The banking crisis is back in the headlines again…
That’s because of the further plunge in California-based regional bank First Republic Bank’s share price.
They’ve tumbled 64% so far this week.
That leaves them 97% below where they were at the start of the year – a near total wipeout.
Unless someone steps in to rescue it (more on that below), First Republic looks like it will be the next U.S. bank to go under.
So, if you haven’t already taken my advice and added some “chaos hedges” to your portfolio in the form of bitcoin and gold, don’t delay any further.
Both have been great performers this year. And both are set to climb even further as the banking crisis takes center stage again.
First Republic is an awful lot like Silicon Valley Bank…
Both banks are based in California. They also both cater to high-net-worth clients.
So, most of their customers held deposits worth more than the $250,000 FDIC insurance limit.
And both banks bank did the same dumb thing with customer deposits. They bought long-dated bonds that plunged in value when the Fed started raising interest rates.
Without getting lost in the weeds, bond prices move opposite interest rates. So, when rates go up, bond prices fall.
This is what took down Silicon Valley Bank. And it’s what’s threatening to take down First Republic.
Its customers know it’s in trouble. And they’re fleeing.
Since the banking crisis flared up last month, First Republic customers have yanked out about $100 billion from the bank. That’s more than half its pre-crisis deposit total.
If this keeps going, collapse is inevitable.
The government hasn’t announced a rescue for First Republic yet…
Legislators in Washington raised the limit for insured accounts at SVB when it collapsed last month. But it hasn’t done the same thing for First Republic.
Last week, 11 U.S. banks chipped in and handed First Republic $30 billion to try to restore confidence. But judging by this week’s share price massacre, it hasn’t worked. And First Republic is on the brink of collapse.
If it fails, it will be the fifth largest U.S. bank failure in history.
And even if it’s rescued, it’s another reminder of the trouble the Fed has caused the banks by jacking up interest rates.
U.S. banks own hundreds of billions of dollars of bonds that are now underwater due to rising interest rates.
And on Friday, credit ratings agency Moody’s downgraded the bonds of 11 regional banks. It cited “deterioration in the operating environment and funding conditions” for its loss of confidence in them.
And savers aren’t just facing a bank crisis. The fight over the debt ceiling in Washington is putting a question mark over the roughly $31 trillion of outstanding Treasury bonds.
Politicians are playing a game of chicken over the debt ceiling…
Republicans in Congress are refusing to raise the debt ceiling until President Biden agrees to roll back government spending.
And he’s refusing to enter negotiations with them.
Most people think it will turn out okay because one side will eventually yield…and the debt limit will be raised.
But if they’re wrong, it will force Washington to default on its debt.
The only way it can cover its spending commitments… plus the interest payments it owes on Treasury bonds… is to borrow more. And that can’t happen unless the debt ceiling goes up.
It’s hard to say what would happen if the world’s No. 1 economy defaults. But I expect it would send shockwaves through the global economy that would make the collapse of Lehman Brothers look tame.
Treasury Secretary Janet Yellen says the government can get by until sometime in early June. After that, the Treasury’s account will run dry… and the U.S. federal government will renege on its debts.
So, it’s no surprise that bitcoin is up so much this year…
As bank shares have plunged, the world’s first cryptocurrency is up 70%.
That’s what you’d expect during the one of the worst banking crises in U.S. history.
As I’ve spilled a lot of digital ink on in these pages, bitcoin is the world’s first decentralized currency. And its creator made it that way for a reason…
With a decentralized currency, you don’t need banks to facilitate payments.
You also don’t need a middleman to store your bitcoin. So, you don’t have to worry about that middleman getting into trouble.
People have known this about bitcoin for years. But the banking crisis has put it front of mind.
That’s why Teeka has been banging the drum hard on bitcoin lately…
Regular readers will know all about Teeka Tiwari – or “Big T,” as his subscribers call him.
He’s a former hedge fund manager who, in 2016, become one of the first people in our industry to recommend bitcoin to his readers.
Since then, bitcoin is up 7,474%. And Teeka has given his subscribers the chance to close out gains of 866%… 3,237%… and 38,055% on smaller cryptos.
And since the banking crisis began in March, he’s been showing his readers why it’s a strong tailwind for bitcoin. Over to Teeka for more…
Wealthy people who’ve been sitting on the sidelines looking at bitcoin for the last 10 years are now saying to themselves, “We may be moving into the end game as to how far fiat currency can go.”
And they’re thinking, “Well, all my exposure is in traditional assets. I have no exposure to this non-traditional asset. What happens if I’m wrong and I don’t own any?”
That thought is top of mind right now among the ultra-wealthy. So they’re taking a chunk of their wealth and putting it into bitcoin.
Gold should also do well as the financial system strains…
It’s up 9% since the start of the year. And like bitcoin, it’s also surged since the start of the banking crisis.
Again, that shouldn’t come as a big surprise. Like bitcoin, gold allows you to store wealth outside the traditional financial system. That’s made it a traditional haven in times of financial stress.
Teeka sees both doing well. But he’s more bullish on bitcoin than he is on gold. That’s because of bitcoin’s added transparency. Teeka…
The value of all the above ground gold is supposedly worth about $13 trillion. But how much of it is sitting in vaults? And how much of it is “paper gold” – securities that merely represent gold? It’s not an easy answer.
By contrast, you can audit the entire bitcoin blockchain every 10 minutes. You know which wallets own which coins. You can’t have millions of dollars of “paper bitcoin.”
That’s a key advantage for a new reserve currency. Teeka again…
When bitcoin becomes a reserve asset and a bank says, “We own a thousand bitcoin,” we won’t have to rely on trust anymore. We can just look at the blockchain. And it will tell us what they own. This is the beauty of bitcoin as a reserve asset.
I don’t care if it doubles or gets cut in half tomorrow. Bitcoin’s future is wildly bright because humanity needs it. If that wasn’t true, it wouldn’t be as big as it is right now. It would’ve died on the vine 10 to 12 years ago.
We’ll be keeping a keen eye on these twin crises…
Our mission here at Legacy Research is to help your grow your wealth through counter-consensus investing ideas.
But it’s also vital you hold on to what you’ve got through the inevitable crises that come our way.
And it’s hard to think of a graver threat to your wealth than a banking crisis and a crisis in the Treasury market at the same time.
So, if you haven’t already, make sure you own some bitcoin and gold as part of a well-diversified portfolio.
These two chaos hedges stand to do well as investors reconsider the safety of bank deposits and Treasury bonds.
Regards,
Chris Lowe
Editor, The Daily Cut