Gold, bitcoin and cash saw major inflows last week as investors scrabbled to find havens against the possibility of a major US banking crisis.
Since last weekend, when the US authorities rescued both Silicon Valley Bank and Signature Bank, US$112.7bn has flowed into cash and US$600mln into gold, according to the latest weekly US market statistics from Bank of America.
This inflow into cash is the biggest since April 2020 and puts the quarter on course to see the highest in-movement since that year’s second quarter.
Outflows from bonds were modest at US$2.3bn, but that reflected strong inflows into US treasury bonds and flight from emerging markets, said the bank.
Crypto also did well (up 41% in value) while US equity funds flow was barely changed, highlighting shares' resilience, BoA added,
if equities had followed the redemptions seen during the Lehman bankruptcy and the Covid crash, outflows would have been US$30-50bn, but that hasn’t happened, noted the bank.
Ways to trade banking crisis
In its commentary, BoA said that over the last ten days crypto/silver were “long panic” plays, long 2-year Treasuries-short banks the “long contagion” play and FAANG stocks a “long deflation” play for when trades unwind on policy panic working and the crisis over.
BoA points out that the banks emergency borrowed $165bn from Fed and a record $153bn from the discount window.
”Emergency borrowing…tighter bank lending standards…small business credit crunch…higher unemployment…ain’t nothing new under the sun,” it quipped.
Since 1870 there have been 14 big world recessions, it added, all driven by wars, pandemics and banking crises with the latter on average causing a 4% drop in world GDP per capita.
On US banks in particular, BoA notes that Wall St is six times the size of Main St (high street) and remains “too big to fail” but adds banking crises are followed by tighter lending standards and lower risk appetite with small businesses most negatively affected as they are most reliant on regional bank lending.
Banks with under US$250bn of assets also make up 80% of commercial real estate lending.
“With very high US office vacancy rates (18.7% in 2022’s fourth quarter) commercial real estate is widely seen as the next shoe to drop.”