Fear and Loathing in Banktopia
Fear and Loathing in Banktopia
In a world consumed by greed and plagued by financial chaos, we introduce you to Banktopia, a twisted realm where insatiable desires overshadow morality and reason for wealth. Journey with us through
In the tumultuous whirlwind of recent weeks, banks have been thrust back into a vortex of uncertainty. As an ardent admirer of Hunter S. Thompson, I often find myself pondering how he might articulate the current state of our world. And as luck would have it, the release of GPT-4 this week presented the perfect opportunity to put this AI to the test by channeling Hunter's inimitable voice for a preface to this article. It managed to pull off a fairly convincing imitation (which, truth be told, is more than a little disconcerting...).
Fear and Loathing in Banktopia – The Gonzo Chronicles of a Financial Fiasco
In this feverish, drug-addled nightmare of a world, the bankers and financiers – those demonic alchemists of the almighty dollar – have descended into a frenzied dance of excess, their insatiable thirst for wealth driving them to ever-greater heights of depravity.
This is a realm where the once-hallowed institutions of capitalism have been corrupted and twisted beyond recognition, transformed into monstrous caricatures of themselves by avarice and the insidious lure of easy money.
Welcome, dear reader, to the bizarre and twisted landscape of Banktopia, where the once-mighty titans of finance have tumbled like a house of cards, leaving a trail of chaos and shattered dreams in their wake.
Banktopia is a place where morality and reason have been cast aside, trampled underfoot by the relentless march of greed, and replaced with a perverse, carnivalesque theatre of the absurd. In this nightmarish hellscape, the once-proud titans of industry and commerce have become bloated, ravenous beasts, gorging themselves on the shattered dreams and shattered lives of the unsuspecting masses.
As we venture deeper into this forsaken land, we bear witness to the grotesque spectacle of bankers and financiers feasting on the spoils of their insidious schemes. Like a pack of hyenas, they revel in the misery they have wrought, their hollow laughter echoing through the desolate wasteland of shattered hopes and foreclosed homes.
But even as we shudder in horror at this desolate panorama of destruction, a glimmer of hope emerges from the smouldering ruins of Banktopia. The great American spirit, that indomitable force that has driven us through the darkest of days, rises like a phoenix from the ashes, defiant and unbroken. As the denizens of this twisted world continue to gorge themselves on the remains of a once-proud financial empire, the people have begun to stir, rising up in righteous anger to reclaim what has been stolen from them.
In the end, the story of Banktopia is not just a tale of greed and corruption, of twisted desires and shattered dreams. It is a saga of the eternal struggle between the forces of light and darkness, a battle that has raged since the dawn of time and one that will continue long after we have all turned to dust.
So, buckle up, dear reader, and prepare yourself for a wild, hallucinogenic ride through the twisted labyrinth of Banktopia – a place where the lines between reality and delusion are blurred beyond recognition and where the only certainty is the mad, swirling vortex of greed and the relentless pursuit of profit.
Hunter S. Thompson — as conjured by GPT-4
A great deal has occurred recently, so let's briefly examine banks from an international perspective before delving into the finer points.
At the moment, the Bloomberg worldwide banks index appears poised to challenge its twelve-year resistance for the fifth time, which, incidentally, signifies a further 20% decline, indicating additional challenges ahead.
The recovery of the US banking system has been more robust compared to its European and Japanese counterparts since 2008. A key factor contributing to this disparity is the lack of exposure to negative debt within the American system.
However, despite demonstrating a stronger recovery than in other nations, the US banking system evidently relies heavily on low interest rates.
As the Federal Reserve pursues its objective of raising interest rates to control inflation, three regional banks — SVB, Signature Bank, and Silvergate (though Silvergate's situation is distinct) — have suffered irreparable losses, which led to a total collapse. Regardless of the individual causes for each bank's decline (read unrealised bond losses), the Fed must now intervene to prevent the crisis from spreading further.
That's precisely what transpired last weekend. Following the collapses of SVB and Signature Bank, the Federal Reserve initiated emergency lending measures, resulting in over $150 billion being borrowed by banks.
This event likely signifies the onset of quantitative easing, as it represents the turning point in the growth of the Federal Reserve's balance sheet for this cycle.
And looking at the outright data, the new trajectory is even more obvious…
Especially as regional banks are now under pressure…
Next in line is First Republic Bank, which has experienced a staggering 82% decline in the past 4 weeks! The announcement of a $30 billion lifeline has had little impact on the situation.
“Over two days of frantic phone calls, meetings and some arm-twisting, the CEOs of 11 banks agreed to chip in a total of $30 billion for First Republic, promising to park the money there at least 120 days.” (Source: Bloomberg)
And now markets are pricing a nearly 100 bps rate cut, making the next FOMC gathering THE event of the year (so far!).
But then something happened in Europe.
It all started this week with Credit Suisse losing 34% in a day. Looking at the bigger picture for CS, this loss actually looks like peanuts. Or maybe it’s the last nail in the coffin…
Although the share price bounced timidly after the Swiss National Bank announced that it will lend $54 billion to Credit Suisse, the risk of default remains extremely high — definitely too high, after the lending announcement — meaning that we will hear more from Credit Suisse soon. One possible outcome could be the default of Credit Suisse, leading to turmoil in the banking sector; however, it seems more probable that another bank will acquire them. This latter scenario is already a subject of speculation.
Last minute edit: UBS just announced the purchase of Credit Suisse for $2 billion!
Credit Suisse is an extraordinary case. Nevertheless, more European banks are showing signs of trouble, starting with BNP Paribas in France…
In Germany, Deutsche Bank, once a giant, has been on life support for a while…
Ditto for Santander in Spain…
Intesa Sanpaolo in Italy is also looking weak…
You get the picture! European banks are… utterly f*cked (pardon my French!)...
As Michael Nicoletos rightly noted, the weakness in European banks was caused by relentless exposure to negative debt. European banks and pension funds were, at some point, buying negatively yielding bonds…
On Thursday, in a bizarre attempt to support the European banking system, Christine Lagarde announced another 50 bps rise in rates and made things worse…
This move was very surprising and invited speculation. Is the ECB dancing with the Fed? If yes, what to expect next week from the Fed — something similar? That would take the markets by surprise and could really break things.
By the way, guess who has been loading up on negative debt as well? Yep, Japanese banks. The never-ending story of a bad legacy banking system…
Next week, all eyes will be on the Fed; and while the market is pricing a rate cut, it will most likely not happen (yet!). At best, they may announce a pause; but for some reason, I would not be surprised by one last 25 bps hike just for the Fed to establish its firm hand.
Regardless, this is very likely the end of the hiking cycle, and we should see central banks changing course one after another going into year-end…
The financial industry is currently experiencing instability, with the widely anticipated recession yet to arrive. It is crucial to exercise caution during these uncertain times in order to avoid regret later. Consider this a reminder to prioritise safety and vigilance!
The Summary - Everything on one page
The global banking sector is facing numerous challenges, with the Bloomberg worldwide banks index approaching its twelve-year resistance for the fifth time, signifying a potential 20% decline.
The US banking system has recovered more robustly since 2008 compared to European and Japanese banks, but it relies heavily on low-interest rates.
As the Federal Reserve raised interest rates, regional banks like SVB, Signature Bank, and Silvergate collapsed, prompting the Fed to intervene with emergency lending measures.
European banks are also struggling, with Credit Suisse losing 34% in a day and other institutions like BNP Paribas, Deutsche Bank, Santander, and Intesa San Paolo facing difficulties.
This decline is attributed to their exposure to negative debt, as they were purchasing negatively yielding bonds at one point.
The European Central Bank's recent interest rate hike has exacerbated the situation, raising questions about their alignment with the Fed's strategy.
With the market expecting a rate cut, all eyes will be on the Fed this week, which may signal the end of the current hiking cycle and a change in central banks' direction.
I will leave you this week with this 4-min. video to watch. I think we can call this insanity, but I’ll let you decide. It makes you wonder, what is the agenda here?
The best thing I've read all week xxx
Thank you for writing in a easy to understand language. This helps me a lot, as I am starting to learn about the banking sector.
One question, if I may: In your opinion what determined the European banks to buy negative bonds? I ask this in the following context: I expect the decision makers were not dumb and they suspected/knew buying such bonds would make their life harder down the line.