that most of the world is operating on now is a relatively new and untested monetary system, very vulnerable to complete collapse.
President Trump can and, hopefully, will take steps to tighten up the US financial ship. But it’s extremely doubtful if he can put out all the fires – such as the nearly unimaginable level of US debt at around $35 trillion, and the rise of the BRICS nations and other China-led global economic alliances - that are threatening the dominance of the US dollar. And I doubt if even Elon Musk has enough cash to cover $500 billion in bond losses for US banks.
If the Federal Reserve continues its reversal back in the direction of quantitative easing, fueling further inflation, that could easily send gold prices soaring much higher.
And, yeah – so could a major banking crisis…..
P.S. Much thanks to the smart guys over at the Grey Swan Investment Fraternity for information provided in this article.
The information provided in this article represents the opinions and insights of True Gold Republic and is intended for informational purposes only. It does not constitute financial advice, investment recommendations, or an offer to buy or sell any financial instruments.
Readers are strongly encouraged to conduct their own research, evaluate their financial goals, and seek advice from a licensed financial advisor before making any investment decisions. True Gold Republic is not responsible for any actions taken based on the information presented herein.
Sources:
https://www.crisisinvesting.com/p/us-banks-in-crisis
https://greyswanfraternity.com/anatomy-of-a-bust
https://goldenportfolio.com/the-gold-opportunity-youve-been-waiting-for/
https://www.bankrate.com/banking/largest-bank-failures/
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