The next shoe to drop...leading to a 30% market crash

Here is what I have read for an ominous warning. Will it happen exactly like this? No one knows for sure but better be prepared as if indeed it happens, it can develop very quickly like a chain reaction. 

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First Republic Bank (FRC) is bigger than Silicon Valley Bank and, from its recent reports, may be doomed to fail on May 20. If this goes down as expected, the hit to the economy could be so severe, stocks could plunge about 30%.

Let me explain…

Following an epic bank run last week, FRC borrowed about $100 billion from the U.S government to stay afloat.

It filed a disclosure report so brutal, it is the likely cause of the S&P's downgrade of FRC for the 2nd time in a week. FRC went from A- to B+ in one week, indicating bankruptcy risk soared from 2.5% to 25%.

In that filing, FRC disclosed that it has until May 15 to repay the $100 billion it borrowed, with interest, or the government will begin liquidation proceedings on May 20.

The trouble for FRC is that it lost a lot of deposits last week. How much? About 50% of its pre-crisis deposits have now left.

Analysts estimate that for FRC to survive, it needs at least $100 billion in deposits. Right now, it has $120 billion. But $30 billion of that is a 120-day emergency deposit infusion from 11 other banks.

While management says daily account withdrawals have slowed considerably, it would take just $21 billion more in outflows for FRC to become bankrupt by May 20.

And just to give you an idea, the average account at FRC is $1 million. If around one hundred accounts or less pull out within the next two to three months, there is no hope for FRC. That is a pretty fine line to walk as a major bank.

The good news is that FRC will likely be acquired in a Credit Suisse-type emergency takeover.

Depositors are safe… but shareholders and bondholders will likely be wiped out.

According to a recent study from Stanford, the regional banking crisis is likely to worsen, as 186 regional banks are at risk of failing like SVB or Signature Bank (SBNY) did.

Even if only a handful of these banks fail, and the FDIC makes all depositors whole, regional bank lending will dry up quickly.

This means banks that are not yet in danger are going to be focused on ensuring their survival. But everyday Americans can still pay the price…

The Makings of a Recession

In order to survive this crisis, banks will be less likely to lend to smaller companies and businesses, and instead focus on the larger corporations that give them a higher return.

For better or worse, small businesses employ nearly half of the U.S. employees according to the U.S. Small Business Administration Office of Advocacy (SBA).

If small businesses start struggling to get loans, it will affect all their bottom line and the income of their employees.

And guess what drives 70% of the economy? Consumer spending.

And most of that money comes from income. If the income of nearly 50% of U.S. employees are affected, the driving force of the economy will be impacted.

And according to the bond market, a recession could be just four months away.

And here's what that potentially means for the stock market…

Historically stocks bottom in a bear market at about 14 times earnings. And the average earnings decline in a recession since WWII is 13%.

This means that a highly average recessionary bear market low would be 2,770 on the S&P 500. That's about 30% lower than stocks are now. And it would represent a peak decline of 43% below the record high of 4819 set on January 2, 2022.

So if stocks bottom, and history were to repeat, the S&P might fall about 30% from here.