As the Fed tightens monetary policy, a banking crisis is historically the first evidence that something is breaking. As noted recently in “Not QE,”
Last week, amid a rash of bank insolvencies, government agencies took action to stem a potential banking crisis. The FDIC, the Treasury, and the Fed issued a Bank Term Lending Program with a $25 billion loan backstop to protect uninsured depositors from the Silicon Valley Bank failure. An orchestrated $30 billion uninsured deposit by eleven major banks into First Republic Bank followed. I suggest those deposits would not occur without Federal Reserve and Treasury assurances.
Banks quickly tapped the program, as shown by the $152 billion surge in borrowings from the Federal Reserve. It is the most significant borrowing in one week since the depths of the Financial Crisis.”
Since last week, that number has surged to almost $300 billion.
Since then, UBS entered into a “shotgun marriage” with Credit Suisse, and the Federal Reserve reopened its dollar swap lines to provide liquidity to foreign banks.
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced on March 19 “a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.”
To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations began on March 20 and will continue at least through the end of April.
Historically, once the Fed opens dollar swap lines, further monetary accommodations follow from rate cuts to “quantitative easing” and other liquidity operations. Of course, such is always in response to a banking crisis, credit-related event, recession, or a combination.
While the “pavlovian response” to a reversal of monetary tightening is to buy risk assets, investors may want to take some caution as recessions tend to follow a banking crisis.
Banking Crisis Cause Recessions
An obvious consequence of a banking crisis is a tightening of lending standards. Given the “lifeblood” of the economy is credit, both consumer and business, the tightening of lending standards reduces that economic flow.
Not surprisingly, when banks tighten lending standards on loans to small, medium, and large firms, liquidity constriction ultimately results in a recessionary drag. Many businesses rely on lines of credit or other facilities to bridge the gap between manufacturing a product or service and collecting revenue.
For example, my investment advisory business provides services to clients for a fee of which we collect one-fourth of the annual fee during each quarterly billing cycle. However, we must meet payroll, rent, and all other expenses daily or weekly. When unexpected expenses arise, we may need to tap a line of credit until the next billing cycle. Such is the case for many firms where there is a delay between the sale of a product or service and the billing cycle and collection.
If lines of credit are withdrawn, businesses must lay off workers, cut expenses, and take other necessary actions. The economic drag intensifies as consumers cut spending, further impacting businesses due to reduced demand. This cycle repeats until the economy slips into a recession.
Currently, liquidity is getting extracted across all forms of credit, from mortgages to auto loans to consumer credit. The current banking crisis is likely the first warning sign of a worsening economic situation.
The last time we saw lending standards contract this much was during the pandemic-driven economic shutdown.
Many investors hope a Fed “pivot” to loosen monetary policy to combat recession risks will be bullish for equities.
Those hopes may be disappointed as recessions initially cause “repricing risk.”
Recessions Cause Repricing Risk
As noted, the bullish expectation is that when the Fed makes a “policy pivot,” such will end the bear market. While that expectation is not wrong, it may not occur as quickly as the bulls expect. When the Fed historically cuts interest rates, such is not the end of equity “bear markets,” but rather the beginning.
Notably, most “bear markets” occur AFTER the Fed’s “policy pivot.”
The reason is that the policy pivot comes with the recognition that something has broken either economically (aka “recession”) or financially (aka “credit event”). When that event occurs, and the Fed initially takes action, the market reprices for lower economic and earnings growth rates.
Forward estimates for earnings remain elevated well above the long-term growth trend. During recessions or other financial or economic events, earnings regularly revert below the long-term growth trend.
A better way to understand this is by looking at the long-term exponential growth trend of earnings. Historically, earnings grow roughly 6 percent from one peak earnings cycle to the next. Deviations above the long-term exponential growth trend are corrected during the economic downturn. That 6 percent peak-to-peak growth rate is derived from the roughly 6 percent annual economic growth. As we showed just recently, and of no surprise, the yearly earnings change is highly correlated to economic growth.
Given that earnings are a function of economic activity, current estimates into year-end are unsustainable if the economy contracts. That deviation above the long-term growth trend is unsustainable in a recessionary environment.
Therefore, given that earnings are a function of economic activity, valuations are an assumption of future earnings. Therefore, asset prices must reprice lower for earnings risk, particularly during a banking crisis.
There are two certainties facing investors.
- The Fed’s rate hikes started a banking crisis that will end in a recession as lending contracts.
- Such will force the Fed to eventually cut rates and restart the next “Quantitative Easing” program.
As noted, the first cut in rates will be the recognition of the recession.
The last rate cut will be the one to buy.
Article cross-posted from The Epoch Times.
Bypass Big Tech Censors
Two Storms, One Harvest
Every food crisis in living memory has been a one-shock event. The 2008 price spike was a commodity bubble. The 2020 shortages were a logistics failure. The 2022 grain scare was a war on one exporter’s ports. Each time, the system bent, adjusted, and recovered, and each time the experts assured us afterward that global markets are simply too big and too diversified to fail.
What nobody in Washington seems eager to discuss is that 2026 is shaping up to be something the modern food system has never actually faced. Two independent shocks, one climatic and one geopolitical, are converging on the same harvest cycle at the same time. Not sequentially. Simultaneously.
Start with the weather. The Pacific Ocean is currently building toward what forecasters now openly call a record event. NOAA’s Climate Prediction Center puts the odds of at least a strong El Niño near 88 percent, with roughly two in three odds it reaches “very strong” status, the tier reserved for perhaps three or four events in the entire satellite era. Every major global model now projects a median peak in Super El Niño territory, and most of them project it exceeding the 2015-16 event, which until now held the modern record. Sea surface anomalies were already brushing the super threshold in mid-July, months before these events normally peak. The atmosphere has already shifted into El Niño mode, and the event is forecast to crest in late fall and early winter.
This is not about “climate change.” It’s about the standard cycles of weather, and the cycle we’re currently in is one that has likely devastated societies in the past. We’re better prepared as a society today, but not all Americans are equally prepared.
Serious households have started doing the quiet math on their own. Grocery bills tell part of the story, and the forecast maps tell the rest, which is why long-term food storage has moved from fringe hobby to mainstream line item in the family budget, with established suppliers like Heaven’s Harvest seeing demand from people who five years ago would have rolled their eyes at the idea. That instinct is not paranoia. It is pattern recognition, and the pattern is worth walking through carefully.
Editor’s Note: Heaven’s Harvest IS a sponsor, but the warnings of this article are real and would be written even if we didn’t have a survival food sponsor. With that said, those who take advantage of what they offer can use promo code “Patriot” for 15% off.
The Fertilizer Clock Is Already Running
While the Pacific warms, the second shock has been unfolding in the Strait of Hormuz. The conflict with Iran turned the world’s most important energy chokepoint into a contested waterway, and the consequences reach far beyond the gas pump. Roughly a third of global fertilizer trade moves through Hormuz, and the disruption sent urea prices up 86 percent year over year by March, with a 53 percent jump in a single month.
The World Bank projects energy prices rising about 24 percent in 2026 and fertilizer about 31 percent. By its own accounting, fertilizer prices ran 35 percent higher in the first five months of this year than the same period last year.
Here is the mechanism the nightly news will not explain. Fertilizer is not a grocery item. It is a time-delayed input. The nitrogen a farmer in Iowa or Punjab could not afford to apply this spring does not show up as a problem this spring. It shows up as a thinner harvest six to twelve months later.
The World Bank’s own food security brief concedes that the effects of reduced applications earlier this season “are likely to become visible only later in harvest outcomes.” Translate that from institutional language into plain English and it means this. The damage is already done, it is already in the ground, and we are simply waiting for it to arrive on the shelf.
Now check the calendar. Six to twelve months from the spring planting season lands us squarely in late 2026 and early 2027. Which is precisely when the strongest El Niño in the instrumental record is forecast to peak, bringing its signature droughts to Southeast Asia, Australia, southern Africa, northern Brazil, and South Asia, the very regions that grow the world’s rice, sugar, and oilseeds.
The World Bank warns openly that a strong El Niño “could disrupt multiple crop belts simultaneously” on top of the conflict-driven input costs. Their baseline projection assumes the Middle East disruptions ease by autumn. What in the last two years of Middle East history suggests that assumption is safe?
The System Has No Slack Left
The comfortable answer is that global markets always adjust. But adjustment requires slack, and the slack is gone. Global cereal production is expected to decline from last year’s records even before El Niño does its work. The UN World Food Programme, hardly a den of right-wing preppers, is calling this the most significant disruption to its supply chains since Covid and the invasion of Ukraine, and its supply chain director put the stakes bluntly.
Today’s supply chain challenges are tomorrow’s hunger crisis.
There is also a political dimension that markets cannot price. When food gets scarce, governments do not behave like economists. They behave like politicians. Export bans, hoarding mandates, and panic buying at the national level turned the modest rice shortfall of 2008 into a global crisis, and analysts are already warning that import-dependent nations are the first dominoes.
The 2015-16 Super El Niño, a far weaker event than what is now forecast, threw tens of millions into food stress across Africa and Asia. This one is projected to be stronger, and it arrives with fertilizer already rationed by price and shipping lanes already contested by missiles.
What Joseph Knew
Scripture does not treat preparation for lean years as faithlessness. It treats it as wisdom delivered in advance to those willing to act on it.
Behold, there come seven years of great plenty throughout all the land of Egypt: And there shall arise after them seven years of famine; and all the plenty shall be forgotten in the land of Egypt.
Joseph did not respond to that warning with a hashtag or a committee. He stored grain during the years of abundance, and when the famine came, Egypt stood while its neighbors begged. The lesson is not that famine is certain. It is that the time to prepare is precisely when preparation still looks optional.
Nobody who filled a pantry in a year of plenty has ever regretted it, and nobody standing in an empty aisle has ever been glad he waited for certainty.
None of this calls for panic, and panic is the enemy of sound judgment anyway. It calls for the same unglamorous prudence our grandparents considered ordinary. Keep some cash margin, know your local growers, and put real food in deep storage while it is cheap and available, because the entire arc of this story is that cheap and available is a closing window.
Families looking for a straightforward place to start can visit Heaven’s Harvest and use promo code Patriot for 15 percent off long-term storable food. The forecasts may yet soften, the strait may yet reopen, and we should pray they do. But hope is a fine thing to hold and a foolish thing to eat.