Last night, the three major U.S. stock indices experienced a significant plunge, with crude oil prices plummeting and the Nasdaq Golden Dragon Index plummeting by over 5%.
Data released by the U.S. Department of Labor on Thursday showed that for the week ending March 4th, the number of initial claims for unemployment benefits increased by 21,000 to 211,000. This figure exceeded all economists' expectations, with the median forecast being 195,000.
Originally, this news in the evening eased market expectations for a Federal Reserve rate hike, leading to a decline in U.S. Treasury yields, a downward trend in the U.S. dollar index, and a substantial rise in U.S. stocks.
However, during the U.S. stock trading session, the explosions of two U.S. bank stocks triggered a liquidity panic.
Firstly, Silvergate announced that it would cease operations and voluntarily liquidate its subsidiary, Silvergate Bank, which provides services to the cryptocurrency industry. Following this announcement, Silvergate Capital's stock price plummeted by over 35%.
Subsequently, the more robust and larger Silicon Valley Bank experienced an explosion. After Silicon Valley Bank announced that the sale of some securities in its investment portfolio would result in an $1.8 billion loss and sought to raise $2.25 billion through the sale of common and preferred shares, its stock price dived by over 60%. The Philadelphia Bank Index plummeted by 7.7%, marking the worst single-day performance since June 2020.
Greg Becker, the CEO of Silicon Valley Bank, stated in a letter that the company had sold "almost all" of its available securities for sale. The letter mentioned that the sale of securities would result in an after-tax loss of $1.8 billion in profit, but the company added that its reinvestment plan should "immediately generate value" as the bank reshapes its balance sheet. However, investors were not convinced.
This news triggered a panic sell-off in the market. Silicon Valley Bank's liquidity crisis frightened investors because the bank has always been a very strong and well-operated institution.
Investors are concerned that under current high-interest rates, Silicon Valley Bank may be just the tip of the iceberg, reflecting the bursting of the current tech bubble, falling asset prices, and the potential liquidity crisis brought about by the continuous rise in interest rates, which could be transmitted to the financial system, triggering a wider area of selling. Previously, the default of the real estate giant Blackstone Fund has already served as a warning to the market. This incident reminds us that anything that seems beautiful can suddenly collapse.
Therefore, after the news emerged, the panic index soared significantly.Additionally, another piece of news from the United States has also contributed significantly to the sharp decline in the U.S. stock market. The President of the United States announced the latest fiscal budget, which amounts to a staggering $6.9 billion, setting a new historical record. This includes increased military spending and social expenditures. The plan is to reduce the government's deficit by $3 trillion over the next decade by taxing the wealthy, laying the groundwork for a potential future re-election campaign.
Compared to the enormous spending, the U.S. government's tax plan has also frightened Wall Street. Clearly, Biden aims to increase government revenue rather than cut expenditures to cover the deficit.
The proposal indicates that Biden wishes to impose a 25% minimum income tax on the wealthiest 0.01% of Americans with a net worth of at least $1 billion. This includes unrealized capital gains on assets (such as stocks).
He also proposes to revert the corporate tax rate, which was reduced to 21% in the 2017 Trump tax reform, back to 28%, as well as to increase the tax rate on multinational corporations' overseas profits from 10.5% to 21%, and to raise the tax rate on stock buybacks from 1% to 4%.
Furthermore, Biden is preparing to restore the highest individual income tax rate from 37% to 39.6%, which was cut by Trump, applying to individuals with an annual income of $400,000 or couples with an annual income of $450,000. In response to the tax avoidance schemes commonly used by Wall Street fund managers, Biden also proposes to tax capital gains at the individual income tax rate for individuals earning more than $1 million.
At the same time, Biden proposes to increase taxes on oil and gas companies, raising the corporate tax rate for these companies from 21%, which was implemented during Trump's tenure, to 28%.
However, the question arises: this could significantly increase the burden on businesses and individuals, leading to capital flight and may even suppress the future economic recovery of the United States.
For a long time, the U.S. economic model has been to provide businesses with cheap capital and favorable tax policies in the form of government debt, thereby helping American companies gain international competitiveness.
But now, with interest rates continuously increasing, if the United States further increases taxes on American businesses and wealthy individuals, it could significantly suppress investment.
Regarding this budget proposal, Republican House Majority Leader Kevin McCarthy responded on social media, stating that Biden's proposed "trillion-dollar tax increase" would cause American families to pay higher costs directly or indirectly, and that the current problem of the U.S. government is spending, not revenue.Essentially, the sharp decline in U.S. stocks yesterday was primarily influenced by two factors. However, the trillion-dollar tax increase plan, though alarming, may not be very feasible and would be difficult to pass within the U.S. Congress. More importantly, is the recent turmoil in U.S. bank stocks the beginning of a butterfly effect?
Currently, the interest rates on U.S. Treasury bonds continue to rise, increasing financing costs, and it is normal for some enterprises to experience financial distress. Rising interest rates can disrupt household balance sheets, increase debt ratios, and cause asset prices to fall, triggering sales. However, the U.S. stock market bubble has already been significantly deflated. At present, the U.S. job market remains strong with job vacancies still at high levels, and as long as people have jobs and income, it will not trigger widespread sales.
However, the biggest risk in the U.S. currently lies in the real estate sector, where many assets are anchored by property values. Real estate prices are 40% higher than before the pandemic, which is a significant issue and deserves attention. It is also important to monitor the rate at which the U.S. unemployment rate rises.
On Friday, the release of non-farm data may also be one of the reasons for the market's early risk aversion. In the coming days, market fluctuations may be quite substantial.
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