The Great Spending Reckoning. The Energy Report 03/13/2023

Joe Biden is going to give a speech and he is expected to say that he is going to hold those responsible for the failure of Silicon Valley Bank (SVB), the second largest bank failure in terms of assets, accountable. Well he should not have far to go because a lot of the blame falls on his administration and the out of control spending in Washington.

Just last week when the Federal Reserve Chairman was pressed on his aggressive patch of interest rate increases, he suggested that the blunt instrument was all he had to work with. He had no comments on US fiscal policy were record breaking debt and policies by this administration that are the most inflationary in US history. The most inflationary policy has been the war on U.S. oil and gas and the poorly thought and planned energy transition. Biden’s decisions based on politics and not energy security, with any real thought to the fallout for the health of the planet, has hurt the U.S.. This administration feels compelled to pay for a war in Ukraine that, because of their failed diplomacy, was allowed to start. They want to solve every problem by spending mountains of money like paying off college loans as opposed to getting the U.S. fiscal house in order.

Biden’s policy which includes a poorly planned energy transition, economic decisions based on environmental, social governance, as opposed to economic soundness, is one of the major causes for runaway inflation and the blow of confidence in the US economic path.

You can in part blame Silicon Valley Bank’s failure on putting too much faith into the US treasury market. The Wall Street Journal pointed out that, “SVB was flooded with cash during the pandemic tech boom—startups and their investors were taking in huge sums, which swelled SVB’s coffers. SVB in turn used a lot of that money to buy Treasury bonds and mortgage-backed bonds. But as interest rates rose, those securities declined in value.” The Journal points out that, “That wasn’t a problem at first—SVB said it would never sell the lion’s share of those bonds—a designation that meant it could ignore any losses from the declining value. But in early March, it had to face up to the losses—the flood of withdrawal requests was more than it could satisfy by selling the bonds.”

The tech startups that SVB lent money to were told to do business with SVB. When depositors need cash, the bank, with major losses on treasuries, when they tried to raise capital to make up for the losses on bond sales that were caused by the Feds historically quick interest rate hikes, like dominoes, began to fall. There are also questions about regional California bank regulators and New York regulators. Did they turn a blind eye to the bank’s problems because they were big players in their states?

Contagions fears rose after New York bank regulators on Sunday evening announced it closed Signature Bank, shocking the bank management. They said it was to avoid a banking crisis spurred by the failure of Silicon Valley Bank. It was reported that New York’s Department of Financial Services took possession of Signature, a major multifamily lender in New York, to protect depositors. The Federal Deposit Insurance Corporation was appointed receiver of the bank.

So, the Fed had to step in saying they would make all depositors whole but has created earth shaking moves in the global treasury markets and making the Fed’s rate path and the credibility of their policies uncertain. A joint release by the Treasury Department, the Federal Reserve board of governors and the FDIC shortly after 6 p.m. said the FDIC would protect all depositors at California-based Silicon Valley Bank. “We are also announcing a similar systemic risk exception for Signature Bank … which was closed today by its state chartering authority.” 

Oil prices are fluctuating dramatically as the market starts to realize that the Fed will have to alter its blunt instrument course or risk more bank issues. Yet at the same time oil is trying to assess if this economic shock will slow investment in the US and cause a crisis of confidence that could kill oil demand. Gold futures are soaring as the US dollar loses ground as the two year were down 35 basis points which is the biggest two day slide since  the 1987 stock market crash.

The reason is the markets, because of the bank failure, must do a faster reassessment of the Feds rate path because it’s clear that based on the Fed Chairs congressional testimony last week that he did not see this bank issue coming. The Fed must adjust their rate hikes and to not do so until they understand the damage it could be doing would be a big mistake.

Overall, when the smoke clears, this should be very bullish for oil. With the Fed reopening lending facilities and the market pricing in a less aggressive Fed, oil should be a big winner. The Fed need to pause and allow the markets to work before they continue to break things. In Washington they should learn from this, but somehow, they never do.

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Senior Market Analyst & Author of The Energy Report

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