The System is Straining

The System is Straining

Good Morning:

♄- I am reserving most of my observations for premium subscribers, but I want to share a few thoughts with you.

♄- Two of my recent concerns had been a Master Cycle inversion and a credit event. We may have both, with banks collapsing all over the place. The small to regional banks are the most vulnerable.

♄- Having started and owned a bank, my perspective is from an insider’s point of view. 

♄- Once again, the banks suffer from errant Fed policy and grievous Congressional spending, encapsulated in a Fourth Turning and War Cycle.

♄- The Fed incentivized banks to put their funds in long-term treasuries to keep the Congressional spending going and to shore up the U.S. Dollar. It would have been better to incentivize banks to lend.

♄- But the Federal Government needed the money because the backfire from stealing Russian reserves due to the unwise Ukraine sanctions meant that very few countries wanted to buy our treasuries anymore. See how this works?

♄- The purchased treasuries were returned to the Fed overnight in reverse REPO transactions for a measly  0.50% interest payment.

♄- When rates go from 0% to 5% as now, especially this rapidly, the principal value of the treasuries decreases if the banks want to sell them before they mature in 10, 20, or 30 years. Some instruments have dropped 25% in value if the bank wants to sell early.

♄- The banks must adjust their balance sheets to reflect the temporary principal loss even if they don’t want to sell the securities. They call this “marking to market.” In marking to market, the banks need more money to meet their regulatory capital.

♄- So Silicon Valley Bank, the 20th largest bank in the country and a top-rated bank until a week ago, disclosed that they needed to raise a few billion to shore up their balance sheet. When their uninsured depositors (96% of their deposits) realized that the bank’s viability was in question, they pushed a button to move their funds (no lines when there is a run on the bank as in the old days). It is all electronic now.

♄- In the circumstances, the bank must sell its treasuries early and realize the loss to meet depositor demands. As they take the beating without new capital, they eventually run out of funds because they don’t have enough money to meet the needs of the “run on the bank.”

♄- So, the Silicon Valley Bank bank and several others collapsed Friday. The Feds stepped in and put the insolvent banks in receivership.

♄- Over the weekend, it became clear that the entire banking (and brokerage) system could collapse this morning. In an emergency meeting Sunday, the Fed agreed to lend against the full value of bank treasuries to prevent a run on other banks. You see, 96% of all bank deposits in the country are uninsured.

♄- The overnight futures market responded favorably to the Fed’s emergency move, but the Globex equity futures market is at new lows this morning.

♄- Anything can happen, including a complete panic. A panic resonates with the 1903 panic cycle and tracks a full inversion of the 60-year Master Cycle.

♄- Friday, the Master Cycle dropped to an 80% correlation. As I mentioned in previous writings, anything less than 80% constitutes an inversion in our discipline. So we are prepared. 

♄- Our last sell/short signal was 4069.75 on the Archimedes Hourly Strategy and 4038.25 on the Archimedes Daily Strategy last Monday and Tuesday. So our subscribers are either in cash or short.

♄- We will now look for a buy signal. We will know when we see one. But because of where we are in the cycles and the time of year, remember that we are likely ending something here rather than beginning something anew. The third anniversary of the Covid Crash low is in a few days. The number “3” and third anniversaries are important in Kinectics.

♄- The Room will have charts and comments posted today, and we will trade on Thursday this week. Please consider a free 7-day trial subscription to help guide you through this.

A.F. Thornton

AF Thornton


A.F. "Arthur" Thornton is an expert in logic, risk/reward quantification, market fractals, pattern recognition and asset class behavioral analysis with 34 years devoted to developing algorithmic and quantitative trading systems. In addition to trading his own capital, Mr. Thornton designs custom algorithmic and quantitative trading systems for a small and exclusive group of exceptionally qualified traders.


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