Risks are balanced, trouble in Europe

Credit Suisse is the next to receive a bailout. It won't be the last.

Dear readers,

Banking crises don’t take a few days to play out. They take a few months. Sometimes, they can take over a year—for example: in August 2007, the origin of the Great Financial Crisis began when BNP Paribas failed to publish the Net Asset Value (NAV) of its subprime mortgage investment vehicle, but it wasn’t until over a year later that the crisis culminated with the fall of Lehman Brothers.

To think that a Sunday bailout of Silicon Valley Bank followed by a Wednesday bailout of Credit Suisse will mark the end is reasonably foolish. This banking crisis isn’t over.

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Today’s Topics

• We’ll refute some of the narratives surrounding the current banking crisis.

• Crypto is under attack by the government, but why doesn’t bitcoin seem to mind?

• Credit Suisse is in the news again, this time for receiving a $54 billion infusion from the Swiss National Bank. The ECB raising rates today will not help.

• Recessionary signals are intensifying. Terrible price action in oil is possibly the brightest signal of them all.

• What will the Fed do next week? Whatever it is, it better be done carefully.

• Stocks in a box.

There aren’t any bubbles being popped.

Silicon Valley Bank folded due to poor risk management. The hiking cycle contributed to bond yields increasing and prices falling, but it was the unimaginable unhedged allocation to long-duration assets with short-term deposit liabilities that ultimately busted the shop.

What is duration? Duration measures the price sensitivity to movements in interest rates—a long-duration bond, essentially derived from the bond’s years to maturity, will have more sensitivity than a short-duration bond. For example, a 1% increase in 10-year yields will have about 5x the price sensitivity of the same move in 2-year yields.

Now, we must admit that when rates were skyrocketing all of last year, it did appear to many that the debt bubble was finally popping. Additionally, the apparent bursting of that bubble broke Silicon Valley Bank and potentially others. But what happened after SVB required rescue and confidence in the smaller US banks started to disappear? Yields fell, and dramatically. That is not the definition of a popping bubble.