Rafi Farber: Collapsing Bank Reserves Deposits Mean Stagflation Just Ahead
Summary
➡ The banking system is nearing a crisis point, with a potential $3 trillion trigger. In recent weeks, we’ve seen a decrease of about $330 billion, and we could hit the crisis line soon. This is due to a shift from short-term debt to long-term debt, locking in high interest rates for 2-10 years. This, along with a decrease in bank reserves and deposits, indicates we’re heading into a deflationary period, not in consumer prices, but in the money supply, which could lead to a financial crisis and a surge in gold and silver prices.
Transcript
It’s back, baby. There’s all time record shorts by the hedge funds in two year treasuries. The gold bull market is finally breaking out, about to break the 200 week moving average. You got to be careful not to confuse a gold bull market with a commodity bull market. And yes, the gold bull market is finally breaking out. After being in a trading range since 2011. Silver is not quite there yet, but as we know, silver will catch up to gold in the end phases of the gold bull market, and it will catch up with a vengeance. Bank reserves are approaching the crisis line of about $3 trillion.
That triggered the last banking crisis, and it will trigger the next one as well. High interest rates are being locked in because the government is being forced to sell longer term notes and roll over the bills to the notes category. I’ll show you the statistics on that one. And the bank of Japan spent about $50 billion supporting the yen three times this past week. We’ll see how long the intervention succeeds. The last time, it took about three months. This time I think it’ll be shorter. The yen is doomed, but the bank of Japan can buy a lifeline of about few weeks, maybe a few months, but that’s really it.
And let’s get going with this week’s silver report brought to you by Fortuna Silver mines, symbol FSM. This week in Fortuna News, they have renewed their share repurchase program, returning capital to stockholders. Toronto Stock Exchange has approved the renewal of Fortuna’s normal course issuer bid, meaning the stock repurchase program to purchase up to 5% of its outstanding common shares within the next year. So they have increased their gold equivalent production, open new mines, paid down debt, and now they are returning capital to shareholders. Also this in their updated presentation from April 15, just two weeks ago.
This is the course of their growth since 2005. We see here gold equivalent ounces trending higher and higher and higher as they open more mines, beginning with Peru, then Mexico, then Argentina, now Burkina Faso, Ivory coast, and finally Senegal. We’re up to about 500,000 gold equivalent ounces a year. The growth pace is responsible. It’s slow and steady and it will continue, in my opinion, though, of course, do your own due diligence. And this is not a recommendation for anything, but it is one of my favorite gold and silver mining companies to own. And with that, let’s continue with this week’s silver report brought to you by FSM.
All right, so the first thing I wanted to share here is that it was a few months ago when this basis trade thing became big news. There were worries that hedge funds were shorting too many bonds. Trying to pick pennies from a steamroller, is that the expression? And the amount of shorts in two year Treasuries is an estimation for how much, how many shorts there are in the market generally. So we have here a new record high in hedge fund shorts on treasury bonds. Two year treasury bonds specifically, we’re at 1.831 million contracts short and a record long for.
I think these are. I can’t tell if that’s red or green, but whatever it is, it’s the other side of the trade. So a record short position in treasury bonds is a very unstable phenomenon and it can’t last. We’ll see how long this one lasts, but it’s going to create a lot of volatile trading conditions in treasuries. What we can definitely see here is that this is not a stable market and treasuries are going to be dangerous. Something is going to happen in the financial system to mess with their prices, short squeeze, something like that. Who knows? I’m staying out of it.
And I wouldn’t touch treasuries with a $35 trillion poll. Okay, now I’ve shown, I showed this chart two weeks ago. Something is happening here. This is gold relative to other commodities. It’s important not to confuse a commodity bull market with a gold bull market. There’s a reason that we are gold and silver stackers as opposed to, let’s say, oil or natural gas stackers. Though there could be natural gas stackers. I don’t think that’s particularly healthy. What we see here is the gold to commodities ratio. And basically it’s been in a trading range since 2011, since the 2011 top here.
And we see here that the bull market really began in 2008. This was the beginning of the destabilization of the financial system. It was stable over here, the gold to commodities ratio, pretty much until 2006, then it started to move up, and then in 2008, it really moved up. But since 2011, it’s been in a trading range. And also since 2021, we’ve been below the 200 week moving average. But that is now finally changing, which is suggesting that we are on a major bull run of gold relative to other commodities. And this ratio is really. It’s a proxy for the profit margins of gold and silver miners.
So the higher this ratio goes, the more profitable miners are. If we zoom in here, we can see that we are right on the cusp of breaking the 200 week moving average for the first time since 2021. This is a very rare event in gold markets. The 200 week moving average is at 8.11. Here, the red line we see, and we are at 8.10. We’re just about to break it. Let’s see how rare this is. Well, this has happened about three times since 2008, when the gold to commodities bull market really started. So it happened once in 2014, at the end of 2014, and that looked like a gold bear market, but it was really a bull market relative to other commodities.
It was a commodity bear market, but gold was falling much less. And here it happened again in 2019 that we had barely gone below the 200 moving average here. So if you want to count this, fine. If you don’t want to count it, you don’t have to. Technicals like this is more of an art than a sign. And here we have, for the third time since 2008, we’re breaking through the 200 week moving average. And once we break through that, I do believe we will be on a sustained bull market. You could call this a bull market, but what it really was was the shutting down of the global economy for the best reasons ever in the world that nobody may ever dispute.
But if we iron that out as just a little blip of insanity, we’re about to embark on a gold bull market relative to commodities. And silver will, of course, follow. If we zoom in on silver, see what’s happening here. Silver relative to other commodities. We are at resistance here in the silver to commodities ratio of about 0.09.1. We’re just below the 200 moving average. So we’re gonna break through it. It’s gonna take a little bit more time. And once we do, we should be in a silver bull market also relative to golden. And in that final year of the gold bull market, as we saw in the 1970s, late 1970s to 1980, silver should break out.
It should be quick, it should be brutal, and it should be glorious. Now, I wanted to go into the banking situation here, this is banking reserves. Bank reserves are reserves that banks hold at the Fed. So this is really the liquidity line. How much extra liquidity banks need. Now, the higher the pyramid goes, the more liquidity that there is in the system, the more liquidity that is needed, because banks obviously make loans and therefore they need reserves to cushion against those loans and they themselves go into debt. So the more reserves there are, the more reserves are needed, which is why I drew these two lines in.
You see here, this is right before QE three in 2012. And then QE three brought us up to a new level of reserves, just below 3 trillion. And then once we fell back to the pre QE level of reserves, we hit a repo crisis, and that was in September 2019. So we see the same thing here. We hit a new level of reserves because of the crisis over here, which we don’t want to talk about. And then we hit high over here just as 2022 came into being. New year’s 2022, we hit a high, and then QT starts again.
The Fed starts drinking its balance sheet. We head down to about $3 trillion, the previous line of where the new QE line stopped initially. And then we hit another banking crisis. This is around March 2023 over here. And so we’re heading down again. We’re going to zoom in a second. I’ll show you how far we are from this new banking crisis line, which I assume is about $3 trillion. Not going to be exactly then, and it’s not going to hit exactly when we hit the line. We see here in the banking crisis of 2023. It took a few months for this line to be approached, for the bank price to be triggered, but it is around $3 trillion, and it will happen somewhere around there.
If we zoom in, we can see we are at $3.25 trillion. This number over here is about 3.585, if I remember correctly. So we’re down about $330 billion in the last three weeks. We could hit the crisis line anytime, and there’s no reason that we shouldn’t because we’re still in QE. And even though the Fed announced that it is slowing down QE, it is continuing. Sorry, QT, they are slowing down QT, but they are continuing it. And the slowdown will only happen in June. So we have another four weeks to fall on a $252 billion to reach the $3 trillion crisis line, and then it should take a few weeks, maybe a few months, for the next crisis to be triggered.
Somewhere in the repo market, somewhere in the banking system, I don’t know exactly where it’s going to hit, but it is definitely going to. And now this is the Sifma table. SIFMA is that organization that crunches all the treasury numbers. So we can see what’s happening here. These numbers were just released today. So we have here the gross issues of bills and notes, bonds also. But bonds are pretty minor compared to these numbers. So we see here the net issuance of bills, that’s short term treasury bills, up to one year maturities is down about $200 billion.
And the net issuance of notes is up about $102 billion. So we see here that short term debt is being moved into longer term debt notes or two year to ten year maturities. And so what I’m saying is that long that interest rates, high interest rates that we see now are being locked in for between two to ten years. And so even if the Fed cuts interest rates in an emergency, the federal government is still going to be paying these high interest rates because they’ve already locked them in. They’re moving them to notes because there’s no more room on the bill side.
That’s already stuffed about $6 trillion of debt that’s cycling through every two to three months and now reflecting what is going on in bank reserves, meaning they’re falling. We can see the same thing is going on in bank deposits. Bank deserves are bank reserves, and bank deposits are different. Reserves are bank money that belongs to the banks that they stuff at the Fed. Deposits are obviously depositors money that does not belong to banks. What we can see here, that the same deflation that’s going on in bank reserves is going on in bank deposits. And bank deposits account for about 82% of the money supply.
So I made two little rectangles here. One is this week’s deflation. This is the week to week growth or shrinkage in bank deposits. We see here that the latest number as of April 26, there should be a new number out now as you’re watching this, but it’s not out by the time I’m recording this. So if it’s down again, or even we’ve continued the deflation. By deflation, I don’t mean falling consumer prices, I mean deflation in the money supply, in the amount of dollars that are in the banking system. So in the austrian sense, is what I mean, $133 billion in one week.
That’s the amount of deposits that have been erased. So when’s the last time we hit that number? In March 15, 2023. These are seasonally adjusted. So it does take into account the vacuum that usually happens around tax days. So the seasonal adjustments here kind of try to iron that out. And we see here in March 2023, during the banking crisis, the regional bank crisis, deposits only fell by 132 billion. So this week was even worse than that. Even taking into account the tax day seasonal factors, the last time we had a deflationary week so extreme was back here in September 2001.
We all remember what happened then. There was a big influx of money as the Fed was trying to cushion the bank system after the terrorist attacks. And then there was a big deflationary episode here. So that was the only time when we saw a greater deflationary week than what we just saw this past week. And who knows what the numbers are this week? You should know what they are. I encourage you all to look them up. Just look up deposits at Fred and you’ll find them. So the conclusion here, my friends, is that we are headed into another deflationary wave.
Not consumer prices. I’m not talking about consumer prices. Those will continue to rise. You can have consumer inflationary epochs, together with actually financially or monetarily deflationary time periods. They can coexist. And that is where stagflation comes from. Rising consumer prices, falling asset prices. If reserves are falling and deposits are falling, that is where we are headed. And once we are headed there, and it’s undeniable, the Fed will, of course, reflate, print again. And that should take us to the end game within months, who knows how many months? But it shouldn’t be that long, because the next printing round is going to be quite extreme, triggered by whatever crisis comes next.
And just as we’re seeing gold starting to break out relative to commodities, once we do have that final printing round, we will have gold and silver climbing relative to other commodities, not because of any lockdowns, but because of monetary panic. And with that, this is Rafi, the endgame investor, with this week’s silver report for arcade Economics. You can subscribe to the in game Investor on Substack for free. I do put a portion of every article that I write for free so you can get a taste of what I’m writing about. It’s getting kind of fun in a scary roller coaster kind of way, but, you know, who doesn’t like roller coasters? And with that thought, I’ll see you guys next week..
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