The Pomp Letter

Note: You all should have received my latest book summary (Excellent Advice for Living by Kevin Kelly) in your inbox this morning. It is under our new book brand — The Bookrat. If you don’t see it, please go to your spam folder and move it to your inbox. You can also reply to the email to solve the problem for the future too. Enjoy!

To investors,

British lawmakers from the U.K. Treasury Select Committee published a report yesterday claiming that bitcoin and cryptocurrencies have no intrinsic value. The report also claims that these tokens are similar to gambling and should be regulated in a similar manner.

There are a number of problems with this line of thinking.

First, every investment is a gamble. You can make money or you can lose money. This is true in stocks, real estate, bonds, commodities, currencies, and crypto. Investors are professional risk takers. Free markets should be determining the winners and losers. The stock market is a casino with a different name. If one financial asset is gambling, then all financial assets are gambling.

Rather than put cryptocurrencies in the same bucket of entertainment games based on odds, they should be regulated as a tradable asset where people take both sides of a trade. We have rules for securities. We have rules for commodities. We have rules for currencies. Decide which asset each crypto token is and then regulate it accordingly.

The next problem is that the Committee report claims that bitcoin and cryptocurrencies have no intrinsic value. This is a dumb argument. In fact, it is a VERY dumb argument.

Intrinsic value is a concept that humans made up in an attempt to wrap their heads around financial instruments. What is the intrinsic value of a business? If you ask two different people, you can get two different answers. What is the intrinsic value of a barrel of oil today vs a barrel of oil tomorrow? Ask on different days and you’ll get different answers.

Bitcoin and cryptocurrencies obviously have value. The assets are worth trillions of dollars. Hundreds of millions of people around the world, from politicians to investors to businesses to individual citizens, continue to acquire and hold these assets. We may debate what the value of the asset is today, along with the value in the future, but it is crazy to think people can argue these assets have no intrinsic value at all.

So what is their argument on this front? Bitcoin and other crypto assets are not backed by anything.

This argument is incorrect though. It highlights the lack of understanding from the Committee members. Let’s use bitcoin as an example. The decentralized, digital currency is backed by computing power. To put it more directly, bitcoin is backed by the strongest computing network in the world.

This report out of the UK is arguing that the strongest computer network in the world has no value. As I said, this is a VERY dumb argument.

Computing power may be the single most valuable commodity globally in the digital age. Whether you agree with that or not, I don’t know a single serious person who will argue computing power has no intrinsic value.

This brings me to my overarching point — these types of ill-informed, bombastic reports from government agencies are actually having the opposite impact of their intended outcome. When people see the government being so wildly wrong, they lose confidence in the government’s ability to evaluate future technologies.

Most people, especially in countries outside the United States, have learned that their government can’t be trusted to look out for their best interest. When the country bans something, the people become more interested in it. We saw this happen with bitcoin in countries like Nigeria and Pakistan. As soon as the government became openly abrasive to the asset, adoption skyrocketed.

You can call it the Streisand effect. You can call it common sense. Whatever the name, this phenomenon is only going to accelerate in the information age where the internet increases transparency and the speed of information transfer.

My guess is the U.K. Treasury Select Committee report is going to actually serve as a marketing campaign for bitcoin and cryptocurrencies. The mainstream media will write about the report, which drives awareness of these assets. More people adopt them and learn to hold them for the long-term. History will be unkind to people who publish these reports, but more importantly — these reports serve as one of the greatest marketing opportunities for digital assets.

We should thank those who have the courage to publish such ridiculous work.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Pomp

Note: You all should have received my latest book summary (Excellent Advice for Living by Kevin Kelly) in your inbox this morning. It is under our new book brand — The Bookrat. If you don’t see it, please go to your spam folder and move it to your inbox. You can also reply to the email to solve the problem for the future too. Enjoy!

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe

Note: A book summary went out this morning on The Dhandho Investor by Mohnish Pabrai. The sender is “The Bookrat,” so if you did not receive it yet please check your spam folder. Move the email to your inbox or respond to the email to make sure it doesn’t go to spam in the future. Thank you and enjoy.

To investors,

The second and third largest bank failures in US history happened earlier this year. As more large banks came under pressure around the world, there was concern that the contagion would spread out of control.

The Federal Reserve and US Treasury, along with their counterparts in other countries, stepped in to backstop customer deposits. This action was seen by many to not only be necessary, but a proactive approach to calming fears and reassuring citizens that the banking system was strong.

The government did not save equity or debt investors in these banks. This is exactly how capitalism should work. The risk-takers were wiped out for making a bad bet. The average citizen was protected and all is well in the world, right?

Not so fast.

There were a number of banks that did not require the government to save them and their depositors, but remain in a really bad situation. Take First Republic Bank (FRB) as an example. The stock price plummeted and customers withdrew billions of dollars as they watched Silicon Valley Bank fail. The largest banks in the country stepped in to contribute ~ $30 billion in deposits to FRB in an attempt to strengthen the prospects of survival.

Crisis averted for the time being. But we are right back where we started in recent days. The bank’s stock is down more than 90% year-to-date and it fell ~50% just yesterday after a disappointing report, which highlighted a 40% drop in customer deposits in Q1. Simply, First Republic Bank is not out of the woods and it is on the brink of collapse.

If First Republic Bank was to fail, it would be one of the five largest bank failures in US history. That would mean that three of the five largest bank failures in history have all happened in the last four months. Insane!

The potential collapse of First Republic Bank is important to pay attention to because it highlights the ongoing problem for financial institutions around the world. They are still holding hundreds of billions of dollars in debt that is underwater. The mark-to-market losses would render many of the organizations insolvent.

The only potential path out of this situation is for the government to step in and save these financial institutions. They can do it in a number of ways — they can try to manipulate the accounting rules as they have done in the past, they can print a significant amount of money, or they can let the banks fail while saving the depositors. I don’t think they will pursue the first strategy, so my expectation is for the government to print more money over the next 12 months.

We are not only facing a private sector bank crisis though. There are a number of central banks that are under immense pressure as well. Let’s use Argentina as the example — inflation is over 100% in the country in the last 12 months and the central bank just raised interest rates to 81%. Think about how crazy that is. Anyone holding pesos has lost 50% of their purchasing power in the last year. The definition of destroying a currency and your citizen’s savings.

Whether we are talking about central banks or the private banking sector, the pain is only just beginning it appears. Jason Karaian and Stacy Cowley wrote in the New York Times:

On Friday, Moody’s downgraded the ratings of 11 regional banks, citing “a deterioration in the operating environment and funding conditions.”

In calls with investors about their latest financial results last week, regional bank leaders tried to cast the crisis as a moment that had passed. The banks also distanced themselves from rivals still caught in the storm, like First Republic, which reported on Monday that it had lost $102 billion in customer deposits.

The leadership of the banks continue to say everything is fine. Moody’s is downgrading many of them. First Republic Bank is on the brink of failure. And it feels like the average citizen in America is asleep at the wheel. They believe the banking crisis has been thwarted. We have all moved on.

That is a dangerous situation. The banking crisis is still underway. It doesn’t mean that catastrophic failure is inevitable. In fact, I would argue that the banking sector will survive this test and thrive on the other side. The government and central bank are heavily incentivized to protect depositors and prevent a full-on bank run of the system.

They don’t have very many tools to accomplish that mission though. So turn on the money printer and watch it go BRRRR! Markets need liquidity. Everyone knows the Fed was going to create tighter financial conditions until something breaks. It looks like we are watching many of the largest banks around the world buckle under the pressure. The question is — has there been enough pain? Or will the Fed seek more before they waive the white flag?

Your guess is as good as mine. Hope you all have a great day. I’ll talk to everyone tomorrow.

-Pomp

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe

Note: Tomorrow you will receive the next installment of our book summaries, which is now called The Bookrat. Many of you reported the email went to spam last week, so please search “Bookrat” in your spam folder and move it to your inbox. You can also respond to the email and that will solve the problem in the future as well. Thank you.

To investors,

Social Capital’s Chamath Palihapitiya recently said on the All-In Podcast that “crypto is dead in America.” He was referring to the recent increase in regulatory scrutiny, including more enforcement actions from the SEC.

There is a lot of truth to what he is saying. It is hard to deny that regulatory pressure has drastically ramped up. It started with the collapse of Three Arrows Capital and Terra/Luna, continued with the unraveling of the alleged fraud of FTX, and hit a climax with the second and third largest bank failures in US history earlier this year. Whether you believe crypto is the culprit or not, the door has opened for regulators to apply more pressure to the industry and they are taking advantage of the opportunity.

Before we continue, it is important to call out the difference between bitcoin and the rest of the crypto industry. Bitcoin is the only digital asset that has been labeled a commodity by every US regulatory organization. They all agree that bitcoin does not meet the security standard and therefore is not subject to those rules and regulations. The rest of the crypto industry, from Ethereum down to the smallest asset, is still widely debated — are they securities? Are they commodities? Are they currencies? How should they be regulated? Who has jurisdiction? What is the proper framework for entrepreneurs who want to participate in the industry?

There are more questions than answers.

Palihapitiya has a good point that “the United States authorities have firmly pointed their guns at crypto.” The critics of the crypto industry believe this is a positive development. Their argument is that Gensler and the SEC should have acted long ago, because it is obvious that crypto assets are securities and industry players have been skirting the rules for more than half a decade.

The proponents of the crypto industry vehemently disagree. Some will argue that the introduction of decentralization means these assets don’t meet the securities standard, while others will argue that these new assets need entirely new regulatory frameworks. As an example, Coinbase announced last night that they are suing the SEC over the organization’s refusal to answer a rule-making petition that was filed last summer.

There is nuance to this debate that usually is lost though.

Most people will focus on the technical rules and who wins in court. They will look at the data, they will read through the various public filings, and they will scrutinize the SEC’s actions. This is the quantifiable approach to measuring impact of crypto regulation in the US.

However, it appears that Palihapitiya is referring to the qualitative impact, which is more important in my opinion. Regardless of whether the SEC ends up winning their various enforcement actions, or if there are new rules passed or not, the posture of the US government and their regulators has become abrasive. We have even seen US politicians suggest banning this new technology. The abrasive stance deters entrepreneurs from building their companies in the United States or serving customers with US citizenship.

We have seen a number of companies move off-shore in the last few years. Hundreds of founders have moved to places like Dubai, Singapore, or various islands with more friendly regulation to start their next business. And Coinbase has even alluded to the fact that they could move their business to a new jurisdiction if the lack of clarity continues in the US market.

This is probably what Palihapitiya means when he said “crypto is dead in America.” It is no longer clear that the US is the best place to start a company or project in this new industry. In fact, many people would argue that it is better to start those businesses elsewhere in the world.

The reason this is important is that the crypto industry is not going to die. If the US continues to be abrasive, the industry will shift to locations outside the country. I have long been a proponent of founders starting, building, scaling, and exiting their companies in America. The rule of law, access to capital, and dominant culture have been tailwinds for entrepreneurs. But the market is shifting under our feet and there are numerous data points that tell us people are changing their minds.

Americans have to remember that we live in a global world. Facebook only had ~ 15% of their users in the US when I worked at the company in 2014/2015. I am sure that number is much lower now. Bitcoin is similar — majority of mining hash rate is outside the US and there are hundreds of millions of people who participate in the crypto industry from international markets. In some ways, the global nature of these assets is what makes them attractive.

If that doesn’t convince you, understand that our country’s adversaries see the US’ abrasive stance as an opportunity. Bloomberg reported that China’s state banks have been opening their doors to crypto companies:

“Chinese banks have been directly reaching out to crypto businesses over the past few months, adding to signs that the city’s push to become a major digital asset center has backing from Beijing, even though trading of crypto has been banned on the mainland for well over a year.”

At the same time that the US is ramping up regulatory pressure and pushing crypto companies outside our borders, the Chinese are opening up their banking system to those same companies? That seems more than a coincidence.

Chamath Palihapitiya nailed it when he said “crypto is dead in America.” That does not mean it has to stay that way though. It would only take a few small decisions from our politicians and regulators to return to embracing new technology, which would provide the foundation for the US to re-take the leadership role on a global stage.

I remain optimistic about the United States’ position over the long run. It just may be a bumpy ride along the way.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Pomp

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe

READER’S NOTE: Many of you have asked me when you will receive more book summaries from the books I am reading each week. I am splitting the content into two separate emails. You will continue to receive my commentary on finance and economics here in The Pomp Letter. You will receive the book summaries once a week through a separate email we are launching today called The BookRat.

Separating the content into two dedicated emails is much clearer for readers. You are auto-subscribed to both emails if you are reading this note. If you only want finance and economics content, you can unsubscribe from The BookRat later today when you receive the first email. If you only want book summary content, you can unsubscribe from The Pomp Letter below. Hopefully this will help clear up the confusion and empower each of you to choose what content and information you receive in your inbox.

To investors,

SEC Chairman Gary Gensler testified in front of the House Financial Services Committee for four hours yesterday. His message was consistent — many crypto companies and projects are violating regulatory rules and need to come into compliance.

This is a position that Gensler and his team at the SEC has continued to repeat in various interviews, speeches, and materials on their website. Many of the Republicans on the Committee took issue with this position. To say the questions and testimony got heated at moments would be an understatement.

For example, Representative Patrick McHenry persistently asked Gary Gensler to explain whether Ethereum, the second largest digital asset, was a security or a commodity. Gensler would not directly answer. This could be because Gensler does not know how to categorize it, does not want to categorize it, or believes it is valuable to refrain from answering.

Either way, the fact that the Chairman of the SEC did not answer with “yes” or “no” highlights the frustration that many people in the industry have. The actual answer is almost less important than an agreement from regulators on a single answer. If the conclusion is “yes, Ethereum is a security,” then market participants understand how to proceed. If the conclusion is “no, Ethereum is not a security,” then market participants understand how to proceed. But the lack of clarity is tough for everyone.

Another interesting moment is when Rep Bryan Steil asked Gensler whether he owned any bitcoin or cryptocurrencies. Gensler said “no.” Steil went a step further and asked Gensler whether he has ever owned digital assets, including during the time he was teaching crypto courses at MIT. Gensler said no to this as well.

This answer highlights the challenge of regulating innovation. It is hard to understand something without using it. The idea that we have regulators who are actively making rules for something that they have never used seems confusing. Additionally, to have professors at universities teaching courses about technologies they have never used highlights the absurdity of academia.

One of the most explosive parts of the testimony was when Rep Tom Emmer pressed Gensler on the fact that China’s CCP is planning to open their banking apparatus to US-based crypto firms in an effort to capitalize on our country’s hostile posture towards the industry. Gensler continued to stick to his talking points that various crypto companies are operating outside the rules and should come into compliance.

Regardless of whether you agree with Gensler or not, this exchange highlights the fact that bitcoin and cryptocurrencies are going to thrive globally with no regard for US securities law. The United States has a choice to make — do we want this innovation to happen in the US or elsewhere? The rules we create and apply to the industry will determine that answer.

Lastly, Rep Warren Davidson revealed that he is putting forward legislation to remove the Chairman of the SEC and restructure the entire organization. The new structure would create the role of Executive Director who reported directly to the board. Davidson’s argument is that the current structure, along with Gensler’s body of work, has created more harm than good.

It remains to be seen whether there will be support for Davidson’s proposed legislation. A complete restructuring of an integral organization like the SEC would be difficult and controversial. But there have been much bigger, more complex things that have occurred so never say never.

I want to leave you with one more thought this morning — SEC Chairman Gary Gensler was grilled for four hours yesterday. Most of the viral video clips and various media coverage was focused on the questions coming from our public officials, rather than on specific answers from Gensler. In some way, that is a win for Gensler and the SEC. They didn’t necessarily make any mistakes during the testimony.

Gensler stuck to his view that the existing securities law covers these new technologies. He believes majority of the crypto companies and projects are violating regulations and they need to come into compliance. There are millions of people who disagree with him, but ultimately it may not matter — Gary Gensler and the SEC are the ruling body. They have the ability to create enforcement actions and impose their view of the world on the market.

Many people throughout the crypto market continue to call for “clarity.” I am quick to remind them that clarity simply means you will know what the rules are, but it does not mean you will get the rules that you want. That is an important distinction.

Hope everyone has a great day. I’ll talk to you tomorrow.

-Pomp

🚨Want A New Job? 🚨

My team and I have helped approximately 2,000 people get a new job in the bitcoin and crypto industry. A big part of our success has been a training program we run, which teaches people the fundamentals of the industry and technology. If you are interested in transitioning into this new sector, I recommend you check out the training program for our April cohort.

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe

To investors,

What the Fed gives, the Fed can take away. This has been the story for interest rates and asset prices for as long as fiat central banks have existed. Each new generation of investors have to learn this lesson the hard way and that is exactly what we have seen over the last 18 months.

The Fed’s suppression of interest rates to 0%, coupled with trillions of dollars in QE, led to one of the most epic asset price bull markets in history. You could blindfold yourself and randomly pick winners across stocks, bonds, real estate, commodities, and crypto. In fact, Barstool’s Dave Portnoy was even picking Scrabble letters out of a bag to pick winning stocks. Incredibly entertaining, but obviously peak insanity too.

But the Fed eventually ended the party. They waited until inflation hit approximately 8.5% before acting, but they moved with speed and a violence of action that has previously never been seen before with interest rate hikes. Within one year, the central bank jacked up interest rates from 0% to 5%, which created a cratering of assets that would make the biggest market bears smile with joy.

None of this is new though.

Warren Buffett famously said, “Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is a very low gravitational pull on asset prices.” If asset prices go up, every asset owner is getting wealthier. The incentive is for people to demand lower and lower interest rates from their central bank. Ludwig von Mises nailed it years ago by stating, “Public opinion always wants easy money, that is, low interest rates.”

Regardless of public opinion, professional investors know that interest rates are the name of the game. The old adage of “Don’t fight the Fed” has been popularized for a reason. Ray Dalio is famous for saying, “It all comes down to interest rates. As an investor, all you're doing is putting up a lump-sump payment for a future cash flow.” So when interest rates go up, there is pain in the economy.

Former President Bill Clinton once said, “You know what higher interest rates mean. To you it means a higher mortgage payment, a higher car payment, a higher credit card payment. To our economy, it means business people will not borrow as much money, invest as much money, create as many new jobs, create as much wealth, raise as many raises.” It is not every day that we can point to a politician as a macro expert, but he got that one right.

We can go back in time and see the best investors in the world calling out the issues that we are now facing. Back in 2004, real estate billionaire Sam Zell said “The single biggest issue that I'm very sensitive to is inflation. I'm very concerned that this extended period where the interest rates were quite low and stimulated a lot of activity could breed inflation and create a problem for us.” The problem that he foresaw did not necessarily happen to the severity he predicted then, but the same cause and effect is what landed us in the recent high-inflation, chaotic environment we have lived through over the last two years.

So this begs the question — where do we go from here?

Mark Zandi once said, “An overheating economy, characterized by accelerating inflation and rising interest rates, is another precondition for recession.” This basically describes what we have seen over the first quarter of 2023. It doesn’t guarantee that we will experience a recession, but it definitely increases the odds in my opinion.

Maybe we are just paying for our past sins. Maybe we are merely in the spin cycle of the economic washing machine. No one really knows. But I will leave you with two quotes that highlight one way of thinking about the long term economic cycles.

Michael Hudson said, “The underlying strategy of the Fed is to tell people, "Do you want your money to lose value in the bank, or do you want to put it in the stock market?" They're trying to push money into the stock market, into hedge funds, to temporarily bid up prices. Then, all of a sudden, the Fed can raise interest rates, let the stock market prices collapse and the people will lose even more in the stock market than they would have by the negative interest rates in the bank. So it's a pro-Wall Street financial engineering gimmick.”

David Stockman said, “I think everybody in this generation, and I'm the leading edge of the baby boom - I was born in 1946 - has benefitted from a 30-year explosion of debt, which created temporary but unsustainable economic prosperity and a financialization of the system through lower, and lower, and lower interest rates that has created massive rewards to speculation but not real investments so I benefitted from it. Almost everyone who has been in the market has benefitted but they didn't earn it.”

Interest rates are the name of the game. Will the Fed continue hiking or will they wave the white flag? No one knows for sure. Whoever guesses correctly in the coming months, both in terms of direction and magnitude, will have a competitive advantage when allocating capital.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Pomp

Reader note: I write this letter every morning on economics, financial markets, bitcoin, and investing. The letter is sent for free once a week and to paid subscribers four times a week. If you would like to receive this letter every day, you can subscribe here for $100 per year. Hope you join us.

🚨Want A New Job? 🚨

My team and I have helped approximately 2,000 people get a new job in the bitcoin and crypto industry. A big part of our success has been a training program we run, which teaches people the fundamentals of the industry and technology. If you are interested in transitioning into this new sector, I recommend you check out the training program for our April cohort.

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe

To investors,

We have entered the Era of Digital Catastrophes. The concept of a Digital Catastrophe is going to be important to understand over the coming years. I define it as a large, negative event that occurs in the analog world, which is accelerated by online action and conversation.

The first big example we have of this phenomenon is the fall of Silicon Valley Bank, the second largest bank failure in US history. The bank went from operational to insolvent in less than 48 hours. As soon as the internet got spooked and believed there was a potential problem at the bank, the Digital Catastrophe mechanism took over.

There was more than $42 billion withdrawn from the bank in a single day(!) and the nationalization of the bank was complete by the next morning. The size of the collapse, and the speed at which it happened, was breathtaking.

This is the new normal though.

Digital Catastrophes have two main components to them — (a) information and (b) action. As we saw with Silicon Valley Bank, millions of people were aware of the banks issues within hours, regardless of whether someone was a customer or not. But the customers didn’t need to leave their office, get in their car, drive to the local branch, and wait in line to withdraw their money.

They could simply navigate to a new tab in their browser, log in to their account, press a few buttons, and move their money.

It would have been physically impossible for Silicon Valley Bank to receive $42 billion in withdraw requests in 24 hours without the internet. People wouldn’t have even known that a bank run was underway, let alone had the time to get to the bank to make the request.

Silicon Valley Bank was the victim of a Digital Catastrophe.

The internet was weaponized by millions of people to create the second largest bank failure in the United States. Speed. Scale. Catastrophe.

My guess is that we will see many more of these in the coming years. The ability for information to move at the speed of light has already led to a lack of trust in institutions, an increase in independent thinking, and a faster velocity of content creation and consumption. Couple the speed of information with dissipating friction when it comes to taking action, and you can clearly see that people will use these newfound capabilities for both good and bad.

One way to think of the Silicon Valley Bank Digital Catastrophe is to see the withdrawals as a DDoS attack. Define as “a distributed denial-of-service (DDoS) attack occurs when multiple systems flood the bandwidth or resources of a targeted system, usually one or more web servers.” This is essentially what customers did to the bank — they withdrew so much money, and so quickly, that the bank ended up folding. Service denied.

To take this analysis a step further, there have been a number of popular tweets suggesting political parties could weaponize the fragility of the banking system to express their views.

We shouldn’t condone this type of behavior, but we must also understand that we won’t be able to stop it. Digital Catastrophes are going to be a staple of society moving forward. We have seen throughout history that people will use tools of coordination to help their fellow citizen, while also using the very same tools to destroy the things they disagree with.

In this political example, citizens could easily be stopped from marching, protesting, or even gathering. The analog world has a response to various analog tactics. But what is the response if a large political group decides to log-in to their computer and withdraw their money from a single bank? This is no different than when a large group on the internet decided to target a single stock as part of the meme stock hysteria.

I don’t have the answers here. Frankly, it is hard to wrap my head around all the ramifications of Digital Catastrophes, but it feels obvious that this is where the world is headed. I would love to hear from each of you what you’re thinking on this.

What other Digital Catastrophes have occurred? How do you think governments or societies will respond to these in the future? Let me know in the comments below.

Hope you all have a great day. I’ll talk to you tomorrow.

-Pomp

Reader note: I write this letter every morning as a way to organize my thoughts and solicit feedback from smart individuals like yourself. The letter is sent for free once a week and to paid subscribers four times a week. If you would like to receive this letter every day, you can subscribe here for $100 per year. Hope you join us.

🚨Want A New Job? 🚨

My team and I have helped almost 2,000 people get a new job in the bitcoin and crypto industry. A big part of our success has been a training program we run, which teaches people the fundamentals of the industry and technology. If you are interested in transitioning into this new sector, I recommend you check out the training program for our April cohort.

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe

To investors,

There is a massive financial crisis underway at the moment. Alarm sirens are going off almost every day. As a friend told me yesterday, “bodies keep floating to the surface.” This is really, really not good.

The shut down of Silvergate Bank, along with the takeovers of Silicon Valley Bank and Signature Bank, have been well documented. Two days ago we got word that Credit Suisse was under immense stress and the Swiss National Bank agreed to step in with tens of billions of dollars in liquidity. Yesterday it was announced that First Republic Bank was going to receive $30 billion in deposits from 11 other banks.

$30,000,0000,000 doesn’t get handed to you by your competitors if there aren’t some major issues at hand.

But all these bank issues are just the appetizer in my opinion. The main course started last night when we received confirmation that the Federal Reserve increased their balance sheet last week by nearly $300 billion.

This increase in the balance sheet comes after a year of quantitative tightening, which contracted the Fed’s assets. But now we have a pivot in the Fed’s balance sheet strategy.

One of the biggest problems with this pivot is that the Fed has not yet won their battle against inflation. In fact, the Fed increased interest rates by 4.5% and dumped about $1 trillion off their balance sheet, but they never got inflation below 6%.

MAJOR. PROBLEM.

The Fed is increasing their balance sheet because they have to lend money to the banks. Without this new injection of liquidity, many of the banks appear to be insolvent due to their unrealized losses on long-duration, low-yield debt.

Why do the banks have unrealized losses on that debt?

Because the Fed jacked up interest rates at the fastest pace in history and the banks didn’t properly hedge their positions against this scenario. On one hand it is understandable why there was no hedging — the Fed told everyone that interest rates were going to be 0.5% or less right now. On the other hand, when has it ever been a good idea to believe everything a central bank tells you?

It may be worse than that though — Balaji Srinivasan describes the gravity of the situation with the following:

The record shows that the entire US banking system — the Fed, the banks, and the bank regulators — knew by 2022 that they had lost the money of many millions of depositors.

Banks tried hiding the losses via hold-to-maturity accounting tricks (should be called hide-to-maturity). And regulators allowed them to bury the fact of their literal insolvency in footnotes. But this just deferred the judgment for a bit. In a sense, the entire bill for many years of printing was coming due all at once. Hundreds of billions of dollars in losses for the central bank, the commercial banks — all of it had to be imposed on someone.

One way to think about what has happened here is to compare Sam Bankman-Fried’s FTX debacle to the actions of US-regulated banks. FTX reportedly took in customer deposits and invested them in high-risk assets, which ended up leading to massive financial loss of the depositors’ funds. These loses, and the overall failed scheme, was exposed when depositors conducted a run-on-the-bank last year.

US-regulated banks have done something that looks eerily similar. They took customer deposits and invested them in the wrong assets. Now the big difference is that the banks were not buying crypto assets, but rather buying US Treasuries and other debt instruments, which have been historically seen as low-risk. Regardless of the risk profile though, the banks now have immense unrealized losses on their balance sheets and when the bank runs started at some of the banks last week, these losses were exposed for everyone to clearly see.

It is absolutely insane to think that FTX and these regulated banks had a comparable mechanism at play. Thankfully, the regulated banks were able to preserve 100% of depositors’ money after the government bailed them out, but the equity and bond holders of both FTX and Silicon Valley / Signature Banks ended up in the same situation. That is exactly how capitalism is supposed to work.

This brings us to the current crisis.

The Federal Reserve and other central banks around the world are in a lose-lose scenario. If they increase their balance sheet and stop hiking rates, they will be able to quell the banking crisis. The trade-off will be a loose monetary policy in a high-inflation environment, which will almost certainly lead to significantly higher inflation in the future.

If the Fed chooses to ignore the current banking issues and continue hiking rates, which would be in-line with what the economic data is telling them to do, then we will test whether the US government, who is currently facing a debt limit crisis, can actually come up with enough money to backstop every bank’s deposits.

That is not an experiment I want to see us run.

This leads me to what I believe the base case for the US economy and dollar will be moving forward. I do not think the Federal Reserve, FDIC, OCC, and other organizations will allow a banking crisis to occur on their watch. That is a good thing. But in order to prevent the banking crisis, we will likely see a return of loose monetary policy and inflation will continue to resist the Fed’s demands.

It is not only unclear how high inflation can go, but it is also impossible to predict how long the high inflation environment could last for. The United States is responsible for the global reserve currency. If our monetary policy decisions create high inflation, we should expect people to flee the dollar and look for alternatives.

The traditional finance people will point to gold or foreign currencies as a potential solution. I disagree. As I have been saying for years now, bitcoin is going to be the big winner in my opinion. The decentralized, digital currency was built out of the ashes of the last financial crisis and I believe it will achieve global adoption through the current one.

I know that many people will question whether we are actually in a financial crisis right now. All that I ask is for you to do your own research. Look at the data. Identify the strong and weak points of the economy. Take a look at bank balance sheets, government debt, and the current inflation levels that are accelerating, rather than decelerating month-over-month.

This situation is very troublesome. Some of you will also argue that bitcoin is not the solution. That is fine. In fact, it is good to be skeptical. Bitcoin needs critics. But if you are going to take that position, make sure you have done your homework first. Read the bitcoin white paper. Ensure you understand the pros and cons of a programmatic monetary policy, especially in light of undisciplined fiat monetary policy.

It is going to be essential that you pay attention in the coming weeks. You need to be informed. As Vladimir Lenin said, “There are decades where nothing happens; and there are weeks where decades happen.” Given that two of the three largest bank failures in US history happened last week, these may be a few weeks where decades happen.

Hope you all have a great weekend. I’ll talk to everyone on Monday.

-Pomp

Reader note: I write this letter every morning as a way to organize my thoughts and solicit feedback from smart individuals like yourself. The letter is sent for free once a week and to paid subscribers four times a week. If you would like to receive this letter every day, you can subscribe here for $100 per year. Hope you join us.

🚨Want A New Job? 🚨

My team and I have helped almost 2,000 people get a new job in the bitcoin and crypto industry. A big part of our success has been a training program we run, which teaches people the fundamentals of the industry and technology. If you are interested in transitioning into this new sector, I recommend you check out the training program for our April cohort.

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe

To investors,

The past week has seen three banks shut down, including the second and third largest bank failures in United States history. This appears to be created by a bad economic situation on the surface, but there is a controversy brewing behind the curtain that I think is worth taking a look at.

As most of you know, I have the good fortune of speaking with many of the top venture capitalists and hedge fund managers on a weekly basis. Some of those interactions happen because of my investing activities, but a lot of them are a product of various topics I write about in this letter. I’ve found that it is worth exploring something if numerous people reach out about it, so that is what we are going to do today.

I want to start with Signature Bank, which was “shut down” on Sunday afternoon by the New York State Department of Financial Services. The mainstream narrative is that the bank was insolvent due to a bank run. This all happened after the $100+ billion deposit bank took too much risk through service of crypto clients. These talking points were repeated over and over again from various news outlets. For example, The New York Times headline reads “Risky Bet on Crypto and a Run on Deposits Tank Signature Bank.”

Sounds straight forward, right? Not so fast.

More information has come out and it appears that the bank may have been a target of political games. A lot of this information is being publicized by Barney Frank, the former Congressman who is famous for his banking regulation work that culminated in the Dodd-Frank Act after the 2008 Financial Crisis. Frank was a board member at Signature Bank and it seems like he has a very different perspective of what happened.

First, to understand the disagreement, it helps to find some common ground between Frank’s perspective and the NYDFS. Frank is adamant that Signature Bank was not insolvent and it appears that the NYDFS has avoided claiming that the bank was insolvent too. In an interview with Jen Wieczner of NY Mag, Barney Frank said the following when asked about the closing of the bank:

I’m very disappointed to learn, apparently, the Department of Financial Services in New York, which did the closing, hasn’t said we were insolvent! They said, well, they had a problem, because they couldn’t get sufficient data. I mean, I was disappointed when they closed it, and sort of vindicated — they have not argued that we were insolvent. And I think it’s very clear if we had the benefit of those two announcements, we’d still be an ongoing bank.

Now, the question is, why did they react so harshly to what they said was our inability to give them the sufficient data? I believe it was probably to send the message that even though we were doing crypto stuff responsibly, they don’t want banks doing crypto. They denied that in their statement, but I don’t fully believe that. I think that they overreacted to what they saw was our problem with data, which may well have existed, but the data was improving. I think sloppy data is not a reason to close a bank that you have not decided was insolvent, and they’ve never said we were insolvent.

Think about what Frank is saying here — the New York regulator helped to nationalize a federally regulated bank that was not insolvent, simply because they didn’t like who some of the bank’s customers were?? If that is true, this is a national scandal that would require a federal investigation into who made the decision, what their logic was, and whether it was legal or not.

Wieczner didn’t stop there in her questioning of Frank though. She explicitly asked him “I mean, is that even legal? Can the government just seize any bank, even if it’s not insolvent?” And Frank’s answer did not disappoint:

Well, that’s worrisome. Let me say this. I don’t want to comment on that personally, because as a director, I could be conceivably involved in any kind of lawsuit that anybody brought, but I think that is a very good question you raise. And particularly, somebody ought to look and see, I wonder, are we the first bank to be closed, totally, without being insolvent? And if so, why? I think the DFS, the state of New York people should have to answer that.

That’s why I speculate that using us as a poster child to say “stay away from crypto” was the reason.

I was speechless when I read this. We have a former Congressman, who is one of the harshest bank regulation experts in the world, who is questioning the legality of what the New York regulators just did. This gives me COVID lab leak vibes…sounds like a conspiracy theory at first, but the more you think independently, the more you start to believe there could be a much, much bigger story here.

This brings me to the next data point in our dive down the Signature Bank rabbit hole. Nic Carter eloquently pointed out that the “conspiracy theory” would have a lot more substance if the government forced the new owner of Signature Bank to shut down the bank’s crypto activity.

Within hours, we received confirmation that this is exactly what is happening. David French wrote for Reuters that his sources confirmed “any buyer of Signature must agree to give up all the crypto business at the bank.”

I want to be careful not to make too many assumptions here, but this looks like the United States government nationalized a regulated financial institution with more than $100 billion in deposits in an effort to impose a political agenda on the market. Honestly, this is hard to fathom. Not something that you expect to happen in a country that claims to be the capital of democracy, capitalism, and rule of law.

Ok, let’s keep going further down this rabbit hole.

With the context of potentially questionable decisions around Signature Bank, we must now re-scrutinize the actions related to Silvergate Bank and Silicon Valley Bank. The consensus in these private conversations revolve around two big questions — why was Silvergate Bank pressured into fully paying off the $4.3 billion loan from the Federal Home Loan Bank of San Francisco and why was a potential acquisition of Silicon Valley Bank blocked by regulators?

On the first question, many are wondering why Silvergate Bank paid back this multi-billion dollar advance early, which caused the run on the bank and ultimate liquidation of the company. Since there is not a clear explanation for why the bank would pay back the loan early, it has left people to speculate on a potential political pressure campaign that was done “off the record.” No one knows for sure. It will likely be impossible to get an actual answer from Silvergate or their executives. And the Federal Home Loan Bank spokesperson continues to reiterate that they did not request the early repayment. Your guess is as good as mine on this one.

On the second question of a Silicon Valley Bank acquisition being blocked, it is unclear why the regulators would not want a larger financial organization to step in to support a struggling institution. This would be better for equity and bond holders, while also probably better for depositors as well. Instead, the bank was nationalized in the short-term through placement in receivership, so now the government run process will rule the day.

To be clear, I don’t have answers for these questions. I don’t think anyone does at the moment. What appeared initially to be a few banks succumbing to financial stress, now looks like a potentially explosive scandal. Hopefully that is not the case, but if we have learned anything over the last three years — we must think independently and we must think critically during these moments.

Jake Chervinsky, the Chief Policy Officer at the Blockchain Association, confirmed this morning that the organization has “sent FOIA requests to the Fed, FDIC, and OCC, demanding information about the unlawful debanking of crypto companies.” My guess is that these types of requests will help us learn a lot more in the coming weeks and months. Maybe there is a smoking gun, maybe not. But it feels important that the American public gets answers either way.

Hope you all have a great day. I’ll talk to you tomorrow.

-Pomp

Reader note: I write this letter every morning as a way to organize my thoughts and solicit feedback from smart individuals like yourself. The letter is sent for free once a week and to paid subscribers four times a week. If you would like to receive this letter every day, you can subscribe here for $100 per year. Hope you join us.

Want A New Job?

My team and I have helped almost 2,000 people get a new job in the bitcoin and crypto industry. A big part of our success has been a training program we run, which teaches people the fundamentals of the industry and technology. If you are interested in transitioning into this new sector, I recommend you check out the training program for our April cohort.

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe

To investors,

Silicon Valley Bank’s failure on Friday afternoon left the business and finance industries scrambling in uncertainty. Would depositors get their money back? What would happen to the equity and bond holders? How would so many startups meet their payroll requirements in the coming week?

I know of multiple companies who had tens or hundreds of millions of dollars stuck in the bank. They spent the weekend planning what they would do next. The options ranged from mass layoffs to taking high-interest loans from neobanks at 1% per week.

Thankfully, all of this work was for nothing.

The FDIC, Treasury, and the Fed issued a joint statement Sunday afternoon stating that they would backstop every single depositor at Silicon Valley Bank, regardless of the deposit amount. This move has been celebrated by majority of people, and it likely will help mitigate a wide-spread bank run, but there is a lot to unpack in what they just did.

First, the rescue package for Silicon Valley Bank is only for depositors. The equity and bond holders are being wiped out, which is exactly what should happen. If you take risk in the market and end up on the wrong side of a trade, it is important that you lose because it forces everyone to only take risks that they believe are worth taking in the future. If there were no losses in the market, everyone would just take as much risk as possible and then beg the government to save them when it went wrong.

Second, the government also shut down Signature Bank on Sunday and put it in receivership. It is unclear why they did this, but the joint statement ensured that all depositors of that bank would be treated the same way. All equity and bond holders would also lose in the Signature Bank situation as well.

Third, every depositor will have access to their funds starting this morning, Monday, so the risks of a bank run have been drastically reduced. This doesn’t stop customers from going to their regional banks and withdrawing all of their funds, but it will hopefully disincentivize them from doing so.

An important part of this component is that the money used to cover depositors will not come from taxpayers. The money is instead coming from a fund that banks have been paying into for the last few years for this type of emergency situation. You can think of this as a fund that was created with bank revenue or profits, but at least it does not come directly from taxpayers.

Fourth, the Fed and others are providing a massive, multi-billion dollar bailout to the entire banking industry. They won’t call it a bailout, but there is no other name for it. The government is going to allow banks to post collateral, mainly Treasuries, as collateral to borrow against, but they will be able to use the par value of the asset rather than the market value. That is insane.

This is the equivalent of you buying a house for $100, the house value falls to $70, and you go to the bank to take out a mortgage and demand they honor the original $100 value. They would laugh you out of the room. But now the government is going to let the banks do it. The logic is the bank wants to post Treasuries, which have a maturity date, and the government could hold the assets to maturity. There is no guarantee of the future and this decision introduces a significant amount of risk into the system.

We fail to ever learn our lesson.

There are a number of other details in the statement and the government’s plan, but this is the high-level details. Frankly, it is what I think matters most. The ramifications of this are worth noting as well. We have effectively proven that the $250,000 FDIC limit is just a farce. The government will step in to protect depositors of any amount. I wouldn’t bet my life savings on them doing it again in the future, but the precedent has been set now where the FDIC limit should just be raised to $5-10 million.

We must also call out that the Federal Reserve created this scenario. They held interest rates at 0% for too long and told everyone they would not aggressively raise rates by having forward guidance suggest less than 0.5% interest rates months and years out. Of course, the situation changed and the Fed increased interest rates by 4.5% and it completely screwed every bank that listened to what the Fed had originally told them.

This created a $200+ billion hole of unrealized losses on bank balance sheets. Then we get a little bank run and now we have a crisis on our hands. The belief is that the government’s plan should mitigate the bank runs from spreading, but multiple reports this morning suggest that people are lined up outside regional banks to get their money anyways.

The portion of the population that believes everything just changed is not exclusive to bank depositors. Investors across Wall Street are now predicting that the Fed will stop hiking interest rates beginning with the March meeting. If that is true, the banking system teetering on failure will have put a halt to the most aggressive interest rate hikes in history.

But there is a thread here that is worth following.

The Fed has been hiking interest rates to get inflation under control. Although they have raised rates by 4.5%, inflation has been persistently sticky. We still have CPI showing a 6.4% increase over the last 12 months and there was a 0.5% acceleration in inflation between January and February of this year. So if the Fed was to stop hiking interest rates, there is a strong argument that inflation could continue to rise again.

Add in the inflationary pressures of a multi-billion dollar bailout program for the banks and you can start to see a path towards higher inflation and a nearly guaranteed avoidance of returning to the Fed’s 2% inflation target any time soon.

Let’s talk solutions now.

First, we could move away from the fractional reserve system. I have invested in a company called Custodia, which was founded by Caitlin Long, that is trying to create a regulated financial institution that promises a very radical idea — they will take your deposits and simply hold them. They won’t gamble with your money on the back end and they won’t participate in the fractional reserve system. The Fed and other organizations have been denying various applications and they won’t let Custodia in the club. It begs the question “why?” I’ll let you pontificate on that answer for yourself.

Another solution is bitcoin. The decentralized, digital currency was created out of the ashes of the last banking crisis. It has a programmatic monetary policy and allows you to become your own bank through self-custody. There are no bitcoin holders begging the government for bailouts and you never have to cross your fingers that you can get your money out when the banks open Monday morning. If you want to learn more about bitcoin, I suggest starting by reading the Bitcoin White Paper here.

The current financial crisis is still unfolding. People are lined up outside banks right now. Bank stocks are down significantly, including regional banks which are down double-digits in pre-market trading. The overall sentiment on Twitter is a “sigh of relief,” but I don’t think we are out of the woods yet. It is imperative that you keep paying attention. Start informing yourself of the various risks you are undertaking in your deposit institution, your investment portfolio, and your overall financial life.

Self-reliance is a key theme of the 21st century. I didn’t know any of this stuff a few years ago, but I took the time to learn it. You can do the same. And it may be essential to know in the future.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Pomp

Want A New Job?

My team and I have helped almost 2,000 people get a new job in the bitcoin and crypto industry. A big part of our success has been a training program we run, which teaches people the fundamentals of the industry and technology. If you are interested in transitioning into this new sector, I recommend you check out the training program for our April cohort.

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe

To investors,

Silvergate Bank announced they would liquidate earlier this week. Now Silicon Valley Bank has come under immense pressure as a bank run commenced yesterday. There is a lot to unpack in this situation, so let’s dig in.

Silicon Valley Bank is the leading bank for Silicon Valley tech companies. Great marketing in their name. Their customer base is dominated by businesses, not retail. And the bank is notorious for extending lines of credit to companies and venture capital firms as well, which many banks are more shy about participating in.

The main issue at play is a liquidity issue. Silicon Valley Bank is the perfect example of what happens when central banks intervene in markets and distort the free market forces. The financial organization had approximately $62 billion in deposits at the end of 2019 and that grew to almost $190 billion by the end of 2021. That sounds great, right?

Yes, of course. The bank was becoming more popular and they were collecting more assets. But banks aren’t in the business of merely collecting more deposits. They are in the business of making money. This meant that Silicon Valley Bank could do two things — they could lend these new deposits out to companies and individuals to earn a yield, or they could buy financial assets to generate a yield.

Given how difficult it would be to find borrowers for $130 billion in 2 years, Silicon Valley Bank ended up putting majority of these new deposits into financial assets. As Jamie Quint pointed out, the $80 billion or so that SVB invested was heavily concentrated in mortgage-backed securities. But not just any type of MBS — about 97% of these were 10-year maturity MBS that SVB was determined to hold till maturity.

In layman terms, the bank took lots of money and bought long-duration assets. Why were they doing this? Because at the time, US Treasuries were providing 0-0.25% yield and the bank was seeking something higher. The MBS products that SVB was purchasing had a yield above 1.5%, which is obviously more attractive if your business is to make money for shareholders.

There is only one problem though — the money that SVB was using to buy these long-duration assets was not their money to keep forever. This money was deposits from customers. And customers could ask for their money back at any time. Normally, this is not a big deal. A few customers ask to withdraw and the bank can easily process that from a day-to-day basis. But in a fractional reserve banking system, the problem arises when a lot of customers all want their money back at the same time.

That would never happen though, right? Customers wouldn’t ask for tens of billions of dollars back all at once, right? Well, never say never.

The last 36 hours have been a whirlwind for Silicon Valley Bank. Venture capitalists and technology companies are withdrawing assets at a frenetic pace. This is putting immense pressure on SVB and forcing the bank to make decisions that they would otherwise avoid. Before we get to those decisions, let’s look at why so many people are withdrawing.

Silicon Valley Bank and many other financial organizations are all holding these long-duration bonds with low yields because of the investment decisions they made in a zero interest rate environment. As these assets have traded down in value because the Fed is increasing interest rates aggressively over the last 12 months, the banks are technically underwater on their investments.

Joseph Wang tweeted “a graph from the FDIC's recent quarterly report showing that banks have a few hundred billion in unrealized losses on securities.”

Not a good situation. But Silicon Valley Bank recently had to crystalize some of these losses in order to reduce risk and put the bank in a better financial position. Samir Kaji pointed out that SVB’s sale of $21 billion in medium-duration securities created a $1.8 billion loss for the organization.

This wouldn’t be a huge deal normally, but we are living through uncertain times. Add in the fact that Silvergate Bank announced their intention to wind down operations and liquidate assets due to a duration mismatch in their portfolio and it is easy to see why SVB customers began to get a little uneasy. But SVB then made a second unintended mistake — they announced a large capital raise this week.

The bank publicly stated that they were taking on $500 million from General Atlantic and would simultaneously conduct a $2.25 billion equity and debt offering to raise additional capital. Sounds fine, right? Ehhhh.

Investors and customers just saw a financial organization with unrealized losses measured in the billions have to crystal a multi-billion dollar loss, which happened right after a similar business had to wind down for the same reason, and now that financial organization is trying to raise approximately $3 billion to help solidify their financial position. You can’t yell FIRE! in a movie theater, but you sure as hell can withdraw your money from the bank in an abundance of caution.

And that is exactly what began to happen yesterday. Founders and venture investors started to aggressively withdraw funds, which puts additional pressure on SVB to sell their underwater securities and crystalize losses in order to honor those withdrawal requests. It is a reinforcing mechanism that has each withdrawal putting the bank in a worse financial position, which leads to more people wanting to withdraw, which adds more stress to the finances of the organization.

So what is the current state of SVB? The stock is down almost 70% in pre-market trading. There has been a complete destruction of market cap in the last 36 hours. The stock is now halted and CNBC is reporting that the bank has hired advisors to help them sell the business after they failed to raise enough capital to shore up their financial position.

This is one of the historic downfalls of a regulated bank in the United States. Thankfully, it appears that depositors will be unaffected and only equity shareholders will deal with repercussions of the situation. The 16th largest bank in the country will have a new owner in the coming days or weeks — all of this because of a nearly impossible economic environment to navigate.

It is hard to watch this happen. Silicon Valley Bank has been an incredible partner to Silicon Valley and the technology industry for decades. There are very smart, hard-working, genuine people who work there. They have always done the right thing in my experience, including going above-and-beyond the normal course of business to help their customers. The tech industry is better off with a strong Silicon Valley Bank, but this week is a rough one for the legendary institution.

To be clear, this situation with Silicon Valley Bank is not exclusive to them. Every bank in the United States is in a similar situation. If there is an accelerated withdrawal tempo, these banks will come under immense stress. They are all holding long-duration assets that were bought in a zero interest rate environment and now those assets are under water.

You could even go as far as to say that the Federal Reserve, and their constant intervention in the market, has created this situation. They artificially held interest rates at 0% and banks were forced to search for yield by buying longer duration assets. Then when the Fed reversed course and increased interest rates to over 4%, these banks are left holding the bag.

As I have continued to reiterate in my letters to each of you over the last few months, it is impossible for banks, companies, and individuals to plan their life when there is constant central bank intervention. It may sound like I am exaggerating when I say that the central bank’s decision has put every single bank and financial institution in a high-risk position, but I’m not joking. The distortion of free markets changes the incentives and forces companies to make bad decisions. It ultimately hurts individuals and organizations in the long run.

This story is not over yet though. There is immense issues in the financial system lying under the tip of the iceberg. As Nick Gerli points out, the contraction in money supply “has only happened 4 previous times in last 150 years. Each time a Depression with double-digit unemployment rates followed.”

Keep paying attention to what is happening. The Fed will likely continue to raise interest rates in the coming months, so that will add more complexity and chaos to the market. When you whip people from a low interest rate environment to a high interest rate environment, it is impossible for things to break. No one thought the things to break first would be US-based, regulated banks though.

Stay safe out there. Keep your head on a swivel. Hope you all have a great weekend. I’ll talk to everyone on Monday.

-Pomp

Want A New Job?

My team and I have helped almost 2,000 people get a new job in the bitcoin and crypto industry. A big part of our success has been a training program we run, which teaches people the fundamentals of the industry and technology. If you are interested in transitioning into this new sector, I recommend you check out the training program for our April cohort.

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe