These 2 Major Banks Could Soon Fail

I started writing this dispatch in a lounge at Singapore’s Changi Airport a few days back. I wish I’d sent it to you then—I’d have looked clairvoyant! Alas, over the weekend, everything I discuss in this column began to emerge much faster than expected. 

First, here’s the original opening paragraphs I wrote in the lounge… 

I bring you a warning: Pack away some cash at home. 

Pack away some bitcoin too. And some gold. 

Not to be an alarmist, but the storm clouds are looking more ominous than they have in a very long time. 

My concern: We’re on the cusp of a financial crisis that could cause undue stress on the banking system. We could even see banks close for a while. We could see a different financial system emerge. 

OK, now back to today’s dispatch… 

In recent days, news emerged that Credit Suisse, one of Switzerland’s most important banks, is facing liquidity issues. Same with Germany’s Deutsche Bank. Both of these banks are so big that they are considered systemically important to the global financial system.  

A significant factor in this is the Federal Reserve’s damn-the-torpedoes approach to interest rate hikes. The Fed has forced up the value of the dollar dramatically and sharply, and it has sent the value of bonds plunging. Both of which, in turn, have pushed down the value of global currencies and various global assets…which is causing financial stress on bank balance sheets.  

So-called credit default swaps, which are investments that offer protection against a company defaulting, soared for Credit Suisse and Deutsche Bank to levels last seen in the 2008 global financial crisis. That’s an indication of investors’ increasing concern that the banking giants are deeply troubled. 

For reference, credit default swaps surged for Lehman Brothers in 2008 as the U.S. housing crisis exploded. Lehman shortly thereafter died.  

I’m not saying Credit Suisse or Deutsche Bank are on their deathbed. But I am saying that this is not a minor matter. In fact, this could be a very large matter that cascades across Western economies, much like—or even worse than—the global financial crisis. To wit: Lehman Bros. had about $600 billion in assets under management when it collapsed. Credit Suisse and Deutsche combined have about $2.8 trillion—nearly 5x larger. 

Moreover, all this is happening as the U.K.’s new prime minister, Liz Truss, is successfully proving the Peter Principle of rising to the level of her incompetence. She has quickly undermined the British currency with widely criticized plans for tax cuts. Today, she backed off of one element of her tax-cutting plan, but the damage has already been done. Last week, U.K. financial authorities had to step in and shore up pension funds on the precipice of collapse because of the pound’s plunge. 

At its core, that shows just how fragile global institutions really are right now. 

And we also have Europe in the throes of an inflationary spiral that is killing families and businesses. Eurozone inflation is at a record high 10%. Energy costs are up many fold across the continent, leading to businesses simply shutting down because there’s no way they can afford the costs. The building I live in, for instance, is planning on a 5 million Czech crown cost ($200,000) for natural gas in 2023. That’s up from 1 million crowns ($40,000) in 2021. 

Governments are talking about—or have announced—plans to give citizens free money to offset the dramatically rising energy bills. But think that through… 

Largesse during the pandemic is a primary reason we have runaway inflation today. Now, we have Western central banks all over the world hiking interest rates to tame inflation…while at the same time governments want to helicopter drop more bags of cash. 

Central bankers are fighting the fire in the front of the house, while government is opening the natural gas lines feeding the fire in the kitchen. 

And speaking of central banks…our Federal Reserve has lost the plot and is so blinkered by its desire to avoid the 1970s that it’s leading America and the world back toward the 1930s. 

The Fed continues to push for aggressive rate hikes, and if that keeps going you can bet we’re going to see a violent global recession…or worse. Bankruptcies are coming. Businesses are going to close. Jobs are going to be lost in stupefying numbers. 

Home values are going to fall another 30% to 50%. Jobless homeowners are going to be mailing on their keys as they did in 2008 and walking away from homes that they can’t afford and which suddenly have negative equity. 

And banks are going to fail…which gets us right back to what’s happening right now with Credit Suisse and Deutsche Bank. 

I hope every sentence you’ve read to this point is 100% wrong. I hope you send me an email months from now saying, “Well, Jeff, that didn’t age well, did it?” 

I really hope the Fed bankers realize they are fomenting a disaster on a global scale. 

I have some hope that’s true because of a story last week. Charles Evans, president of the Fed’s Chicago branch, said he’s nervous the Fed has gone too far, too fast with interest rate hikes. I mean, one Fed banker might just be a hiccup in a hurricane. But maybe J. Powell and the Rate Jockeys heed the message of one of their own…or at the very least realize they absolutely must take their foot off the accelerator, lest they cause two global banks to collapse, which will unleash a domino chain of nastiness on the global economy. 

If not…if the Fed keeps blindly driving this jalopy toward the cliff that is imminent to everyone with two brain cells to rub together…then a global banking crisis will descend upon us. 

Banks could very well close in a banking holiday. The U.S. banking system was shut down in 1933 amid a bank run in the Great Depression. So, this is not unprecedented. 

It’s predictable because the government will need time to sort the mess the Federal Reserve is creating. 

If this dour image does come to pass, you’re going want access to liquidity since online purchases, ATMs, debits cards, etc. are not likely to work. ATMs that are available will quickly run dry. So, I’d have some cash on hand. 

I’d also want gold and bitcoin. I’m not sure which one will do best. So I want both.  

If nothing else, bitcoin can be used for purchases…although I suspect in a global banking crisis caused by government debt and interest rates, a larger percentage of the world population is going to realize the future is finance that is not beholden to fallible men and women who have proven for nearly a century now that they’re ability to read the economy is about as accurate as a carnival tarot-card reader’s ability to predict your future. 

Again, let me reiterate that I hope this column has been written in vain…that the Fed engineers its way out of this dilemma it has created for itself and, now, the world.  

I hope the Fed announces very quickly that it has done enough and that it now will take a break from raising rates for several months to let the impacts of its rate hikes filter through the economy and for the economy to catch up. 

That would be the prudent path forward. 

Alas, prudence has never been a character trait of the modern Fed. 

Good luck. And stay safe out there if the financial storm hits.