Concerning but not surprising describes the events of the last 48hrs…
We have entered a new era in the financial economy, where Quantitive Tightening and economic deleveraging in the setting of rapid de-globalisation is causing severe liquidity crisis’s among banks.
There’s been very few (if any) periods of time in the last 15 years where cash equivalent investments made sense, low interest rate policies and Keynesian approaches to propping your financial markets has been the reason for this. However, the liquidity tap has now turned off and with government bonds now offering 5%+ risk free – we are seeing households flood into the bond market rather than deposit money into bank accounts.
Banks engage in what’s called fractional banking (you deposit $100 into your bank acc, the bank lends that out 5 times and pays you interest once). This works fine when people trust the banking system and central banks are lubricating financial transactions with ever increasing reserves. The issue arises when the reserve banks start decreasing their balance sheets through quantitative tightening. In addition to this we have cash equivalent investments being a very sensible alternative store of wealth to regular bank deposits.
In summary, banks are getting liquidity crunched from both sides right now. From the central reserve banks reducing their balance sheets, and from regular bank deposits from normal households. Small banks are showing cracks now, some bigger banks will likely have their day in the Sun too.
So much to unpack on the topic but it’s evident the financial landscape has fundamentally changed in the last few years, lots of strategies that have worked for the last 20 years will not fair the same in the next 20. In the interim this is a period for traders. Time value of money now matters more than ever.