Breaking the Banks: Is Danger Ahead?

It’s hard to tell when a scary event happens whether it is the start or the end. Are the bank runs we saw on Silicon Valley Bank and a few others the start or the end of the panic?

A Bad Bet

A $1M Twitter bet caught my attention. The bet is from BalajiĀ Srinivasan, Coinbase’s former CTO. Balaji is one of those guys who you can’t understand 75% of what he’s saying. Maybe it’s because he’s on another level of intelligence or maybe he’s just frickin’ nuts. I really can’t tell. He has some major wins in his past (he was all over impacts of COVID way before anyone else) and it’s led to the saying: “the three scariest words in the english language… Balaji was right”. I’m not a fan boi or anything, but find the whole situation interesting, so I decided to dive in.

It didn’t take long to realize this is all just marketing. It makes no sense from the start (i.e way better ways to make money off this if you truly believe). Balaji is gaining attention for a movement he believes in. It’s easy to tell the bitcoin end of this is stupid (just buy 40 Bitcoin instead… or lever up and buy 400 Bitcoin…). Furthermore, any other crisis we’ve had has led to bitcoin selling off, not rising. Maybe this crisis will be different, but so far I’m operating under the mental model of bitcoin being a speculative/liquidity driven asset in the short term. All of this is great, calling people out on their bull shit is fun, but what if Balaji is sort of right? What if the banks are insolvent and Silicon Valley Bank was just the first of many future stressors that are going to happen?

Money In Da Bank… Not So Much

I don’t get an overwhelming antifragile feeling from our banking sector. It’s concerning to see charts like these, where what’s happening right now is compared to the last two major market panics we’ve seen. The FED raised rates until they broke something. The question is how many other things will break? Or what else will break due to the bank breaking cause?

I really don’t know anything here, but we’ve seen banks blow up the economy in the past. The closest equivalent to this is probably 2008, which isn’t great. Maybe the quick Fed action, etc… will release tension here, but part of me worries that we are just seeing the tip of the iceberg here.

Buy and Hold but Still a Degenerate

I’m a buy and hold guy, but some degenerate puts here might be fun. Banks are the obvious puts, but they’ve already been hit and volatility might be too high. I started to think through some of the first order effects and leveraged chatGPT to get my thoughts flowing. Below is the output.

Bank runs can have significant second and third-order effects on the financial system and the wider economy. Here are a few examples:

  1. Second-Order Effects:

a) Contagion effect: A bank run on one bank can trigger a panic among depositors of other banks. This contagion effect can quickly spread to other banks and create a broader financial crisis.

b) Credit Crunch: A bank run can lead to a credit crunch as banks become reluctant to lend money to each other and to their customers. This can have a severe impact on businesses and consumers who rely on credit to operate and can lead to a decline in economic activity.

c) Fire sale of assets: To meet the sudden demand for withdrawals, banks may need to sell assets at a lower price than their real value, leading to a fire sale of assets and further deterioration of the bank’s financial position.

  1. Third-Order Effects:

a) Economic contraction: A banking crisis can lead to a contraction in the wider economy as businesses struggle to access credit and consumer confidence declines.

b) Government bailouts: In some cases, the government may need to step in to prevent a bank run from spiraling out of control. This can lead to the government taking on significant debt or printing more money, which can have inflationary effects.

c) Changes in regulation: After a banking crisis, governments may introduce new regulations to prevent future bank runs. These regulations can have far-reaching effects on the financial system and the wider economy.

Overall, bank runs can have severe consequences for the financial system and the wider economy. It is essential to prevent them from occurring and to address them quickly if they do occur.

ChatGPT on second/third order effects of bank runs

First – wow – maybe this is just me, but if you compare this results to what you’d find on Google, this kind of esoteric question is where chatGPT is dominating Google, but that’s not he topic on hand. I think this result can take you into some interesting directions, really dive into some banking adjacent industries (finance, real estate, etc..).

Wrap It Up

The reality is that everything would be impacted by a large scale financial panic. Anything finance adjacent will get hit hard. I’ll probably buy some put protection (three to six months out). I have no clue if this is a real reason to be bearish, but I’m not a good bear. I still feel bullish, just an odd mix of bull and bear.

I’d rather be the boy who cried wolf, but didn’t sell when it comes to risks like these. I don’t want to ignore them, but I don’t want to overreact either. For me that means HODLing, then gambling on some degenerate puts every now and then. It’s probably dumb, but not one’s accusing me of being smart.

Balaji Srinivasan starting a fire by Stable Diffusion

Author: fatbabyfunds