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There was a time - in fact, it was just three weeks ago - when analysts and economists were debating whether we were heading for a "soft landing" or "no landing." Recession fears seemed to have melted into the background as more and more economic indicators showed an economy at full tilt.
Then the banking grey swan spread its wings and all hell broke loose, and headlines came bounding right back to doom and gloom.
So, which is it?
Well, I'm here to say it: we're heading into a recession, and not a "soft landing" kind of recession. And you need to get ready for it now.
In spite of the stock market's resilience and the chance of a melt-up, there are deep-rooted problems in America's banks that are exponentially complicated by persistent inflation.
And whenever banks are struggling, the whole economy struggles along with them, sometimes for years to come. So when the next wave of problems hits, a recession will follow immediately on its heels.
But there's good news: because I'm about to tell you what's coming down the road, you'll be able to prepare, protect your capital, and even make money along the way.
Here's everything you need to know and what you need to do about it right now.
Problem #1: Unmatched Books and Depositor Demand
The first order problem facing banks is that they're not running matched books. Not that banks have ever run matched books, but the concept is you match the duration of your liabilities (deposits, or CDs, or other funding sources, including equity) with your assets. If you take in a one-year CD and you make a one-year loan against that deposit, you'd be running a matched book.
But what if you take in free deposits, say trillions of dollars' worth during the COVID-19 pandemic, and buy 10-year Treasuries or make 5- and 10-year loans? You're not matched, and if those free deposits leave, you're in big trouble.
That trouble started in 2022 when rising rates made money market funds a lot more attractive than bank deposits. Year-to-date in 2023, money market funds were seeing weekly inflows averaging $23 billion. The week ending March 17 (aka the week Silicon Valley Bank failed), $121 billion flooded into money market funds. The following week saw another $165 billion of inflows, according to Goldman Sachs.
In the digital age, depositor money can exit very quickly, as in a matter of a few clicks, so rule number one is that banks have to have enough money on hand to pay exiting depositors. Rule number two, because most of the assets on banks' balance sheets are funded with deposits, and because those liabilities become realized liabilities when they leave, they have to be replaced as financing tools…
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.