E120: Banking crisis and the great VC reset

Following the failures/backstops of Silvergate, SVB, Signature, First Republic, and Credit Suisse in March 2023, there will be additional significant banking-sector problems (i.e., more “shoes to drop”) beyond those already identified, rather than the crisis ending with those five institutions.

“Moreover, do any of us believe that this is over, or do we believe there are more shoes to drop? If we believe that there are more shoes to drop, we may not know exactly what they are, but. But I think all of us probably believe that we're not at the end of this.” View on YouTube

The Fed’s 2023 emergency lending facility (accepting underwater securities at par for one‑year loans) will not actually resolve the underlying banking-system problems; instead, by around March 15, 2024, there will be a renewed banking/financial problem when those one‑year loans come due unless interest rates have been cut massively to reflate bank asset values.

“As far as I can tell, all we've done is we've kicked the can down the road for a year. But I do think it's important for people to realise this doesn't solve the problem. It just means that mark your calendar for a year from now. We have a problem on March 15th, 2024, because all those folks that took money. What do we do?” View on YouTube

Over time, in the US and likely globally, central banks will effectively absorb and directly backstop a very large share of the banking system’s balance sheets, causing the system to function de facto as if there were one giant central bank acting as the primary bank for the economy.

“at the end of the day, the central bank, it appears in the United States and probably globally, it's going to be one big bank, right? They're basically going to take on the whole balance sheet themselves.” View on YouTube

By roughly 2033, the United States will implement significantly higher tax rates on corporations and high‑net‑worth individuals as a primary policy response to fiscal pressures from debt and entitlement/pension obligations.

“the only stopgap, I'll just say one thing, the only stopgap in the next decade is going to be significantly higher tax rates in the United States. I don't see how you're going to fulfill the tension gap that's underway right now with respect to where productivity is going and where capital markets are going, and where the demands are on the system, from people requiring additional capital to come out to them without taxing assets away from the asset holders. So this would be corporations and high net worth people.” View on YouTube

Venture capital funds raised and deployed in the years immediately following this March 2023 episode (i.e., vintages 2023 onward) will, on average, produce better investment performance than 2021-vintage VC funds.

“my guess is that the new vintages of VC are going to be better than, you know, call it 2021 for sure.” View on YouTube

The Russia–Ukraine war will end because the United States will stop funding Ukraine; specifically, U.S. political and public support for sending tens of billions of dollars per year to Ukraine will collapse such that this level of funding will not continue into years 2–3 of the war (i.e., it will substantially decline or cease by roughly 2024–2025), leading to an end of the conflict.

“The war is going to end there because we're not funding this. And American the American public is not going to want to see tens of billions of dollars go into Ukraine and to to fund this war in year 2 or 3.” View on YouTube