Saturday, 10 June 2023 — South Melbourne

By Nickolai Hubble Editor, The Daily Reckoning Australia

[9 min read]

Dear Reader,

It may not yet have dawned on Australia, but the rest of the world is waking up to the threat of net zero policies. At our recent editorial meeting in Melbourne, I was shocked to discover just how far behind Australia is on this awakening.

Almost all media coverage in Europe and the US is already highly critical of net zero. Even the politicians have woken up.

In Europe, French President Emmanuel Macron has called for a halt on new green legislation coming out of the EU.

Germany successfully torpedoed the EU’s attempt to ban combustion engine cars.

In the UK, some councils are refusing to cooperate with the government’s demands to impose net zero policies.

Net zero is so unpopular in the UK that politicians are using it as a punching bag for all sorts of barely related shortcomings. For example, one minister is blaming her inability to carry out Brexit reforms on the constraints imposed by the emissions commitment.

Companies worldwide are also turning their backs on net zero at an increasing pace. Seven insurance companies have quit the Net-Zero Insurance Alliance — a part of the powerful group called the Glasgow Financial Alliance for Net Zero — which pressures financial industries into adopting net zero policies.

Even the only remaining cheerleaders for net zero — journalists — are having second thoughts. The Financial Times covered ‘the staggering cost of a green hydrogen economy’.

Financial markets cottoned on to this shift first. Green energy stocks plunged in 2022 and clean energy tech companies’ favourite bank in California went bust in 2023…

Just when an energy crisis was supposed to prove renewable energy’s credentials and capabilities, the world concluded the precise opposite. It turned to coal instead.

While Australia still grapples with the impossible implications of net zero, the rest of the world is already moving on to pondering solutions instead. And, as slowly as humanly possible, they’re reaching the painlessly obvious solution: nuclear power.

In October 2021, the UK’s Independent Review of Net Zero report commissioned by the government concluded that nuclear power is ‘a no-regrets option’ for the UK.

In April 2022, the UK government outlined its plans for nuclear power. These include building eight new reactors plus smaller modular reactors, set to provide 25% of the UK’s electricity demand by 2050.

In Japan, utility companies are applying for 27 reactor restarts, with 17 passing safety checks and 10 resuming operations.

In South Korea’s March 2022 presidential elections, a pro-nuclear candidate defeated an anti-nuclear incumbent who planned to phase out nuclear power.

The country’s 26 reactors produce about a quarter of its electricity, but the new president wants to increase this to at least a third. Plans include extending the life of existing reactors and building new ones.

Macron committed to building six new reactors at a cost of nearly €52 billion. And government-owned power utility EDF is set for nationalisation to make the government’s plans happen.

To achieve its emissions commitments, China’s government plans to build more than 150 nuclear reactors by 2035 — more than the rest of the world in the last 35 years. It currently has 49 operational power plants and 17 under construction.

The list goes on and on and on. It’s important to note that many of these plans are dramatic shifts away from phasing out nuclear to growing it. It’s a huge change.

Of course, it took quite a bit of pain to get there. Pain that didn’t play out in Australia in quite the same way. But Europe has been in an energy crisis since 2021, well before Russia invaded Ukraine.

Why? Ever since governments committed countries to the goal of net zero, without figuring out how to do it first, more and more analysis has been done on what that might mean.

The growing consensus is that it isn’t going to happen, and any attempt to make it happen will crush living standards to a point that is not politically viable in a democracy.

Now, some people’s conclusion is that we need to impose these changes anyway. We are, after all, trying to save the planet, democracy be damned. And the only thing that justifies more draconian policies than a pandemic is saving the planet.

But, if those economists, engineers and physicists who have done the analysis are correct, we’re discussing imposing something worse than the Second World War rationing.

Given the choice between adopting nuclear power and destroying our standard of living entirely, governments are increasingly opting for nuclear power. Well, they’re opting for coal and then nuclear power.

As energy consultants and commentators, Doomberg put it:

‘There is simply no path to a low carbon economy without a massive nuclear power renaissance. If you are simultaneously opposed to fossil fuels and nuclear power, you are for mass starvation and extreme human suffering (whether you realise it or not).’

Nuclear offers the most plausible solution for a long list of reasons.

It is much safer than other forms of power which cut emissions — only solar comes close in terms of deaths per unit of emissions.

It is much more environmentally friendly than other forms of renewable energy.

It takes up far less space.

It provides easy energy security.

It isn’t intermittent.

It can be located anywhere.

Its output can be controlled reasonably well.

It doesn’t require a backup grid to be ready to fire up.

It doesn’t require vast energy storage capacity.

And so on, and so forth…

But this solution poses a bit of a problem for Australia. And not just because of our fossil fuel exports.

Nuclear power remains illegal in Australia. No number of facts, evidence, public polling or experience seems to convince our government to shift. And even if it did, a nuclear rollout on a scale that cuts emissions radically appears a lifetime away.

Heck, given the choice between fossil fuels and nuclear, I’m not sure what Australia’s Government would choose. Which, of course, puts the whole climate change story into perspective…

But the threat is that Australia will be left behind as a result, as it has been on perceptions about net zero. Our delay in providing safe, clean and reliable nuclear power will leave Australia in the dark, as Europe was in 2021 and 2022.

Australia better learn to stop worrying and love nuclear, fast.

The good news is that Aussie investors need not wait for their government and fellow voters to get their act together. Investing is an individual’s game not driven by mob mentality. You can chart your own course.

Indeed, a lot of investing success is driven by anticipating change and being one step ahead of the crowd.

Given the Australian stock market’s uranium mining opportunities, that’s not terribly difficult to do either. 

So, instead of waiting for your government to figure it out, do it yourself.

Until next time,

Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend

By Jim Rickards Editor, The Daily Reckoning Australia

Dear Reader,

The SVB fiasco threw a monkey wrench into the Fed’s carefully laid plans to raise interest rates to head off inflation. That alone threw markets into confusion and increased volatility. A global recession that was developing anyway is now a near certainty and will be worse than would otherwise have been the case. A global financial crisis is here.

Let’s recap a simple timeline of events. That will give us a baseline for considering the more technical aspects of the bailout, and some of the corruption going on behind the scenes. Put on your crash helmets. You’re going to need them.

The chronology of a collapse

The SVB collapse is, in some ways, the bitter fruit of eight years of zero interest rates (2008–2015) under Ben Bernanke and Janet Yellen. That zero-interest rate policy and the accompanying US$4 trillion of quantitative easing (QE1, QE2, QE3, and so on) created an age in which investors were forced to channel savings into riskier assets such as stocks, real estate, and emerging markets in a chase for yield.

Those asset bubbles were amplified with borrowed money in the form of carry trades and derivatives. No one cared about the potential for higher interest rates and monetary tightening. That seemed to be off the table. Investors were driven by TINA (There is No Alternative) and FOMO (Fear of Missing Out).

A narrower timeline would begin in November 2021. Two critical events happened that month. The first is that Fed Chair Jay Powell threw in the towel on his view that inflation was ‘transitory.’ Powell made it clear that inflation was a real threat, and that the Fed would soon be taking steps to stop it. A few months later, in March 2022, Powell began a series of nine interest rate hikes, which continue today.

The second event, perhaps not coincidentally coinciding with the first, is that Bitcoin [BTC] began to crash from an all-time high of US$68,990 to US$15,480 in November 2022 — a 78% crash in one year that started what crypto cultists call the Crypto Winter. This crypto crash has direct connections to the SVB collapse, which we explain below.

While December 2008 and November 2021 are both good starting points for our story, the day-by-day chronology specific to SVB really begins on 27 February 2023, when the SVB CEO dumped US$3.5 million of SVB stock. On the same day, the bank’s CFO dumped US$575,000 in the bank’s stock. Both executives claim these sales were pursuant to pre-announced programs allowed by the SEC.

Still, SVB’s unrealised losses (unknown to the public) date back years, so the programmed selling may itself have been a cover for what they both knew was coming. The SVB stock price at the time of those sales was about US$290 per share. Today it is worthless. The insiders got out in time.

Remember the debt ratings agencies?

On 1 March 2023, rating agency Moody’s called SVB management to tell them that Moody’s was considering downgrading the credit rating of the bank. This set off alarm bells inside SVB. Management knew that a credit downgrade might start a flood of deposit withdrawals and a crash in the stock price. The CEO, Greg Becker, immediately called Goldman Sachs to work out a financial rescue plan. The hope was that a credible plan might cause Moody’s to change their mind on the ratings downgrade.

In its simplest form, SVB’s problem was the classic banking blunder of borrowing short and lending long. In SVB’s case, this meant taking in short-term deposits from customers and investing them in long-term Treasury notes and bonds with maturities of up to 30 years. By December 2022, SVB had US$174 billion in customer deposits and held US$74 billion in loans as well as US$100 billion in securities.

The securities were divided into a held-to-maturity (HTM) account of US$74 billion and an Available for Sale account of US$26 billion. The available-for-sale securities must be mark-to-market to reflect any changes in market value. The HTM account did not have to be mark-to-market. SVB had 74% of its securities in the HTM account. The norm for large banks is 6%.

The idea of HTM was that if you hold securities to maturity, you will receive all your money back. Therefore, daily fluctuations in value can be safely ignored. SVB took the use of that rule to extremes in order to abandon responsibility for actively managing market risk.

Reckless risk management

Banks need to exercise some risk management over all their assets, including the HTM account. That’s just prudent banking. SVB had completely deficient risk management.

The risk management officer position at SVB was vacant for six months leading up to the fiasco. The UK risk management head spent more time on LGBTQ plus and other diversity issues (including a celebration of Pride Month) and seemed to spend no time on risk management. SVB was paying as much as 4.5% interest on deposits at a time when most Americans were lucky to get 1.0%, another example of reckless risk management.

As a result, SVB seemed not to realise that as the Fed raised interest rates beginning in March 2022, the value of its bonds would decline.

A run begins and a rescue plan ends

The plan fell apart when billions of dollars of deposits began to flee the bank. Whether large depositors had inside information or had heard about Moody’s downgrade threat is unknown. But some kind of leaked information seems likely. The deposit withdrawals were so large that SVB had to sell billions of dollars of bonds to meet the withdrawal obligations.

SVB, Moody’s, and Goldman worked frantically over the weekend of 3–5 March to devise a rescue plan. The plan would work as follows: SVB would sell US$20 billion of low-yielding bonds and reinvest the proceeds in newly issued higher-yielding bonds. When you sell the HTM bonds, the exception to mark-to-market rules no longer applies, and the bank must recognise the full loss immediately. The bond losses turned out to be US$1.8 billion. Since SVB is a public corporation, and a highly regulated bank, that US$1.8 billion loss had to be reported to the public. The public disclosure occurred on Wednesday, 8 March 2023.

SVB planned to plug that US$1.8 billion hole in its balance sheet with a new stock issue of US$2.25 billion. Goldman lined up private equity giant General Atlantic to commit to US$500 million of that amount. Other potential investors were in discussions to buy more. Moody’s announced the ratings downgrade on 8 March, but the downgrade was mild because of the bond sale and reinvestment part of the Goldman plan. SVB and Goldman raced to complete the capital raise to mitigate the damage of the bond portfolio loss.

Then the capital raise plan blew up. The hope was to announce the capital raise completion before the market opened on Thursday, 9 March. But SVB was incompetent at getting NDA agreements signed so that investors could examine the books. Investors said they needed more time to do due diligence given the size of the Wednesday losses.

Meanwhile, the Wednesday loss announcement caused SVB’s stock to plunge from US$268 per share to US$172 per share in after-hours trading. When the market opened Thursday, the shares fell to US$106 per share — a stunning 60% crash from the Wednesday close. Goldman still hoped to close a deal at US$95 per share, but it was too late. Trading in the stock was halted on Nasdaq. General Atlantic walked away from the deal and the stock offering collapsed.

Venture capital firms and others urged their startups to get all their money out of SVB as soon as possible. US$42 billion of deposits were withdrawn on Thursday alone. On Friday, 10 March 2023, California bank regulators closed SVB and appointed the FDIC receiver.

The FDIC issued a press release that day stating that only accounts of US$250,000 or less would be protected. All other deposits would be eliminated, and depositors would get a ‘receivership certificate’. Distributions on the certificates would depend on future sales of assets by the FDIC. That process could take weeks or months. In the meantime, the certificates were illiquid and of uncertain value. The uninsured deposits were simply gone.

But like Dracula, the deposits rose from the dead. An explanation for that requires knowing the difference between a ‘bailout’ and a ‘bail-in’ of depositors in a bank panic situation. That distinction will be discussed next week.

All the best,

Jim Rickards,
Strategist, The Daily Reckoning Australia