Digest: The Banking Crisis Is Far From Over

Plus, Crypto Companies Flee America.

Welcome to the digest… my breakdown of the things we’re thinking about and talking about in the Global Intelligence world. 

First up this week… the history of the global financial crisis. 

When we look back now, it’s easy to think of the 2007 housing crisis and the ensuing financial crash as a single, big event that suddenly struck one fateful day. 

In fact, it was a slow-moving story that unfolded over a period of years. 

The first indications of the crisis emerged in August 2007, when the French bank BNP Paribas froze three of its funds, stating that it had no way to value the sub-prime mortgage loans contained within them. 

It wasn’t until six months later, in March 2008, that Bear Sterns collapsed and was bought by JPMorgan. 

Then, two months after that, in May, U.S. Treasury Secretary Hank Paulson said “I do believe that the worst is likely to be behind us.” 

But in reality, the crash had yet to truly begin… 

The true extent of the crisis was only revealed in September that year, when Lehman Brothers filed for bankruptcy, AIG had to be bailed out, and Fannie Mae and Freddie Mac collapsed and had to be nationalized by the U.S. government.  

I point this out today because of the current, ongoing banking crisis… 

This banking crisis exploded into view in March this year with the collapse of Silicon Valley Bank and Signature Bank. Then it subsided for a while until May, when First Republic collapsed. 

Now, as we approach mid-June, the crisis has once again faded from the public consciousness. But that doesn’t mean it’s over… 

Over the past year or so, the Federal Reserve has raised interest rates from 0.25% to 5.25%, or 500 basis points in Wall Street speak. That’s the fastest proportional increase in U.S. history and it has put banks under severe pressure by increasing returns on savings accounts, lowering demand for products such as mortgages, and decreasing the value of older bond holdings that were issued with lower interest rates. 

Just this week, the famed billionaire hedge fund manager Stanley Druckenmiller said “there are more shoes to drop. 

“There’s a lot of stuff under the hood when you go from this kind of environment, the biggest broadest asset bubble ever, and then you jack interest rates up 500 basis points in a year, I think the probability is that Silicon Valley Bank, Bed Bath & Beyond, they’re probably the tip of the iceberg.”   

The global financial crisis unfolded over a period of years, with lots of lulls in the middle. This situation could well be the same.  

Druckenmiller is right… the banking crisis is not over.  

*** 

Next up… crypto companies flee the U.S. 

This week, the Securities and Exchange Commission launched a big broadside against crypto… targeting two major exchanges—Coinbase and the U.S. operations of Binance. 

If the SEC’s intent was to make its hostility toward crypto clear, then companies are getting the message.  

Galaxy Digital, a major crypto investment firm, announced this week it’s accelerating plans to move its operations overseas in the wake of this SEC crackdown. CEO Mike Novogratz said “Companies like ours are looking at how fast we can move people offshore.” 

Now, to be clear, these companies aren’t trying to get away from the SEC’s strict regulations so they can conduct nefarious operations. Largely, they are moving to places that have very strict rules in place, such as Singapore and the EU. 

They simply want regulatory clarity.  

The SEC has pointedly refused to explain to the industry which rules apply to it. Instead, it has pursued a policy of using enforcement actions to regulate the industry… a deeply cynical and unfair approach. 

It’s like you approaching a police officer and asking if there’s an appropriate place to cross the street. He refuses to offer any information, so you pick a place to cross, and then he arrests you for jaywalking. 

No company could operate under these conditions, and so they’re leaving.  

Just this week, crypto company Circle, which issues a major cryptocurrency that tracks the dollar called U.S. Dollar Coin (USDC), announced that it had received a license to operate in Singapore.  

Crypto is already a trillion-dollar industry. And it will grow many times bigger from here.  

If the U.S. wants to ostracize this industry, Singapore and the EU will happily accept it. And then one of the key technologies that defines the next several decades will be based outside the U.S. 

*** 

Finally this week, a copper shortage is bad news for the global economy, and good news for our investment. 

Copper is the key metal needed to electrify our world. It has the highest conductivity of any non-precious metal. So, you’ll find it everywhere… from batteries in electric cars… to the power grid… to the wiring in houses. 

With the world moving away from fossil fuels and rushing headlong into battery-powered vehicles and green energy, demand for copper is exploding. 

Now, a new analysis by consulting firm McKinsey & Co. has found that demand for copper is estimated to reach over 36.6 million metric tons by 2031. But supply will only reach 30.1 million metric tons, meaning a shortfall of over 6.5 million metric tons. 

That means copper prices are going to shoot higher… which will mean big profits for copper mining companies (including the copper miner in our Global Intelligence Portfolio). 

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website. 

Enjoy the rest of your Sunday.