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New Bull Market

June 12, 2023

If you have been paying attention to the financial press over the last week then you are probably familiar with the news that the S&P 500 is in a new bull market. This is of course, an arbitrary label that really doesn’t mean much. But the fact that the S&P 500 is 20% off of the lows from last year does show that things are going better than one would expect considering the rocket launch in interest rates. There is still a lot of negativity in the financial press and a lot of short interest in the markets as well – meaning speculative investors are positioned so that they make money if the stock market goes down. But while it goes up these “short positions” lose money.

So likely there is at least a near term leg higher in the stock market and it will continue to frustrate investors that think it should be going down. For example, Morgan Stanley’s Mike Wilson previously suggested the stock market would struggle until the debt ceiling issue was dealt with. Now that it has, he is still sticking to his bearish guns thinking that the math just doesn’t add up for the stock market to continue higher. Time will tell…

One of the things that we continually write about is the overinvolvement of the Federal Reserve in the whole world’s financial and economic matters. The outrageous money printing after the Covid panic hit, choosing winners and losers during the shutdowns and now standing on the monetary brakes after “transitory inflation” didn’t turn out to be so transitory… Take a look at a historical charts of percentage changes in the most accepted measure of “money supply” under the Fed’s stewardship-what a ridiculous rollercoaster they have put us on…

So, the black line is the percentage change in M2 money supply, and the red line is inflation in percentage terms as measured by the CPI (Consumer Price Index). So, you can see the Fed got out of hand in 2020 but especially in 2021 when the lockdowns were over and the economy was back on its feet. The Fed had orchestrated a WHITE HOT residential real estate market by the fall of 2021, and they left the accelerator on the floor for another 6 months WHICH COMPLETELY DISTORTED THAT MARKET AND THE FINANCIAL SYSTEM BEHIND IT. Inflation was raging and Fed Chairman Powell was calling it “transitory” (June 2021) and didn’t ease off the throttle – until the next March. It was WILDLY irresponsible what the Fed did stimulating financial markets, and this is not Monday morning quarterbacking on our part!!

We wrote in real time (June 2021) how ridiculous the Fed was being – take a look

Now we are worried that the Fed is going too far on the tightening side. But we know that the Fed is engendering OBSCENE distortions in our financial markets. To be sure, no reasonable person 16 months ago would have predicted financial markets holding together as well as they are with a discount rate at 5.25%. That’s the good news. The bad news is that the Federal Reserve is rigging the game to a degree that also no reasonable person would have predicted. When Silicon Valley Bank blew up, they backstopped an account with $500 Million in it and basically every other account in the country regardless of size. The whole concept of FDIC insurance became immediately irrelevant…

When Washington Mutual collapsed in 2008, the FDIC insurance was $100,000 per depositor. Meaning any money that you had on deposit at WaMu in excess of $100,000 was at risk in the event that the bank went bad. That was moved to $250,000 by The Emergency Economic Stabilization Act of 2008. It was proposed by Treasury Secretary Hank Paulson, passed by the 110th United States Congress and signed in to law by the President Bush. I guess those are just silly formalities now disregarded. The Fed is shooting from the hip, changing rules on the fly as they see necessary and $250K in FDIC insurance “coverage” turned into $500 Million over a weekend. For the most part, all risks for banking deposits have been displaced - but actually shifted to the value of the currency. What could go wrong?


Now the Fed understands – at least to a degree - that they have created a tough environment for banks. They have for decades had rules in place for what banks could do with depositors’ monies and during Covid times, banks bought a lot of bonds with low interest rates and high prices. Now that the interest rate has gone higher and bond prices have gone lower, many banks are insolvent. The Fed has come to the rescue and initiated the “Bank Term Funding Program” which basically lends to banks with the full purchase price of their bonds being usable as collateral – not the existing market price. Example: a bank bought $10 Million in bonds in June 2020. Now those bonds are worth only $7.8 Million in the marketplace so the bank can’t sell them or they will secure their insolvency. What they can do is borrow $10 Million from the Fed’s new program and wait for the bonds to get priced higher. The Fed says that this program will only be in place for one year. We all know that it will be extended. More kicking the can down the road…


One of the cans that didn’t get kicked down the road was that of First Republic Bank. This bank ran into solvency issues just like Silicon Valley Bank over the last few months sponsored by the Fed’s aggressive interest rate hikes. The Fed came in and took it into receivership. To oversimplify it, the Fed gutted Signature Bank like a fish, gave the filet to Chase and the entrails to the US taxpayer. Chase gets guarantees on future potential loan losses, $120 billion excess assets over liabilities and government financing to orchestrate it.

Much like Washington Mutual 15 years ago when Chase got to pay only $1.9 billion for a carved up and cherry-picked bank that had some $120 billion of assets in excess of liabilities

What is it about giving banks to Chase that have about $120 Billion more assets than their liabilities? Like they always say – it’s not what you know, it’s who you know…

Wrapping this up, financial markets are holding together well considering the circumstances. But don’t get complacent - remember that three of the four largest bank collapses in the history of America have happened in the last four months. The Fed claims that they will stick to “higher for longer” interest rates whatever that means. But the banks have already proven that they can’t stand on their own in this environment – so what else will the Fed have to prop up? What other laws/regulations will the Fed rewrite on a whim? No one knows for sure, but it is quite clear that the Fed having to prop things up doesn’t mean the stock market is going down. Especially as many buyers as still have to come into the marketplace (speculators have to buy to cover their “short” positions) – so plan accordingly.

The hard part is that it sure seems the Fed is playing chicken with the financial markets by keeping interest rates at unsustainable levels and cleaning up collateral damage on the fly. They seem to be one-dimensional in thinking interest rates have to be high to push inflation down. Markets and economies have proven for decades that is a bad strategy, but the Fed doesn’t seem to be listening. In a financial system as complicated and interconnected as ours, we are doubting that the Fed can keep patching everything together if interest rates stay up here. Of course, there are lurking economic issues that they haven’t even thought of. They may be inviting a black swan event that makes this last banking crisis look like a warmup! However, for now things are holding together remarkably well.

Of course that doesn’t mean you should sell your gold - and let us know if you would like to learn how to earn interest in gold on your gold!

Regards and good investing,

Greyson Geiler