Bankruptcy in the Banking Industry, Brewing Epic Market Turmoil

The banking crisis is like a Pandora's box. Once opened, it is difficult to close. In the post-interest rate era, the US financial crisis is approaching. How can we avoid risks and achieve profitability in this round of turmoil? First Republic Bank bankruptcy

On May 1, 2023, the First Republic Bank of the United States (FRC) went bankrupt and was acquired by JPMorgan Chase. On the same day, the U.S. Federal Deposit Insurance Corporation (FDIC) released the report "Deposit Insurance Reform Options", hoping to reduce market panic and stabilize market volatility.

On May 2, 2023, the New York Stock Exchange announced the start of the delisting procedure for FRC. First Republic Bank of the United States was shut down in early May due to a broken capital chain, becoming the third U.S. regional bank to be shut down in two months.

On May 4, 2023, "USA Today" reported that research shows that nearly 190 banks in the United States are at risk of bankruptcy.

The seriousness of bank failures is being underestimated. From the incident itself, it can be seen that the United States is currently facing the greatest financial risk since the 2008 subprime mortgage crisis. In addition to the First Republic Bank, plus the earliest Silicon Valley Bank and Signature Bank, three large American banks have already encountered debt problems.

What investment opportunities will emerge from the bankruptcy of the banking industry?

First of all, looking at history, bankruptcy events are not high probability events. Such a result, in addition to the objective reasons caused by the expansion of the United States’ balance sheet and the printing of US dollars during the epidemic, and the subjective factors of the recent interest rate hikes to ensure the stability of CPI price data. Therefore, under the current monetary policy, banks that have been heavily leveraged by these actions are prone to cash flow problems and bankruptcy.

Financial enterprises are the cornerstone of the national economy. Once they go bankrupt, many industries will be implicated:

Industry Affected 1: Technology

Silicon Valley Bank is one of the main sources of financing for US technology start-ups. Its bankruptcy has broken the capital chain of many technology companies, affecting technology innovation and investment.

Industry 2 affected: cryptocurrency industry

The bankruptcy of Logo Bank, one of the main sources of financing for cryptocurrency companies, triggered panic in the cryptocurrency market, leading to a sharp drop in the prices of digital currencies such as Bitcoin.

Industry Affected 3: Financial Industry

The bankruptcy of Silicon Valley Bank and Marker Bank triggered turmoil in global financial markets, causing bank stocks in the United States and other countries to plummet, increasing financial risks and tightening credit, but products with safe-haven value are vulnerable to buying Promote, such as gold, yen, Swiss franc, etc.

The most affected is the banking industry, because banks are shouldering the credit endorsement of the national currency, and investors are facing concerns that the US economy may fall into recession, which has led investors to flood into safe-haven assets. As a result, gold skyrocketed, and at the same time, everyone chose to sell in order to avoid commodities that use the US dollar as a means of payment, resulting in a sharp drop in crude oil.

To sum up, we can conclude that the collapse of banks will affect the price trend of investment products. Simply put, the collapse of the banking industry will lead to the decline of US stocks, the decline of crude oil, and the rise of gold.

In addition to the ongoing banking crisis, the U.S. debt crisis remains unresolved.

According to official US statistics, the US is only US$73.3 billion away from reaching the legal debt limit of US$31.4 trillion.

If the US borrowing capacity is exhausted, the next debt maturities may not be repaid on time. U.S. Treasury Secretary Yellen sent the most serious letter since the founding of the United States! Yellen solemnly stated in the letter that the U.S. government may default on its debt "as early as June 1", which will be the first debt default in U.S. history.

The risk of U.S. default is at a new high. The total amount of U.S. debt exceeds the combined GDP of China, Japan, Germany, and the United Kingdom. Over the past few decades, raising the debt ceiling has been an important issue in the game between the two parties in the United States.

From 1976 to 2018, the U.S. government shut down 14 times due to the debt ceiling dispute. However, the two parties have been able to compromise with each other after each government shutdown. In both 2011 and 2017, the debt crisis was "turned out" at the last moment. According to data from the U.S. Treasury Department, since 1960, the U.S. has experienced about 80 debt default risks, but they all survived the crisis safely.

How will a US debt default affect the market?

If the U.S. defaults, that is, if it fails to pay its debts on time, there will be widespread repercussions for many. Here are a few areas that may be affected:

1. Global financial markets will be turbulent U.S. Treasury bonds are considered one of the safest investments in the world, and their default will have serious consequences for global financial markets Market shocks. Investors could lose confidence in U.S. bonds, sending bond prices lower, raising interest rates and triggering capital outflows.

2. The U.S. economic capacity will be weakened

A default would lead to a downgrade of credit ratings, increasing borrowing costs and weakening the U.S. economy. Governments may face a shortage of funds to maintain normal operations, and government departments may have to cut spending, defer payments or close some services.

3. International relations will be negatively affected

The United States is one of the largest economies in the world, and a breach of contract may damage its reputation and credibility, and have a negative impact on the international status and influence of the United States. The international community could lose confidence in the United States, casting doubt on its economic and political leadership.

4. The growth of the global economy and trade will decrease

The downturn in the U.S. economy will have knock-on effects on the global economy. Since the United States is one of the world's largest importers, a weakening of its economy could reduce global trade volumes, affecting exports and economic growth in other countries.

5. The status of the US dollar will plummet

A default on the U.S. dollar, the world's main reserve currency and payment currency for international trade, could undermine its centrality to the global monetary system. Other countries may seek to diversify their foreign exchange reserves and reduce their reliance on the dollar.

6. Global investor confidence will be severely damaged

A default could stoke concerns among global investors about risky assets, leading to lower stock markets, currency volatility and financial instability. Investors may seek safe-haven assets such as gold and other relatively safe investment vehicles.

The above are some potential impact scenarios, which still depend on the size of the default, the market's expected reaction to it, and the government's response. The U.S. government usually takes steps to avoid default and resolve debt through debt restructuring or other means, so it cannot be generalized.

What investment opportunities will a U.S. debt default bring?

A default on U.S. debt could lead to increased market volatility and risk, but could also present opportunities for certain investments. Here are some investment areas that could be affected and why:

Stock Market:

The market tramples on vicious selling: debt default may trigger uncertainty and panic in the market, leading to vicious selling by investors in the stock market.

Investment opportunities: Theoretically, you can take advantage of the stampede in the US stock market to grasp the short-selling opportunities of the three major US stock indexes.

Gold:

Gold prices rise as safe-haven demand increases: A default may trigger risk aversion, with investors seeking relatively safe assets to preserve their value. Gold is often seen as a safe-haven asset, so demand is bound to increase, driving up the price of gold.

Currency instability Increasing physical demand for gold: Debt defaults could weaken the U.S. dollar's standing and credibility, leading to increased currency instability. In such cases, investors may turn to physical assets such as gold as a store of value.

Investment opportunity: You can take advantage of the opportunity to benefit from gold, and use the advantage of leverage to double your principal and do more gold.

Crude Oil:

Economic slowdown Crude oil demand falls Oil prices fall: A default could lead to slower global economic growth, negatively impacting crude oil demand. That could lead to lower crude prices, providing lower-cost energy to oil-consuming countries and related industries.

Intensifying geopolitical conflicts Volatility in oil prices: A default could exacerbate geopolitical tensions, leading to supply disruptions and heightened geopolitical risks. That could spark volatility in crude prices and provide trading opportunities for speculators.

Investment opportunities: Take advantage of T+0, first take advantage of the economic slowdown to short crude oil, and then take advantage of geopolitical conflicts to go long crude oil and operate in volatility.

It should be noted that investment involves risk, and the market reaction is uncertain. The above is only possible impacts and opportunities, and investors should conduct sufficient research and careful evaluation when making decisions.