Unemployment Rates Alone Can't Save the Economy. The Same Trap From the 2008 Crisis.

Government Money Market Funds Represent 83% of All Market Funds.

Here is what we will be getting into today:

1. Economic Warning Signs: Deflationary Money and Weakening Economy on Collision Course.

2. Government Money Market Funds Dominate Market, Complicating Federal Reserve's Inflation Management Effort.

3. Japan's Regional Banks Face Uncertainty Amid Turmoil at Credit Suisse & Collapse of Silicon Valley Bank.

4. Climate Change and Fiduciary Duty: A Call to Action for Individuals and Organizations
   

Let's Dive In!

YouTube Channel: Eurodollar University

Title: What is the 2008 trap and how do we avoid it?
Link: https://www.youtube.com/watch?v=1uoSK97fV2g

Here are the key highlights:

• The Federal Reserve Chairman, Jay Powell, has warned about a potential 2008-style scenario that could comprise a bad economy and deflationary money. He acknowledges recent difficulties at a small number of banks in the past two weeks, which could undermine confidence in healthy banks and threaten the banking system as a whole if left unaddressed.

• Powell's predecessors in 2008 made a mistake in not addressing the wider problem, which led to the catastrophic situation. It is important to recognize the parts of the scenario to prevent a recurrence of a 2008-style disaster. Deflationary money causes the banking system to retreat, depriving the global economy of credit and money needed for commerce, activity, and employment. The risk of isolated bank problems is a systemic issue that affects the monetary system itself, not just public confidence.

• While there are risks to GDP growth due to the credit problem, the labor market remains tight with job gains increasing in recent months and an unemployment rate of 3.6%. However, job vacancies still exceed the supply of available workers, creating a massive labor shortage.

• Falling for the idea that a low unemployment rate offers protection against economic issues is a trap that could lead to repeating the mistakes of the 2008 financial crisis. The Federal Reserve is aware of potential issues but doesn't believe they will come together to create a crisis. There are similarities in the deflationary money scenario and weakening economy.

• There have been warning signs of economic trouble leading up to 2023, and many participants believe the risks to GDP growth are weighted to the downside. The Federal Reserve is aware of potential issues but doesn't believe they will come together to create a crisis. Despite not repeating the 2008 crisis, there are similarities in the deflationary money scenario and weakening economy. These two are on a collision course, and policymakers would have the public fall into the same trap. The overall outcome is likely to be substantial economic damage, as seen in current market trends.

Website: Wall Street On Parade

Title: The Banking Crisis Knock-On Effect Has Been a Stampede into Government Money Market Funds Foiling the Feds Effort to Raise Market Interest Rates
Link: https://wallstreetonparade.com/2023/03/the-banking-crisis-knock-on-effect-has-been-a-stampede-into-government-money-market-funds-foiling-the-feds-effort-to-raise-market-interest-rates/

Here are the key highlights:

• The Financial Times reported a significant growth of over $286 billion in money market funds since the start of the COVID pandemic. During the 2008 financial crisis and the 2020 pandemic-induced financial panic, money market funds required government bailouts, raising concerns about their safety. In both instances, the government intervened to stabilize the funds, with the Department of Treasury providing guarantees in 2008 and the Federal Reserve establishing the Money Market Mutual Fund Liquidity Facility in 2020.

• It is crucial for investors to understand the differences between money market accounts and money market funds. Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC), providing protection for deposits up to $250,000 per depositor, per institution. In contrast, money market funds are not FDIC-insured and are subject to market risk. While money market funds may offer higher returns, they also carry greater risks and may not be suitable for all investors. During times of financial uncertainty, Americans often invest in money market funds, particularly government money market funds, which hold short-term debt instruments guaranteed by the U.S. government.

• According to the Investment Company Institute, government money market funds in the U.S. now represent 83% of all money market funds, with assets totaling $4.26 trillion as of March 22, 2023. The dominance of government money market funds complicates the Federal Reserve's efforts to manage inflation by hiking its benchmark interest rate. These funds hold short-term instruments like U.S. Treasury bills, which have increased demand due to their maturity of less than one year. The heightened demand for these instruments contributes to an inverted yield curve, as short-term government securities yield higher than long-term government bonds. This trend is concerning, as it hinders the Federal Reserve's ability to control inflation in the U.S

Website: Financial Times

Title: Japanese banks take post-SVB hit over bond fears
Link: https://www.ft.com/content/1d9d93ef-4551-42fd-a89d-4afbb67e162d

Here are the key highlights:

• The collapse of Silicon Valley Bank (SVB) and turmoil at Credit Suisse have raised concerns over Japan's regional banking sector, which has been under scrutiny since the 2008 global financial crisis. The sell-off following SVB's collapse has intensified worries about the risks in Japan's regional banks, which have experienced long-term income decline but hold almost half of the country's total cash in combined bank deposits.

• Japan's central bank and financial authorities held a crisis meeting in mid-March, as the country's banks faced heavier sell-offs than their US and European counterparts. The key question is whether Japan's regional banks and financial system can withstand the impact of future interest rate hikes as inflation and wages rise. Japanese banks have been investing heavily in US Treasuries and other global assets due to a high savings rate and stagnating economy. However, rising US interest rates have led to significant losses in their holdings of US Treasury bonds.

• Regulators have been surveying the securities that regional banks have bought since Summer 2021 to assess the risks they face if borrowing costs rise. Japanese regional banks maintain higher capital and liquidity standards than SVB, reducing the risk of sudden withdrawals and policy cancellations at life insurers. They also hold unrealized gains from substantial equity portfolios in listed Japanese companies, whose values have reached heights not seen in three decades.

• The Bank of Japan (BoJ) is under pressure to shift away from its ultra-loose monetary policy under new governor Kazuo Ueda. Speculations arose after BoJ slightly tweaked its yield curve controls in December 2022, causing the market to speculate that the central bank was getting closer to abandoning its policy of buying massive amounts of JGBs to keep yields anchored near zero. If yields reach about 1%, Japanese banks are safe, but if they rise to 1.5% or 2%, smaller banks may face capital problems, according to JP Morgan's Nishihara.

Website: Financial Times

Title: Fears of an energy price surge percolate through sector
Link: https://www.ft.com/content/9264df51-fcbf-4332-bc1f-52afb7f484f2

Here are the key highlights:

• The recent meeting between Xi Jinping and Vladimir Putin highlighted the importance of energy ties between their countries amidst the global energy trade's rearrangement following Russia's invasion of Ukraine. Despite the rising demand for fossil fuels, there is an urgent need to shift away from them to achieve zero-emissions targets. This requires significant efforts and investments from governments worldwide, including increasing clean energy infrastructure and promoting sustainable practices.

• Norway's experience with subsidies for battery-powered cars demonstrates the potential for rapid adoption of clean energy solutions. Investment in manufacturing capacity is also necessary to improve energy efficiency and reduce costs in the long run.

• More than half of the US states have taken action against using ESG factors in public retirement plans or targeted funds that boycott certain industries like fossil fuels. Despite this opposition, efforts to decarbonize industries are gaining traction, as evidenced by President Joe Biden's recent veto of a Republican-led attempt to ban private retirement funds from considering climate change in their investment decisions. Over 250 investors and firms have urged policymakers to protect their freedom to consider the financial risks of climate change in investment decisions.

• Anne Simpson, global head of sustainability at Franklin Templeton, emphasizes the importance of fulfilling fiduciary duties by paying attention to severe weather disasters, scientific forecasts, and innovative solutions for market needs. The US Environmental Protection Agency (EPA) is also taking action by cracking down on oil and gas methane leaks. Articles by energy source writers highlight the significance of climate data, the economic implications of an unsustainable energy industry, and businesses' role in mitigating climate change. To address the critical situation, individuals and organizations must adopt sustainable business practices and shift towards sustainable investments, aligning with the fiduciary duty to a sustainable future.
  

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