Bitcoin Shines Through Bank Failures, Bailouts

Macro highlights

• Inflation in the US is too high for interest rate cuts, but largely in line with expectations
• The ECB raised another 50 bps and took the deposit facility to 3%
• Silicon Valley Bank files for Chapter 11 bankruptcy
• Credit Suisse and First Republic Bank continue to receive liquidity
• Fed initiated stealth QE as balance sheet grows

Bitcoin Highlights

Stealth QE and bailouts

Stealth rescue operations

Credit Suisse seized a liquidity lifeline thrown by the Swiss National Bank and borrowed up to CHF 50 billion, equivalent to 6.25% of Swiss GDP. Credit Suisse’s share price has fallen around 20% this week as default swaps continue to blow out.

It is not just Credit Suisse that was given a lifeline; First Republic Bank’s ( FRB ) stock price has fallen 78% in the past month. News was announced that 11 major banks helped the FRB when they pledged $30 billion. However, the stock continued to slide into Friday’s session.

Stealth QE

The Fed’s balance sheet has increased by over $300 billion this week, jumping to $8.69 trillion, wiping out half of the Fed’s quantitative easing over the past year.

The increase in the balance is from the BTFP programme; in layman’s terms, this allows institutions to exchange devalued assets for full value cash. Additionally, the Fed’s discount window went parabolic to $148 billion this week, the highest level since 2008. Again, in layman’s terms, distressed banks require fed liquidity.

Balance sheet growth

• Approximately +$148.3 billion – net borrowing with discount window.
• About +$11.9 billion – the new Bank Term Funding Program

Subtotal: $160.2 billion

• Approximately +142.8 billion dollars – loans to banks seized by the FDIC Total:

This amounts to 303 billion dollars

ECB hikes of 50 bps ignore forward guidance

The ECB raised rates by 50 bps for the third session in a row, raising the deposit facility to 3%. Just six months ago, the deposit rate was at 0. Lagarde and the ECB stand firm in their “commitment to fight inflation,” which is “estimated to be too high for too long.”

Forward guidance was removed, and no understanding of future moves, instead reiterating, “the elevated level of uncertainty reinforces the importance of a data-driven approach”.

All eyes on the FOMC next week

The next FOMC meeting is March 22nd and the markets are expecting a 25bps rate hike, and assuming there is no other major breach, I think we will get that. After that, it’s anyone’s guess for the future path of the fed funds.

Powell enters the meeting with a massive choice in either trying to contain inflation or save a fragile financial system.