The Fed JUST Initiated CRISIS LEVEL Protocols

The Fed just initiated crisis level protocols as they're starting to believe that the problems in private credit could bring down the entire banking system. And get this, the response from the banks, this is going to blow you away. They're implementing the same tools they did going into the global financial crisis. The same exact things that nearly brought the entire financial system down to its knees and required a government bailout. And this time, they're expecting a completely different response, but we already know that this is going to blow up right in everyone's face. Now I'm gonna break down exactly what's going on, why the Fed is panicking, the banks' response, and why the odds of this happening are actually pretty high. Because the Federal Reserve is now asking major U.S. banks for details about their exposure to private credit, calling a surge in redemptions from funds and a rise in troubled loans in the industry. And you know exactly what the banks are gonna say, is we don't have much exposure, it's very minimal. Because what they did is they're not doing direct lending. Now in some cases, they're doing a small amount of it. But what they're doing is they're extending credit lines to these companies and turning a blind eye to what's actually going on. And of course, the banks know the truth, but the exposure to the Fed's perspective is gonna be minimal. In fact, the queries by Fed examiners are intended to assess the level of stress in the private credit industry and the potential for it to spill over to the wider financial system. And the potential is huge because these credit lines to these private credit funds, they're massive. And if they start to go into delinquency and default, it means it's going to have a major impact on the big banks. And of course, they don't want you to know about this because if you did, we'd be back facing the same problems we've seen before and that would lead to bank runs. And the Treasury Department is also questioning the insurance industry about exposure to private credit. But what's notable here is they're not questioning pension funds. Now, what's happened recently is all these private credit funds, well, they've been having a lot of trouble with liquidations. So what have they done? They've taken their absolute best loans and they sold them off into the industry. Who are the buyers? The insurance industry and large public pensions. Now, of course, you could say, well, they have long time horizons, but the risk is what happens if these loans, again, go into default, and then next thing you know, the entire system starts to hemorrhage. You can see it's going to impact Americans no matter where they turn. Your insurance products, your retirement, it's all going to come into hit. Because private credit, which relies on investor money rather than bank deposits to make loans, it's been on examiners' radars for years. And yet, what have they done about it? Absolutely nothing. So now the Fed, of course, has got to step in and say, wait a minute, there's a lot of redemptions. The stock in these companies is crashing and everybody's panicking. I guess we'll start to do an investigation. But this is the very first red flag that they actually know something far worse is going on. Because they stepped up their focus and retail credit funds came under pressure in recent months and investors rushed to pull cash because that's the issue. As long as everyone keeps their money in the banking system, keeps it in the stock market, keeps it in these private credit funds, everybody seems to be happy. But the real issue here is investors are much savvier than they were going into the financial crisis. They can see the stress in the system. They're seeing the fact that their money could get locked up. It could actually plummet in value and they're the ones that are going to take the hit. And this time, they're saying they're not willing to. Because the Financial Stability Board Chair, Andrew Bailey, said this week that private credit may be facing more stress after the shock from markets from the Iran war. Absolutely. This is the big issue here that I've been warning about. Because it's not just an issue of the fact that the stock in these companies are going down, that they're having to sell off their assets to buy their stock back. That's not the issue. The real issue, it's all about American consumers. And what's the shock from the war? Energy prices have gone up. And that means discretionary spending is going down. And the big issue here is where do we see a lot of these private credit loans? They're on inventories, receivables, payables, software stuff. And what happens if demand drops? People don't spend. And then, of course, these companies don't have the money to make payments on their loans. So for good reason, they should start to be worried because at the pace we're headed, the outcome doesn't look so good for the banks. Let's take a look at some evidence backing that up. We've got advanced retail sales. That's shown in blue against average weekly hours of production and non-supervisory employees. And one of my favorite charts is weekly hours because this is the big risk. The moment we see that drop, and we didn't see that drop from production and non-supervisory employees in the last report, but the moment it comes down, everything starts to fall apart. Let's take a look. Because going back to 94, when I graduated high school, what happened? Retail sales were headed down, and why? Because weekly hours were on a big decline. Happened again going into the dot-com bubble. You see it at the financial crisis. And how about 2022 when we had the big market correction? It's because weekly hours were dropping and retail sales were coming down. Now, for the moment, retail sales have been trending down just slightly. Weekly hours have been holding up. But what's the problem for consumers? Again, it's inflation. It's energy prices. Now, from the bank's perspective, because wait till I show you what their response is. Again, it's gonna completely blow you away. But they already know there's problems coming. And here's the evidence. Let's take a look at the net percentage of domestic banks tightening standards for commercial industrial loans to firms of all sizes. Now, the way you read this chart is very simple. See that horizontal black line across your screen? Well, any time the blue line is above that, it means on that banks are tightening. Now, on the way up means they're tightening faster. On the way down, it means they're tightening slower. Let's go back to 2022. Banks aggressively tightening lending standards. Then they slowed their pace. But they've been tightening lending standards ever since. So the problem is, and you can see it starting to form, the economy's slowing down. We're headed into stagflation. Consumers are dealing with the fact that prices are going up, but their hours are not keeping pace. So their spending's going to drop. The banks, in turn, are tightening lending standards, making it harder and harder for people to get a loan, particularly these businesses. So as we see demand drop, what are these businesses gonna wanna do? They're gonna want to extend their loans. They're gonna wanna refinance. They're gonna wanna do anything. Banks are already saying no. So the Fed, again, too late to the party here. But there's a bigger problem. They actually wanna offload a lot of this garbage onto consumers. Now, the Fed's question comes as President Donald Trump's top financial watchdogs seek to loosen rules for Wall Street lending giants. And part of that deregulation efforts is meant to bolster banks' abilities to lend to private credit outfits and have traditional lenders better compete with non-bank financial firms in areas such as mortgages and small businesses. They also wanna put this inside your 401ks. Now, I wanna know, what do you think about all that? Do you think that's a good thing? Do you think it's a bad thing? We in the comments love to know what you have to say about that. Because Jamie Dimon, he doesn't think private credit is a systemic risk, but the reality is it is, and he knows it is. And do you know how I know? Because what did JPMorgan Chase do recently? They tightened their credit lines to private credit companies. He already knows, and he's trying to back out of this. He's just trying to say, look, it's not an issue here. Don't come looking at our balance sheet. By the way, go look at these other banks. They got cockroaches all over the place, but not us. The reality is every bank is exposed. The Fed is starting to wake up to that reality. But as always, they're too late to the party. And again, rates, they're gonna have to cut rates the moment this thing blows up. And I know a lot of you are saying, there's no way the Fed's gonna be dropping rates aggressively. Well, we'll if the financial system blows up. Now, in the short term, we've made a killing chasing this real rally here. We told our subscribers for our CTA Timer Pro to buy the KBE. I didn't put it on the screen there. It says, should say KBE. Back on the six, that's regional banks. We saw an expected win rate of 62.5%. And since the six, that trade is up 4.39%. Now, you too could be grabbing these rallies, making some real money in the market. And I'd love it if you join us. All you have to do, grab those links in the description below. Use the coupon code for your free 30-day trial. Because these banks, they need lines of credit. That's the issue. So when we talk about tightening lending standards, what does this mean? They're not going to get the credit lines they need. So you can see, what are the big banks like JP Morgan Chase doing? They're making it harder and harder for these private credit funds to survive. They're trying to push them into a situation where they're going to go into delinquency. And what's that going to do? It's gonna raise the alarms at the Fed because they're already doing an investigation, which we know is the first step that they see as a major problem. And then what's the Fed's next reaction gonna be? Exactly what the banks want. They want the Fed to cut rates because who's been buying bonds like crazy lately? It's the banks. So do you see this all coming together? It's the banks who are driving this because a private credit portfolio sour, this puts the collateral banks are lending against that risk. And what's that collateral? Of course, it's inventories, it's big banks like JP Morgan. It puts everything at risk. And of course, we already know, it's the banks that force the Fed's hands. Now, some evidence that the banks really do want this to blow up, they're gonna make a ton of money on this because you're not gonna believe this. It's the same thing they did going into the financial crisis. It's the same thing that blew up that nearly brought the system to its knees. The same exact thing that caused bailouts. And just take a look. Because large banks, including JP Morgan, there you go, are preparing to offer a new way for investors to bet against managers and private credit funds. And again, these are the same funds that they're extending credit lines to. So I want you to see the big picture here. This is exactly how the banks drive the Fed into every decision. Because the banks are working with S&P Global to launch an index of credit default swaps that would protect buyers against defaults by companies, including the index called the CDX Financials. And you're saying, wait a minute, credit default swaps? That was the same thing that brought the financial system to its knees. You got it, and they're coming back in a big way. So you think about it. The banks, they're tightening credit. They know these things are gonna go bad, so what are they doing? They're gonna sell insurance against it and make money. But the moment it starts to go bad, what's gonna happen? The Fed's gonna cut rates, and of course the value of those things are going to go up because they don't think the thing can blow up. But the problem is, and I'm gonna show you, this whole thing can blow up, but let's take a deeper look at these credit default swaps. Because the so-called Findex Index would give debt investors and traders a fast way to hedge or short what is now more than a $3 trillion industry. So again, if you short this stuff and it blows up, maybe the banks got the insurers. Maybe they can hold steady. I don't think they can, but you start to see all of this stuff start to flow through the financial system. These funds go bad. They start laying off people. You have small businesses can't access credit, so they have to lay off people. You can see the dominoes fall here very, very quickly because the banks, including JP Morgan, want the index both as a product to trade, so think about that, and a tool to protect against potential losses from their loans at private credit managers. So they wanna hedge their own risk. They're saying, again, Jamie Dimon, there's no risk here. No, there is risk here, and you wouldn't be coming out with these products if you didn't think there was. But the problem is, remember, going back to the financial crisis, banks didn't think these loans could go to zero, and they oversold the amount of insurance. What do you think's about to happen all over again? But why are hedge fund clients suddenly pushing hard for a leverage way with much less capital at stake to take on private credit? Well, it's due to a wall of looming debt maturities. Now, more than 200 billion of high-yield and leveraged loan technology debt is coming due for repayment through 2008. Now, think about this. We just talked about commercial mortgage-backed securities, and what happened? They got to their balloon point. The small and mid-sized regional banks said, great, let's see your next payment. They said, we can't make it. So they restructured loans, and then they defaulted. They went into delinquency again. So what we're seeing here is the market wants to make the same bet against private credit. So what you're seeing is everybody believes this whole thing's gonna go down. Jamie Dimon doesn't want you to think it impacts the big banks. The Fed thinks it does, and at the end of the day, it probably will, but they're gonna get the Fed to cut, and the banks, they know they're gonna lose money on this. The big banks, they know that, but how are they gonna make their money? Again, for the last couple of years, they've been buying huge amounts of U.S. Treasuries, but everybody's told them they're fools. Well, they're not fools if you can force the Fed to cut, and they can, because many private credit firms have been ramping up their use of payment-in-kind, or what's called PIC debt, to mask weakness in their portfolios. And this, this is a real cockroach in the financial system, because what we don't know is how many PIC loans are really out there. Now, if you're just hearing this term for the first time, this is what it means. It means, instead of making a payment on a loan, they just tack that payment plus penalties and interest onto the end. Now, in a lot of cases, some of these loans, they've never made a payment. And for some borrowers, they just get to a point where they can't, and the companies, they don't want to put these loans into delinquency. So they say, hey, we'll just tack it on the end. So think of it this way. You bought a house you couldn't afford because you didn't have the wages you need to make the payment, and the banks said, no problem. We believe that your wages will go up over time, and you can make the payment. So in lieu of that, every month, instead of making a payment, anytime you don't make one, we'll just tack it on the end of the loan. Well, there's a problem. You do this long enough, and there's no way out of the problem. That's what the market senses. That's the problem. The banks are seeing this, and there's a reason. They do need to get the Fed to cut. Now, what are the odds this thing is gonna blow up? Well, pretty high, because take a look at this. The CPI surged 0.9% in the largest monthly jump since 2022 on gas prices. So you think about this from a consumer's perspective, because this is really where it all comes down to. Now, we know there's a lot of software loans and private credit, but in the end of the day, what happens? People need to actually buy this stuff. They need to buy all the stuff that's sitting in inventories and warehouses, on shelves. Plus, you need businesses to drive demand, buy all these software products. You need everybody to be spending money. But if inflation is going up on things like energy costs, what does it mean on the other side of the economy? Decretionary spending goes down, and next thing you know, all these loans have struggled to get payments. And the evidence that people are already trading off, another measure that excludes food and energy, that's called the core CPI, increased at a slower-than-expected 0.2% pace. So we didn't see any inflation on the core side, but we did see it on the other side, meaning consumers are already trading off, meaning their stress is rising. There's a reason these banks are rushing to get these CDSs out there, because they already know what's coming. And you can see it, and it's gonna get worse. Because the University of Michigan Consumer Sentiment Survey fell in recent weeks to a record low, we just got that data on Friday. The preliminary April Sentiment Index plunged to 47.6 from 53.3, and the evidence that this is gonna have a huge impact on the retail market is massive. Let's go back to that Advanced Retail Sales Data, it's still shown in blue. Now we're relating it to the University of Michigan Consumer Sentiment Survey in red. What do you see? You note that consentiment drops, and what happens is retail spending goes with it. And you can see that in every instance. So what happened in 2022? Sentiment plunged, retail sales went with it. And now look, consumer sentiment has been dropping, retail sales haven't followed, but if it does, it's game over for the financial system. This is what Jamie Dimon knows. This is what the banks know, and this is what the Fed is starting to figure out. And this is how they're going to get the Fed to cut. But again, the evidence that things are actually getting worse, well, we can turn to pawn shops. Because pawn shop owners across the U.S. say they saw an increase in demand for loans in the past month, a sign of how punishing higher gas prices are for some Americans. We're making a lot more loans, this is from Tim Cassidy, he's a fourth generation at a pawn shop in Stockton. They've got to have the gas, they've got to get to work. And what they're hearing is they just need a little bit until I get paid. The problem is, that little bit, as long as inflation stays up, is going to get to the point where it doesn't work and spending is going to have to decline. At that point, the inventory doesn't move, the delinquencies on a lot of these private credit loans start to go up, the default rates start to rise. Next thing you know, the banks start to hemorrhage, and this is why. They want these CDSs out there. The problem is, they're going to do it all the wrong way, just like they did last time. But in the end of the day, they're going to force the Fed to cut, which is exactly why we're starting to see them panic right now. So now you know what's coming, but we're not there yet. But keep in mind, as long as the economy slows, this is the next canary in the coal mine. And with that, I'm Steve Van Meter. Thanks for watching. Thanks for being fans. Bye now.