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Early signs of economic unraveling are appearing. The federal corporation that insures bank deposits is woefully underfunded. The Fed is under pressure to pivot away from its inflation fight.
Warren Buffett famously observed, “There’s never just one cockroach.” Let’s review what we know with an eye toward what might happen next. The following topics are today’s headlines.
Bank failures
Silicon Valley Bank and Credit Suisse have failed due in large part to losses in their bond investments caused by rising interest rates. This combines with last year’s stock market loss to put pressure on the Fed to pivot. See the section below on the Federal Reserve.
Disintermediation
Fears have calmed, so bank withdrawals caused by fear have subsided. But greed is another reason for withdrawals. Treasury bonds and Bills pay at least 4%, more than twice bank savings with interest below 2%.
The Federal Deposit Insurance Corporation (FDIC)
The public is being calmed by insurance that covers depositors in failed banks. But the insurance company that provides this coverage could easily fail.
Some very interesting but scary facts about the FDIC (from Steve DeVito, Ryan ALM's head bond trader):
As of Q4 2022, the FDIC reported having a reserve of around $126 billion.
But considering there are approximately $9.9 trillion in insured deposits in US Banks, $126 billion covers only about 1.26% of total deposits.
The FDIC fund doesn’t come close to meeting the minimum legal reserve requirement of 2%.
The FDIC admitted this amount needs to double to exceed “the minimum level needed to withstand future crises of the magnitude of past crises.”
The FDIC invests that $128 billion in U.S. government bonds!
As Steve pointed out, there are $9.9 trillion in insured deposits. It would take many additional trillions to insure the entire banking system's deposits. Consider the potential inflationary impact if the U.S. must inject resources to that extent. It has already injected more than $164 billion!
The Fed
The fed is “tapering” to fight inflation. It’s backing off its zero-interest-rate policy (ZIRP) to cool the economy. When the Fed tapered in 2013, it caused a “taper tantrum” that forced it to reverse its rate hikes – it pivoted.
Most believe the Fed will pivot again, because rising interest rates hurt stock prices and weaken banks. But unlike 2013 when inflation was negligible, inflation is quite high. Pivoting will fuel inflation this time.
Either course – pivot or taper – is not pretty. These are indeed scary times.
Conclusion
There are more cockroaches. We just don’t see them, yet.
Please see my previous article on protecting your investments.
Ron Surz is president of Target Date Solutions, developer of the patented Safe Landing Glide Path and Soteria personalized target date accounts. He is also co-host of the Baby Boomer Investing Show.
His passion is helping his fellow baby boomers at this critical time in their lives when they are relying on their lifetime savings to support a retirement with dignity, so he wrote a book Baby Boomer Investing in the Perilous 2020s and he provides a financial educational curriculum.
Read more articles by Ron Surz
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
