There are very few things in the financial world that have the same kind of emotional impact and similarly big contagion effect that bank runs do.
And that was even way before social media became a thing!
We just saw not one, but two bank closures. The SVB collapsed, and the Signature Bank was shut down by regulators.
The Signature Bank was primarily a real estate lender, but in 2018, it expanded its operations into the crypto world.
Do you recall a time when something seemingly small triggered some problems in the real estate and credit markets?
Something like… A subprime crisis in the U.S.? And a bank collapsed? *Cough* Lehman Brothers *cough*.
This time, it’s the crypto market that was the first domino to fall. And we now saw one bank’s failure, and the second one was closed by the regulators. But in investors’ minds, it might look like this: “The first bank was closed, and the second one was closed right thereafter – how many days until my bank is closed? I better get my money out now.”
The bank-run-based articles slowly start to dominate social media and other places.
Do you see where I’m getting at?
This could be 2008… on steroids.
Why on steroids?
First, interest rates have been hiked much more now than they used to be previously. This is a global phenomenon, not a U.S.-based thing only.
Second, the markets are after an even bigger emotion-and-hope-based medium-term rally.
Third, social media is more popular than it was in 2008, as is public participation in the market that started it all (crypto). This means that the word and emotions (like panic!) are likely to spread much faster this time.
The best (or worst, depending on the perspective) thing is that all the above came about after I’d been writing about the situation being similar to 2008 – literally – for months!
In fact, if you took advantage of my recent trade idea (that is also based on this analogy), you already profited handsomely from it, even though it’s been just a few days.
Now, most people out there don’t have this context – they don’t realize the similarity to 2008. However, it’s likely to become apparent in the following weeks. It will not happen at the same time for everyone, of course. And as more and more people realize it, the faster things are likely to develop, because nobody will want to be the person left holding the bag before the price drops – so they will most likely sell before the slide happens… In this way, they will contribute to the slide and speed it up.
What does it all mean right now?
It means that stocks are likely to collapse either shortly or very soon, and that things in other markets are also likely to develop just like it happened in 2008.
The key thing to keep in mind is the existence of the contagion effect (if people get scared about stocks in one country, they are likely to get scared about them and sell in another country, even if there is no good reason for it), and the fact that interest rates were raised substantially pretty much all over the world.
This means that while the first few domino pieces might fall in the U.S., the loudest collapses might come from elsewhere.
This, in turn, means – and that’s very, very important – that the currency movement that we see initially might be misleading. In fact, that’s what we see in today’s pre-market trading. The USD Index is down quite visibly.
“There’s a bank crisis” in the U.S. – some non-U.S. investors might be thinking, so they sell the U.S. dollars for their local currencies.
However, the tables are likely to turn in a short while and the opposite is likely to take place as – after all – the U.S. economy is still likely to hold up better than most other economies (and we saw the same thing about 15 years ago). Let’s not forget that the U.S. dollar is also viewed as a safe-haven currency.
So, when it becomes obvious that the current “problem” is global, and not just U.S.-centered, the value of the USD Index is likely to soar.
And guess what happened in 2008?
Please focus on the purple ellipse in the USDX and the corresponding action in gold.
Initially, the USDX declined, and the size of the decline was more or less similar to the size of the move lower that we just saw very recently.
But what happened next was the sharpest upswing in the USDX in decades!
The U.S. currency shot up from about 72 to about 88 in just a few months, as the precious metals sector collapsed.
Let’s leave the above 2008 link for a moment to state the obvious.
Gold benefits from strong safe-haven demand, and in times of turmoil, people tend to flock to it and leave risky assets. This effect tends to be temporary.
We also saw that in 2008 – gold soared temporarily, but then it was ultimately hammered to new lows, and that was what started a powerful upswing in the following years. This is in perfect tune with what I’ve been expecting to happen – we now simply see what kind of real-world trigger might put it all into motion (to clarify: a trigger was not needed, but its existence speeds things up).
What does it imply going forward? Much lower precious metals prices, despite likely turmoil in the immediate term.
The profits on our current trading positions are likely to soar substantially, and this became even more likely based on the increased similarity to 2008.
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Sincerely,
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief