Weekly Report
Artem Karida
Educator | C-suite advisor | business strategy, innovation, and marketing expert
Week 18. April 31 - May 7, 2023
INDEX
Macroeconomic indicators
Analytics
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Macroeconomic indicators
The mandate of the Fed does not involve political judgments; rather, it is technical and financial in character. However, in the current situation, the picture appears to be a little more convoluted.
If the interest rate is raised significantly to achieve the required 2% inflation rate, the reduction in production, building, and the population's standard of life will become prohibitive.
This is possible, but in this version, it is a political decision rather than a technological one.
If the rate is hiked while also stimulating private demand, the outcome may be the opposite - inflation may not decline. What is the objective of boosting the industrial and construction slumps?
If the poor's consumption is increased (and it has been declining for several months), inflation will almost definitely rise, further reducing middle-class consumption. And assisting the entire middle class is just very high inflation caused by the collapse of the economy's real sector. This is a political decision as well.
You can strive to avoid the decision, which was really demonstrated by the Fed.
Because hiking the rate by a quarter percentage point was virtually universally supported by market participants. The problem is that this will not halt the recession or the banking crisis, thus it is a political decision as well.
Because the Fed's leadership lacks such a mandate, there is no doubt that it has repeatedly requested a political decision from the White House. However, based on Janet Yellen's actions, such a decision was not made. In some ways, this suggests that
the US strategic planning apparatus is dysfunctional,
and political conclusions can be formed, but they are outside the purview of a free study. In the meantime, Powell's behaviour during the news conference revealed he was exceedingly apprehensive. That, in and of itself, presents severe problems.
In general, it can be diagnosed that the industry of the whole world is in a steady decline. If we also consider that industry experts tend to look at the situation in their industry from an optimistic side, the picture becomes even sadder.
Analytics
Aukus block industrialization
The United States is investing at an unparalleled rate in science, innovation, research, and development.
From 2007 to 2012, the invention of technologies (in terms of value-added, not total expenditures) spent an average of 1.9% of nominal GDP. The slow acceleration began in 2013, and the substantial acceleration occurred in 2017, with the start of the technical and economic war with China.
In 2017, the US establishment and tech elite realized that the US was losing and/or falling behind China in terms of innovation, where R&D investment is on a parabolic trend.
After a brief stabilization period (approximately 1.5 years), technology spending in the United States reached a historic high in Q1 2023.
Along with technology, the cost of developing software is rising, and this trend has accelerated dramatically since 2015, with artificial intelligence accounting for almost 80% of the net increase. ChatGPT - a public form of AI at the moment - is one of the forms of the highest evolution of AI at present, but a large portion of AI innovations are non-public.
As a result, more than 5% of GDP (at value added and face value) is invested in the development of technologies and software, the highest level in history. The change in share over ten years is 1.5 percentage points, which is the fastest pace of increase in expenditure on innovation in the history of the United States.
When we overlay the NASDAQ chart, the correlation is clear: intensive expansion from 1993 to 2000, then a new phase of growth beginning in 2013, and a large acceleration beginning in 2018.
Because economic warfare in the twenty-first century is essentially a struggle of technology and ideology, including a battle for the smartest and most creative brains, the conflict between the United States and China has reached a new level.
PS. And what about Europe...?
China and technological innovation
Innovations and technologies impact the economy's strength, stability, and competitiveness, as well as the role of national high-tech products in global trade, which in turn determines society's level of progress and well-being.
At the same time, the level of national output does not always predict a country's industrial potential because industrialized countries have the characteristic of exporting energy-intensive and/or low-profit goods while managing financial flows. Exactly as Europe is doing today in its accelerated phase.
Outside of the industrialized countries, the globe currently has only one hub of technical development - China.
China's development can be classified into numerous stages:
The first stage is the global economic opening from the mid-1980s to 2008. From the mid-1980s through 2008,
China welcomed international investment to establish factories and industrial clusters, helping it to modernize its economy and employ millions of rural citizens.
This allowed China to import the technology and excellence of the world's flagships, while also building a middle class geared toward industrial clusters and overseas trade. The rise of the middle class enabled China to generate a viable domestic market as well as resources for development.
The second stage, as an active period, is the principal development of technology from the early 2000s until 2010.
Not all technologies are cutting-edge. For nearly two decades, China has had secondary technologies; cloned, and replicated commercially successful developments in Western countries, Japan, and South Korea.
Cloning's success was partly owing to the presence of such products in China, where factories, Western technologies, and accumulated managerial and industrial experience allowed China to clone the developments of international flagships fast and with minimal loss of quality.
Essentially, these products were aimed at the local market but were partially dumped in third-world countries as the geography of external purchasers gradually expanded. We began with textile production in the early 1990s, gradually replacing it with more complicated types of production while also enhancing production schemes, chains, and technologies. As a result, they are transitioning to the automobile industry, electronics, mechanical engineering, and electrical equipment.
China introduced alterations through trial and error, gradually fine-tuning and improving its own output, but optimization and improvements could not occur on their own. This necessitates the use of proprietary technology.
The third stage is inventive development from 2008 to the present (creation of breakthrough technologies),
whereas science and technology development in China began in the early 2000s, accelerated rapidly from 2004-2005, and became an exhibitor in 2010.
In 1995, China had roughly 500,000 employees working in research and development, with a meagre $ 5 billion in investment. By 2010, the research workforce had grown to 2.5 million employees, with a total funding of about $ 90 billion. China expanded spending for science and technology to 370 billion dollars in 2020, and the number of scientists reached about 5 million.
China's spending on science could reach $550-570 billion in 2023, with a workforce of more than 5.5 million employees. Approximately half of the costs are borne by the state, and when scientific laboratories at universities are included, the state's part is approximately 60%.
Taking buying power parity into account, China is well ahead of the United States in terms of science funding.
By 2027, when China wants to attain technological autonomy, the amount of scientific investment may approach $850 billion (equivalent to what the US presently spends), and the number of scientists working in R&D may exceed 6.5 million.
China is investing billions of dollars in research institutes, design bureaus, and research laboratories, as well as aggressively building research clusters at educational institutions in collaboration with private industry.
China is fast becoming an unbeatable leader in patents in several sectors of high technology (more on that later).
The United States worry is entirely reasonable.
First Republic Bank has declared bankruptcy
JPMorgan acquired another bank in an attempt to rescue its $5 billion investment in March. JPMorgan's balance sheet now includes 173 billion in loans and more than 30 billion in securities assets.
JPM can purchase anyone, at any time, with about 900 billion dollars in cash. It's not surprising.
The most intriguing aspect is that JPMorgan privatizes profits while nationalizing losses. The FDIC has agreed to share the weight of losses as well as any possible loan write-offs with JPMorgan, with a potential coverage of up to $13 billion.
The FDIC is rendered ineffective because it has burned practically all of the previous two banks' potential rescue reserves and expects up to $500 million in profit each year in accordance with First Republic Bank's asset-liability structure.
According to the plan, JPM would incur $2 billion in restructuring costs over the following 1.5 years but will realize a $2.6 billion one-time gain.
JPM is returning $25 billion to other banks that bailed out the FRC in March, bringing the deposit base to $75 billion.
FRC assets are not as dangerous as the bank's troubles, which were weakening confidence and widening the gap between liabilities and assets. FRC had super-expensive capital at 5% and a 3.5% average return on assets.
A merger with JPM would allow the Fed to return funding at 5% utilizing JPM's trillion-dollar cache reserve, eliminating the bank's fundamental difficulty in the profitability gap, as well as the crisis of confidence in this particular bank.
The third reasonably significant bank in the United States arrived at the exit feet first. There are still dozens of small and medium-sized banks to save in the United States.
In Europe, inflation is slowing
In Europe, inflation is slowing , although it remains at an excessive high of 7% per year.
The decrease in inflation from 10.6% in October 2022 to the current 7% was almost entirely due to the energy component,
which has a weight of 10% in the CPI structure, in which there was a significant decrease in energy growth rates from 40-45% to 2% by April 2023 (over 4 p.p.).
You must comprehend that energy will have a deflationary effect by October 2023, i.e. over the following six months. Because of the base effect from last year, the yearly change by Q3 2023 might be minus 15% or perhaps negative 20%, the largest deflationary effect in the last 40 years and stronger than in 2009 and 2020 (minus 12-13%).
This is true if there is no big increase in oil and gas prices in the near future, but there are no prerequisites for this at this time.
For the first time in 1.5 years, the rate of food inflation growth has slowed. Furthermore, unlike energy, prices continue to rise, albeit at a slower rate of 0.2% m/m, compared to a year ago at this time when they rose at a record 1.9% m/m.
As a result, annual food inflation reached about 15.5% in March 2023, before falling to 13.6% in April 2023 (ten times the rate from 2010 to 2020!).
Food prices increased by 22% in two years, whereas the previous 22% increase took 13 years, from 2008 to 2021.
Because of the drop in wholesale costs for food raw materials during the following six months, product inflation rates are predicted to fall to 7-8% by Q3 2023.
Prices for non-energy items are falling slightly, from 6.8% to 6.2%, but remain over ten times higher than the average from 2010 to 2020.
The primary issue is currently concentrated on service prices, which continue to increase to 5.2% year on year (it was 3.3% in April last year, and 0.9% two years ago).
Costs are dispersed across the economy, and inflation becomes more stable. Background inflation is predicted to be 5.5-6%, or three times the usual.
The Economics of Europe
The European economy has entirely ignored the last two years' macroeconomic and political events.
The loss of the Russian market, the crisis of millions of Ukrainian refugees, the collapse of the trade balance, the debt crisis with a record increase in interest rates, and even a powerful energy blow with an epoch-making reorientation of energy flows and the shutdown of energy-intensive production had no effect on the economy.
All of this would normally be enough to collapse the European economy, but what about the simultaneous and concentrated presence of all extremely unfavourable factors? Furthermore, the situation is not just negative, but severely negative, with the highest concentration of destabilizing variables and a narrow margin of safety, at least in terms of debt sustainability.
In principle, all of the above should have resulted in a catastrophic blow to the European economy, much beyond 2008, when the EU-27's GDP fell by 5.5%, but not this time.
According to Eurostat, the European economy increased by 1.3% from Q1 2023 to Q1 2022, and quarterly growth is still present, but close to zero within 0.1%. The European economy has been near to a standstill over the last six months (cumulative growth of 0.13%), but this growth is incredible.
The terrible repercussions of the COVID crisis, as well as all of the preceding negative reasons, have been completely countered, if not exceeded.
Seasonally adjusted cumulative real GDP growth in the EU-27 countries was 3.1% from Q4 2019 to Q1 2023, 2.5% in the Eurozone, negative 0.1% in Germany, minus 0.2% in Spain, plus 1.3% in France, and 2.4% in Italy.
It is difficult to explain how the Eurozone GDP has grown by 2.5% since Q4 2019 when four leading nations have shown growth below 2.5%, and Germany and Spain have not yet legally exited the negative, yet Eurostat believes so.
One can disagree about growth figures, but corporate reporting and other business indicators show that Europe is not yet in full crisis.
Reserves of cash in US Treasury accounts
The cash reserve in US Treasury accounts fell to $238 billion as of May 1, 2023 - a daily loss of $80 billion.
Extrapolating the trend for the entire month is not necessary because income and expenses are out of sync and peak expenses normally occur at the beginning and end of the month.
There's no need to worry since the US debt ceiling will be lifted in the best Hollywood manner - precisely a minute or even a few seconds before "X hour".
The only thing worth watching is when the Ministry of Finance eventually enters the loan market, but it will have to borrow a lot.
The US budget deficit was $1.4 trillion from May to December 2022, $1.2 trillion the previous year, and $2.2 trillion in 2020. Even though they have a debt ceiling, they have boosted their spending this year.
The budget deficit was $1.1 trillion from October 2022 to March 2023, compared to $668 billion in 2022 and $1.7 trillion when the printing press run. Although April data is not yet available, Treasury payrolls suggest a preliminary surplus of $230-250 billion, compared to a surplus of $308 billion last year.
In May, the deficit had averaged around $140 billion during the previous five years, excluding the unusual 2020. This year has been extremely busy, and there have been issues with revenue collection. A deficit of more than $200 billion in May 2023 is simply because the cache stock will be near the red line by early June.
As a result, the debt limit will be raised in June, and the Ministry of Finance will enter the market at breakneck speed, causing significant pain at the start of summer because liquidity will be aggressively withdrawn from the system, increasing demand for dollars while decreasing demand for risky assets.
How much money should I borrow? Quite a few.
From May to December 2023, the deficit could be 1.5-1.6 trillion, plus a replenishment of cash reserves of at least 300-400 billion to 500-550 billion, implying that they can borrow up to 2 trillion if the limit is raised by 2 trillion, but most likely - 1.5 trillion, implying that they will again run into the limit and clowning at the end of the year.
When the Ministry of Finance begins to vacuum the market, it will harm business bonds, particularly bad bonds, exacerbating the crisis.
The vigour of the European economy astounds
According to Eurostat, the nominal GDP growth rate due to inflation significantly outpaced the growth rate of public debt, and the debt burden for the year decreased from 95.5% in Q4 2021 to 91.6% in Q4 2022 for Eurozone countries and from 88 to 84% for EU-27 countries.
Despite growing inflation, the Eurozone countries' public debt increased by only 447 billion euros or 1.8 times less than in 2020.
Europe suffered a high concentration of bad events (inflation, energy crisis, refugees, debt crisis, cutting connections with Russia), yet the growth in the budget deficit was minor - just 2 percentage points from 2.7% in Q1 2022 to 4.7% in Q4 2022.
Simultaneously, only 1.6% of GDP was directed to economic support (50% of state budget expenditures in the first half of 2022 to 51.6% in the second half of the year), and budget revenue fell by 0.3 percentage points from 47.3% in the first half of the year to 47% in the second half of 2022.
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The present budget deficit (4.7% of GDP) does not appear to be excessive, as it averaged 6-7% during the 2009-2010 crisis and 12% during the COVID crisis. It is currently balanced at 7% from Q2 2022 to Q2 2021.
The complex of surplus budgetary subsidies is predicted to be closer to 3-3.5% of GDP, implying that if not for the crisis processes in 2022, European countries' budget deficits would be about 1.5%.
Given all of this, the magnitude of incentives is not as high as one might think in the context of the European economy's sustainability, as one may presume that the strength of European GDP is primarily attributable to fiscal stimulus.
Without assistance, GDP could fall by 2-3%, although in general, the situation is not as dire.
The Fed increased the interest rate
The Fed increased the interest rate by 0.25 percentage points to 5.25%.
This is the highest level since May 2007.
The Fed's conclusion was totally predictable, as it could not have been otherwise given the circumstances.
Powell, as usual, stated , "We don't know, we don't understand, there is too much uncertainty, we need to watch how the data accumulates and make appropriate decisions, the Fed will respond adequately and all along the same lines."
That is what Powell stands for. When the Fed sparked the greatest bubble in human history in the financial system (including the stock market), beginning an unparalleled monetary frenzy in 2020-2021, Powell stated that "there is no risk of inflation."
Furthermore, even when inflation reached 7%, the Fed continued to outperform the market by keeping rates at zero. The same is true of the banking crisis.
Powell has now produced a fresh pearl: "First Republic Bank was the last bank to fail, and a line should be drawn under the acute phase of the banking crisis." ??
When you try to analyze the mutually conflicting theses and, in some places, anger against Powell's common sense, you will notice a distinct lean towards dove rhetoric and a desire to break out from the tightening cycle.
It all started with the February meeting.
The banking crisis since March has established all of the conditions for the Fed's decision-making system to ultimately return to its prior track of "infinite softness," but the difficulty is the typical inertia of the Fed's decision-making system. With the exception of an emergency release of pressure, any rapid jerks nearly invariably cause confusion and a breach of confidence.
The banking crisis may be filled with cash, which was done, but regaining trust in the regulator is difficult if it is lost - this is a long-term damaging process with very terrible effects.
Monetary policy manoeuvres should be carried out at such a rapid pace that the market has time to embrace a new configuration of reality and generate suitable expectations.
Everything the Fed does in public, both during the meeting in Powell press conferences and between meetings through talking heads (representatives of Federal Reserve Banks), is to create a communication window/channel between the Fed and the market so that monetary policy decisions always correspond to short-term market expectations.
Disagreements between market expectations and Fed decisions are exceedingly rare and only permitted in exceptional instances and conditions, such as the COVID crisis in March 2020.
Market expectations determine the vector of change in monetary policy; in this sense, it can be recognized that expectations form the Fed's monetary policy; however, the Fed's monetary policy and the Fed's communication channel with the public are tools of monetary policy, that is, building market expectations.
But, can market expectations be autonomous and independent of the Fed's actions?
To some extent, yes, because the Fed is not an autonomous organization and is embedded in the financial system, and the financial system is primarily made up of the largest financial structures, the majority of which are primary dealers (they perform open market operations on behalf of the Fed).
It is more accurate to state the concept as follows.
Market expectations consider the interests of the financial sector, which has a direct impact on the Fed's monetary policy; yet, the Fed can modify market expectations to meet its purposes.
In general, the Fed remains a conglomeration of megabanks and investment companies.
So, when Powell declares that the Fed is committed to battling inflation by using monetary policy as an ultimatum, he is playing a confidence game. Simultaneously, a fine line is constructed between assertions and their context, establishing the narrative and tone.
The Fed may declare that it will not decrease interest rates this year while also making numerous reservations and mutually exclusive theses. The increase in disorder and entropy i.e. increased confusion and ambiguity, is sure evidence of a schism in words and intentions.
As a result, the Fed is plainly searching for wriggle room to gracefully exit. Actualization of crisis processes, as well as financial sector destabilization, will be ample reasons to put the brakes on, at the very least with toughening. Against this backdrop, the reduction of inflationary pressure will undoubtedly make room for a rate cut.
As a result, the last rate hike occurred with a high probability, and if the situation in the financial sector worsens, the first rate cut is likely in July, rather than September, as a response to the deterioration of financial conditions. The macro data will be fairly bad by this stage.
All of this is done to guarantee that readers may grasp the context of monetarist comments and Central Bank rules of the game more accurately. Denying a rate cut this year is not the same as rejecting one because the intricacies are significant.
What should be known about the Fed's decision-making process?
Because present inflation takes into account the past, there is no deciding value. It's like thinking back on last year's snow. When it comes to inflation, only inflation expectations count to the Fed.
Inflation expectations are proportional to the amount of money lost. The greater the expectations, the faster money is converted into commodities and services, alternative places of capital investment in financial markets, and money surrogates.
The pattern of family spending and company investment is directly affected by assumptions about future price dynamics.
Rising price expectations contribute to driving the money supply into commodity circulation as economic organizations strive to fix current prices through the purchase of goods and services, so "profitably" transforming savings "into material substance."
This is how boosting monetary policy is implemented during a recession, but if this process occurs under situations of limited supply for different causes, inflation will eventually accelerate due to a supply-demand imbalance.
Many other factors influence inflation expectations:
However, one important feature of inflation expectations is the projection of intent on financial markets.
When allocating liquidity among financial assets, investors are driven by anticipated inflation over the investment horizon.
Inflation expectations have a direct impact on investment horizons and priority financial instruments, influencing both demand potential and market interest rates in the debt and money markets.
That is why Central Banks control inflation expectations rather than inflation, which determines future inflation through the actions and expectations of economic entities.
The labour market in the United States
Last year, 4 million jobs were created in the United States, with the private sector creating 3.5 million and the state (federal and municipal governments) creating 470,000.
The rate of job creation is over double the 2010-2019 trend when nearly 2.3 million jobs were created yearly.
Adjusted for demography and population, the present rate is around 2.5 million people each year, which corresponds to the pre-crisis period, and in actuality, 4 million people are being created.
The labour market is quite strong, however, the rate of growth has slowed in the last six months, with 1.5 million individuals added in comparison to 2.5 million in the first half of the year.
As a result, the gap between the 2010-2019 trend and current employment has narrowed to 3.9 million people (current employment of 155.7 million compared to the trend of 159.6 million), and the overall labour shortage is estimated at 6 million people based on current demand for goods and services, workforce strength, and productivity.
?The number of open openings confirms the labour shortfall, which is 9.6 million (the maximum was 12 million in March 2022), while the norm is 7-7.5 million open vacancies under the current labour market setup.
When the labour market structure is compared to February 2020, sectors of the economy that employ 45 million people (29% of total employment) did not recover from the crisis - this is the industry of culture, sports and entertainment, catering and hotels, other household and personal services, as well as the public sector and mining.
Since February 2022, the technology industry, professional and business services, transportation, logistics, and warehousing have experienced the greatest expansion (representing over 21% of total employment).
Wage growth is fastest in low-wage service sectors that serve a large number of people (catering, cultural, sports, and entertainment) - there is a labour shortage, while employment in higher-wage sectors is increasing.
So long as it doesn't appear to be a crisis yet...
The commodity bubble is bursting
If it's even possible to talk about a commodity market bubble.
When we compare the prices of essential commodities in real terms (accounting for dollar inflation), we find that commodities are only able to sustain the purchasing power of dollars (increase in inflation), but they are mostly losses and big losses.
Sugar average prices in April (in real terms) compared to average prices between 1970 and 1979 - a loss of nearly four times, cotton and cocoa prices have plummeted by a factor of three in 50 years! Coffee is down 60%, and aluminium and soybeans are down significantly (more than twice). Wheat prices have dropped by 44% in the last half-century, while fertilizer prices have dropped by 25%.
Nickel, copper, and platinum have plus or negative zeros, whereas silver has increased by 11% - and this is for the next 50 years!
Only energy raw resources (oil, gas, and coal) rose by 67-80% (a little more than 1% each year) and gold surged by 182% in the visible plus
Of course, the comparison period is key here; hence, to minimize disputed points, a broad range of comparisons was taken over 10 years (average prices from 1970 to 1979); there will be a rise, albeit not considerable, in comparison with the period 1990-1999.
However, in actual terms, oil is presently at the level it was 20 years ago. Gas and coal prices are still high, but these are echoes of the 2021-2022 energy crisis.
With the exception of gold, everything else is quite bad for raw materials.
As a result, with rare instances of local price anomalies, such as gas and coal (prices are also adjusted to the historical trend here), raw commodities can at most track dollar inflation in the long run, but not beat it.
What about the emphasis on the short-term dynamics of nominal raw material prices? A large year-on-year loss throughout the whole product category for January-April 2023 (details in the table), with the decline intensifying until at least June 2023 due to the base impact.
Warren Buffett on the global situation, de-dollarization, and AI
However, both recognize that they will have to work together in some capacity. It is critical that both China and the United States recognize the rules of the game and that neither side pushes too hard, even though both can be competitive and succeed. We require mutual compassion between China and the United States. Anything that raises the level of tension between the two parties is stupid, stupid, stupid!
Even with concerns about the US debt ceiling, I don't see any other candidates for the job of world reserve currency besides the dollar right now. People may lose faith in the dollar, but this does not imply that another currency, such as Bitcoin, can suddenly take over as the world's reserve currency.
It's insane to consider some tokens. Bitcoin is a currency for kidnappers and extortionists, and all of this horrible development is detrimental to civilisation. It's a game chip with no intrinsic value, but that doesn't stop people from playing roulette with it. impossible. Forget about all of your toys.
When anything can accomplish everything on its own, it makes me nervous. Because I know we can't reinvent it, and, you know, we invented the atomic bomb during World War II for a very good purpose. The fact that we invented artificial intelligence was crucial. But is it beneficial for the world's next 200 years that such an opportunity has arisen?
Amusing statistics facts
The American Community Survey (ACS) of 3.5 million households is conducted by the US Census Bureau each year. The questionnaire is 28 pages long, including a 16-page training manual. They inquire about everything: how much you earn at work, how frequently you wash, whom you live with if you have mental or emotional difficulties, who your friends are (surnames, names), whom you work for, and so on.
And now for the fun part: the survey is governed by federal law (link 1 , link 2 ), and each unanswered question is subject to a fine of up to $100, and each intentionally incorrect answer to a question is subject to a fine of up to $500, albeit the total amount is capped.
So you can get detained for $ 5,000 and even sit down for a year for refusing to participate in the survey or attempting to alter state figures. This is what we mean by "data ethics" ??
In light of JPMorgan's bailout of First Republic and the ensuing collapse of PacWest and Western Alliance shares, which are considered the next candidates for withdrawal from the US banking system, Apple's new goals become quite intriguing.
Recently, Apple and Goldman Sachs created savings accounts with a very high rate for the states of 4.15% - over ten times the average deposit rate among US banks. It is worth noting that the highest rate offered to consumers by Goldman Sachs is also lower than the new Apple offering - 3.9%.
Apple Card users transferred $990 million to new savings accounts in just four days following the introduction. We don't recall any past stars of fintech and so-called neo-banking boasting of similar accomplishments at the height of their stardom.
Almost half of the 4,800 US banks today have assets worth less than their liabilities, and the market value of their loan portfolios is $2 trillion less than their declared book value.
Many American bankers have been so convinced of the financial system's stability and the inviolability of zero interest rates during the last 15 years that they have forgotten that, in addition to credit risk (debt nonpayment), there is also interest rate and market risk (debt depreciation). That is, they purchased long-term assets, such as those maturing in ten years, and evaluated the balance sheet at its nominal value.
The argument is as follows: I purchase a Treasury bond with near-zero default risk, thus I will collect interest on coupons and will receive my $100 back in 10 years, so I record $100 on my balance sheet. My bank's clients' money (my liabilities) is fully supported by excellent assets.
Problems can occur only if inflation suddenly increases multiple times, bonds begin to become cheaper for some reason, and clients begin to withdraw money from deposits in large numbers - in short, cancer will whistle on the mountain.
THE END OF THE REPORT
Stay tuned.?
Regards, Negorbis.
The key info about the financial and banking crisis can be found in three issues dedicated to this subject:
Part I "Falling Bank Chronicles "
Part II "Crisis of Confidence & Regionalization "
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We don't make recommendations; instead, we highlight critical patterns that will help you fail less.