The financial landscape of the United States is currently in a precarious state, as evidenced by the recent statements from Porter Stansberry (Chairman of Porter & Co. & Founder of MarketWise), Eric Yeung, and trader Daniel Roland Anderson.
These experts have shed light on the intricate dynamics surrounding the U.S. Treasury bonds (USTs) and their impact on the banking system and sovereign nations. This article aims to dissect these statements and provide a comprehensive analysis of the situation.
The Bank of America Conundrum
Porter Stansberry’s assertion that Bank of America made a historically large investment in long-term U.S. Treasury bonds and mortgages, amounting to $760 billion, is indeed alarming. The timing of this investment—mid-2020—coincides with the peak of long-term bond prices.
This strategic move has led to significant unrealized losses, jeopardizing the bank’s financial stability. Stansberry’s claim that the losses on these bonds will surpass Bank of America’s $175 billion in tangible equity capital is a dire warning. If true, any sustained run on its deposits could render the bank insolvent.
BAC Price Chart
The Wider U.S. Banking System
Stansberry further elaborates that U.S. banks collectively hold $550 billion in unrealized losses from their holdings of long-duration Treasuries and Mortgage-Backed Securities (MBSs). This figure represents nearly 25% of the total equity capital in the U.S. banking system. Such a scenario is not just a problem for Bank of America but poses a systemic risk that could potentially trigger a financial crisis.
The Federal Reserve and Depositor Behavior
The Federal Reserve‘s decision to raise interest rates since March 2022 has had a cascading effect. Depositors have withdrawn nearly $1 trillion from U.S. banks, a phenomenon never before seen in history. This massive flight of deposits exacerbates the already fragile situation and could accelerate the path to insolvency for many financial institutions.
The Burgeoning Federal Debt
The U.S. federal debt has reached a staggering $33 trillion, with an additional $2 trillion budget deficit projected for 2023. This debt accumulation is unsustainable and places additional pressure on the U.S. Treasury to issue more bonds, further complicating the situation for banks holding these instruments.
If this figure is correct, it seems that Bank of America was one of the U.S. G-SIB tasked by the U.S. government with buying up all the USTs that:
— Eric Yeung 👍🚀🌕 (@KingKong9888) October 14, 2023
1) US Treasury auctioned in 2020
2) USTs that China Sold in 2020
3) USTs that Saudi Arabia Sold in 2020
Remember, 2020 was the… https://t.co/4TejozuLd5
The Geopolitical Angle: Eric Yeung’s Perspective
Eric Yeung posits that Bank of America was not acting solely on its own volition but was “instructed” by the U.S. government to purchase these USTs. This was part of a broader strategy to absorb the Treasury bonds auctioned by the U.S. and those sold by China and Saudi Arabia in 2020. Yeung’s argument brings a geopolitical dimension into the equation, suggesting that U.S. domestic banks have become the “bag holders” of USTs, particularly at a time when their prices were at an all-time high.
Sovereign Nations and USTs
Yeung also refutes the notion that foreign sovereigns are the biggest losers in this situation. He argues that these nations have likely sold a significant portion of their long-duration USTs during 2020 and 2021 when the mark-to-market prices were at their peak. This strategy would have allowed them to minimize losses, contrary to the insinuations made by BJ Milkshake.
Trader Daniel Roland Anderson’s Interjection
Daniel Roland Anderson, a trader with a keen eye on the market, has raised a pertinent point. He suggests that there might be a misinterpretation of BJ Milkshake’s views. According to Anderson, Milkshake did not deny that domestic banks holding long USTs have a massive problem or that sovereigns hadn’t been selling USTs. This comment adds another layer of complexity to the discussion, indicating that there might be varying interpretations of the situation at hand.
Conclusions and Opinions
The current situation is a complex web of financial and geopolitical strategies that have placed the U.S. banking system in a precarious position. While it may have been necessary for the U.S. government to stabilize the bond market during a turbulent period, the long-term implications of these actions are now becoming apparent. The banks, particularly Bank of America, are facing a crisis that could have systemic repercussions.
Moreover, the role of the Federal Reserve in this scenario cannot be overlooked. Their decision to raise interest rates has led to an unprecedented flight of deposits, further straining the banking system. It is imperative for regulatory bodies and the government to intervene and implement measures to stabilize the situation before it spirals into a full-blown crisis.
The geopolitical angle adds another layer of complexity. If Yeung’s assertions are correct, the U.S. government’s strategy to involve domestic banks in geopolitical financial manoeuvring has backfired, leaving them to bear the brunt of the losses.
Daniel Roland Anderson’s comment serves as a reminder that the situation is subject to interpretation and that caution should be exercised when drawing conclusions based on statements from various experts.
In summary, the U.S. is at a critical financial juncture. Immediate and decisive action is required to avert a crisis that could have far-reaching implications, not just for the U.S. but for the global financial system.
Author Profile
- Lucy Walker covers finance, health and beauty since 2014. She has been writing for various online publications.
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