This week has been turbulent.
Without a doubt, the biggest news of the week was the banking crisis in the US.
It was all over the media, and investors kept their focus on the Federal Reserve’s next move.
The lender of the last resort (which the Fed essentially is) couldn’t let the banking system collapse following the Silicon Valley Bank’s failure and stepped in with a stimulus package.
It released special funds that the rest of the banking industry could use so the surviving banks could keep their liquidity intact and not follow the downward paths of Silicon Valley Bank (SVB) and Signature Bank.
It increased investor confidence in the system…
Indeed, the Fed had to fix what it had broken in the first place.
You see, it’s not a coincidence that one of the most rapid rises in interest rates in modern history led to a banking crisis.
The whole business model of a modern bank is to earn the interest spread between its cost of borrowing (what it pays its depositors) and the price of its own loans (what it lends to others).
But when interest rates change faster than banks can adapt to the changes, the system can break.
SVB signaled that it required funding to be able to pay off its depositors, and that signal scared most of its customers. They rushed to withdraw their assets and caused a classic bank run. When too many clients request funds at the same time, a bank can become insolvent.
Some can blame poor portfolio composition, lack of interest rate hedges, or SVB’s focus on the tech sector, which is going through a difficult period now. But at the end of the day, the bank crashed… and then another one, Signature Bank.
The Fed stepped in and released special funding for the banking sector to avoid the domino effect.
It goes against the Fed’s tightening policy. Instead of making money less available, it is topping up the economy with fresh liquidity to keep it functional. Over a week, banks borrowed about $300 billion from the facility.
Hopefully, this decision won’t turn into a wave of quantitative easing or QE. Otherwise, the Fed will never bring inflation down to its target of 2% per year.
And inflation is still running high. Last month, prices in the US increased by 6% year-over-year. The number was in line with market expectations.
That was good news, and now the markets are trying to understand what the Fed’s next interest rate decision will be. The next Fed meeting will take place on March 21st.
The market is expecting a 25-basis-point (or a 0.25-percentage-point) increase as of writing.
Meanwhile, we are keeping an eye on the most important megatrends that continue unfolding despite the short-term market volatility in the banking sector.
And we noticed that Tesla made some major news recently…
Tesla Crashes the Rare Earth Sector
Or at least it tried to…
The big announcement from the carmaker was a $10 trillion plan for 240 terawatt hours (TWH) of battery storage capacity and 30 TWH in clean energy generation.
These initiatives will help transform the global power system into a clean-energy network. A great cause, no doubt, but it will take a lot of critical metals to get there. Lithium, nickel, copper, and others… like rare earth elements (or REEs).
But at the same time, Elon Musk said that Tesla would steer away from using rare earth elements in its cars.
This announcement was a shock, as REEs are used in electric vehicles (EVs) extensively.
That news led to a massive drop in REE miners’ share prices.
But that was an overreaction.
IDTechEx research firm estimated that Tesla is responsible for about 2.5% of the total REE demand globally.
And, despite what Mr. Musk says, the car manufacturer won’t likely be able to switch away from REEs completely.
IDTechEx projected 8.6% annual demand growth for REEs through 2035. At the same time, REE supply is expected to grow by 5.4% per year, leading to an inevitable deficit.
Whether Tesla stops using REEs in its cars or not, this market will likely keep growing. And the EV megatrend will continue.
Thank you for your loyal readership,
The Financial Star team