- Jim Costa
Dear Jim: JPMorgan Sets Up a War Room… Blinken Perfecting His Kowtow… And More!
As the X-date nears, the Biden administration and congressional leaders are planning to meet on Tuesday to try to hash out an agreement to keep the U.S. out of default.
Although Wall Street doesn’t seem worried, big banks are very concerned as shown by JPMorgan Chase. What they are doing proves this is a serious situation and I’ll explain more below in commentary.
I. Countdown To The X-Date Has Begun. JPMorgan Sets Up a War Room.
The X-Date is the day the U.S. Treasury goes broke. It’s not the same as the debt ceiling, but it is a consequence of the failure of Congress to raise the debt ceiling. Right now, the Treasury is at the debt ceiling. That means it has no legal authority to issue net new debt. It can issue new debt if old debt is maturing. That keeps the total debt unchanged; you’re just rolling over maturing debt into new debt without increasing the total debt. The problem is that the U.S. is running a $2 trillion per year deficit. It’s not enough to just roll over existing debt. You have to issue new debt to finance the deficits and that’s where the debt ceiling bites. How is Treasury paying its bills today without new debt? They’re shucking and jiving. There is some net cash flow from tax collections in the April timeframe, although that’s being rapidly depleted by tax refunds. There are some other tax collections including excise taxes. The Treasury has some slush funds including the Exchange Stabilization Fund (ESF) currently over $100 billion. The ESF was created in 1934 using the profits from FDRs confiscation of gold at $20 per ounce and subsequent revaluation to $35 per ounce. It has been used numerous times, including the 1994 Mexican bailout which Congress refused to authorize (ESF use has no congressional oversight). Recently, part of the ESF was used to bail out Silicon Valley Bank. But eventually, even the cash flow and the slush funds run out of juice. Then the Treasury goes broke. That’s the X-Date. Treasury Secretary Janet Yellen recently estimated the X-Date is June 1st. Yellen knows little about monetary or fiscal policy and her June 1 date was probably a political ploy to put pressure on Republicans to raise the debt ceiling without conditions as favored by the White House. We shouldn’t rely on Yellen’s estimates; she’s not very competent at this. All the same, there is an X-Date and it’s coming sooner than later. Most investors are ignoring this and assuming that Congress will strike a deal with the White House, raise the debt ceiling, and make the X-Date go away (for now). Don’t be so sure. This article details how JPMorgan has convened a War Room that will soon be meeting three times per day to deal with the fallout of the X-Date and the possibility of the U.S. missing principal and interest payments on U.S. government securities or possibly skimping on social security payments or other entitlements. Whether the X-Date arrives or not, investors should at least be prepared for the market turmoil that will arise as the impasse between Congress and the White House comes down to the wire. It’s a good idea to lighten up on equity positions and increase allocations to gold and cash. That way, even if the Treasury goes broke, you’ll still be solvent.
II. The Banking Crisis Is Not Over. In Fact, It’s Just Getting Started.
It’s a mistake to believe that the banking crisis that began on March 10, 2023, with the collapse of Silicon Valley Bank is over. In response to a cascade of bank failures from March to May, regulators took extraordinary and unprecedented actions. The Federal Reserve opened a facility that makes loans against U.S. Treasury securities delivered by member banks as collateral. What’s unusual is that the loans are equal to 100% of the par value of the securities, even if the market value is only 80% of the par value. The Fed is lending more than the securities are worth. This facility could result in a trillion dollars or more of newly printed money to make the loans. This money printing spree comes at a time when the Fed claims to be reducing the money supply as part of its inflation-fighting. So, the Fed is tightening and easing at the same time. That’s the kind of public policy incoherence that results from free-form intervention in the markets. The FDIC is offering potentially to guarantee every deposit in the banking system without regard to the statutory limit of $250,000 per deposit. They justify this using a “systemic risk” exception to the insurance limit. But systemic risk is undefined and every bank in the system poses potential systemic risk if a run on the bank creates panic leading to contagion and runs on other banks. The FDIC insurance fund is also running low because of the $40 billion or more of claims paid out due to the failures to date. Treasury Secretary Janet Yellen has destroyed confidence in the FDIC system by blurring the limits on insurance offered and depleting the insurance fund. Again, heavy-handed intervention has its costs in terms of uncertainty and lost confidence. It’s also critical for everyday Americans to realize that there are long lags between the time a crisis actually begins and the time it reaches an acute stage that comes to everyone’s attention. For example, the 2008 global financial crisis hit an acute stage on September 15, 2008, when Lehman Brothers filed for bankruptcy. But it began 18 months earlier in the spring of 2007 when HSBC warned about losses on subprime mortgages. The Russia-LTCM crisis reached an acute stage in September 1998, but it began 15 months earlier in June 1997 when Thailand devalued its currency against the dollar. In six major financial crises between 1974 and 2010, the average time between the origin of the crisis and the acute stage was 13.5 months, and the shortest time was 6 months. If we use those benchmarks and date the crisis from March 2023, it could become acute by this September. If we use the 13.5-month average and date the crisis from November 2021 (Bitcoin crash), then we’re already past due. Under any historic method, a major crisis is imminent. As described in this article, the watchlist of banks waiting to fail includes PacWest, Western Alliance, First Horizon, Comerica, and KeyCorp. In short, the system is blinking red. The bottom line is that we are facing a severe recession, a financial crisis worse than 2008, de-dollarization, lost confidence in the Fed and the U.S. dollar, political repression through the rise of central bank digital currencies (CBDCs), and extreme social unrest. The winners in this scenario are gold, silver, land, energy, agriculture, and U.S. Treasury notes. The losers are stocks, corporate bonds, and commercial real estate. You should position your asset allocations accordingly to survive the storm. Don’t wait until it’s too late.
III. Secretary of State Blinken Perfecting His Kowtow to Chinese Communists
The fact that Antony Blinken is one of the worst secretaries of state in U.S. history is well-known by now. He was a chief promoter of both the humiliating retreat from Afghanistan in 2021 and the pointless War in Ukraine, which the U.S. side is now losing badly. There was certainly a case for reducing or even ending the U.S. presence in Afghanistan. But, there was no need at all for a reckless, ill-prepared, and deadly retreat. The War in Ukraine could easily have been avoided with a few concessions to Russia. Instead, the Russians will end up getting what they wanted anyway. The only difference is 300,000 dead Ukrainians, millions of refugees, and the destruction of the infrastructure of the country. Nice job, Tony. Still, Blinken’s venality and incompetence go deeper. We have learned recently that while working for the Biden campaign in 2020, he orchestrated the open letter signed by 51 senior intelligence community officials that said the Hunter Biden laptop had the “hallmarks of Russian disinformation.” This gave Biden a talking point just a few days later in a televised debate with Donald Trump just before the 2020 election. The open letter was a lie; the laptop actually did contain Hunter Biden’s chronicle of the Biden crime family’s activities over many years. Everyone involved, including Blinken, knew the letter was a lie but it worked. The laptop contents were suppressed, and Biden won the election. Post-election polls showed most Americans had never heard of the laptop story (mission accomplished!) and 16% would have changed their votes from Biden to Trump if they had known; enough to tip the election to Trump. So, we can add fraud and liar to the list of Blinken traits along with incompetence. The story doesn’t stop there. According to this article, Blinken was responsible for the slow response to the Chinese spy balloon last February (eventually it was shot down but not before crossing the entire U.S. and sending critical data back to China), and for the delay or cancellation of punitive sanctions on China in response to the incident and others like it. In the end, Blinken emerges as a not-so-bright political hack who kowtows to China and only got his appointment because his boss, Joe Biden, is even more feeble-minded.