The Crackup of Today's "Everything Bubble".

• Author: Bessent, Scott

A decade-plus of zero/negative interest rates across the developed world encouraged extremely risky behavior among households and financial market participants. Importantly, this behavior was not limited to venture capital/regional banks. Rather, it touched nearly all areas of the economy, and created what has been termed an "Everything Bubble." This bubble is now starting to crack as asset markets reprice to a world of materially higher interest rates.

As the Fed moved to aggressively tighten monetary policy last year, interest rates surged, saddling the U.S. banking system with large unrealized losses ($600 billion to $700 billion). This creates numerous problems:

* Bank losses on securities portfolios are not evenly distributed. Combined with losses on commercial real estate lending, some U.S. banks may be insolvent.

* Diminished capital ratios due to securities losses are likely to lead to much tighter credit conditions. Already, this appears to be happening. This will impact the real economy with a lag and result in a recession later this year.

* A rapid migration out of regional banks and into mega banks. Smaller banks will have reduced credit capacity, and in our opinion, mega banks will simply invest their newfound funds in the government and government-guaranteed securities, rather than increase lending.

* The Fed's new back door bailout lending facility, BTFP...