Silvergate Bank Announced its bankruptcy on 8 March 2023
Silicon Valley Bank Taken over by the FDIC on 10 March 2023
Signature Bank Taken over by the FDIC on 12 March 2023
First Republic Bank US$30 billion liquidity rescue by 11 banks on 16 March 2023
Credit Suisse Swiss Government shotgun wedding with UBS on 19 March 2023

Thats five bank failures or rescues in 11 days, including Credit Suisse, one of the largest banks in the world and the second largest in Switzerland.

Combined losses of stockholders and creditors of these institutions exceed US$200 billion. Market losses in the banking sector are much greater.

Walter Wriston, the greatest banker of the 20^th century after Pierpont Morgan, personally tutored me on this topic 40 years ago.

In a bank run, you can pull your money out of banks and invest in gold, silver, land, or anything else. But you give the money to the seller, and she puts it back in the bank.

The point is the money always ends up in the bank. The system is a closed circuit.

Of course, it could go to a different bank, but all banks can borrow from each other through the fed funds market and the Eurodollar market. Again, the money always ends up in the bank.

Putting cash in a coffee can (or mattress) is one exception, but if you try to withdraw more than US$10,000, your bank will file a Currency Transaction Report (CTR) with the Financial Crimes Enforcement Network (FinCEN), and youll end up in a file next to Osama bin Laden. And the IRS gets a heads-up.

So, thats not a practical solution.

These failures and rescues were accompanied by extraordinary regulatory actions.

These actions have thrown the US banking system and bank depositors into utter confusion. Are all bank deposits now insured or just the ones Janet Yellen decides are systemically important? Whats the basis for that decision?

The most important question is: Is the crisis over? Has the Fed done enough to reassure depositors that the system is sound? Has the panic subsided?

The answer is no.

The panic is just getting started

We base that answer on the history of the two acute financial crises in recent decades 1998 and 2008.

The 1998 crisis reached the acute stage on 28 September 1998, just before the rescue of LTCM. We were hours away from the sequential shutdown of every stock and bond exchange in the world.

But that crisis began in June 1997 with the devaluation of the Thai baht and massive capital flight from Asia and then Russia. It took 15 months to go from a serious crisis to an existential threat.

Likewise, the 2008 crisis reached the acute stage on 15 September 2008 with the bankruptcy filing of Lehman Brothers.

But that crisis began in the spring of 2007 when HSBC surprised markets with an announcement that mortgage losses h...

What would you do if you knew your doctor has made an incorrect diagnosis before prescribing you some medicine? Would you just sit there and take it?

Because right now, PhD bearing central bankers are completely misunderstanding the source of inflation. And so, their response has been dangerously misguided. But investors dont seem to be acting in response to the threat.

Today, we explore whats really going on, and what you can do about it

As the modern macroeconomists who run our monetary policy see things, inflation is caused by aggregate demand shifts. If people buy more stuff, it raises prices. If theyre buying less, prices fall.

Closely tied to this is employment, which has an impact on the amount people can buy. But its a secondary factor.

A central bankers job is to manage the economy so that demand is growing moderately. If it grows too fast and prices start rising, higher interest rates are used to slow it down. If the economy is struggling and prices dont go up, or even fall, the economy needs stimulus with lower interest rates.

The fact that this doesnt really consider the supply side of things is the first big flaw in the theory. Especially in the wake of a pandemic that disrupted the supply sector of the economy badly.

What weve seen over the past two years is a spike in producer costs. Resources and energy prices surged first, well before consumer prices. Yes, this eventually led to a shift in consumer prices too. But the causation is obvious because of the temporal relationship producer prices moved and then consumer prices followed.

In 2020 and 2021, I tracked this through producer price indices (PPIs) and purchasing manager indices (PMIs). These are also known as factory gate prices, meaning the prices that factories pay for their inputs. They surged rapidly long before consumer prices did, allowing me to predict the consumer price inflation weve seen since.

The misdiagnosis on the part of central bankers confusing the inflationary spike for a demand-based issue rather than a supply issue is the source of what happens next in financial markets.

You see, interest rates are not just important to demand, but to supply too. Raising interest rates doesnt just slow demand. It also raises costs for producers, including those that supply energy and resources, the lack of which caused the PPI spike in the first place.

In other words, central bankers have made producer price spikes worse by adding costs to struggling factories, energy producers, miners, and other producers. Theyve added to the cause of inflation.

Worse still, they have created a demand slowdown where they didnt need to. This is because excess demand was never the source of the inflationary problem. It was one of supply.

Before we unpack the implications for investors, a quick tangent for those of you who are thinking that inflation is everywhere and always a mo...