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Silicon Valley Bank Collapses

Silicon Valley Bank Collapses

March 13, 2023

Silicon Valley Bank collapses!

 

What just happened and what will happen next?

 

In 2 days, the 180 billion dollar asset bank Silicon Valley Bank collapsed. They couldn’t meet depositor requests, and they were taken over by the FDIC. The stock price went from 260 on March 8 to 100 on March 9  to 40 on Friday March 10 at 11 AM and closed by 4 pm. This is the 2nd largest bank failure in US history.

 

Why this happened is fairly simple. They had significant unrealized mark to market losses on their bond portfolios, but they were deluged with requests to wire out monies. Thursday saw 42 billion in total redemption requests. No bank has 25% of their assets ready to be paid on demand. That ultimately caused the collapse. Why did depositors suddenly want their money out?

 

Silicon Valley Bank catered to venture capitalists and start ups and was well connected to wealthy Silicon Valley capitalists. Their deposit base was very narrow. Their assets and deposits grew rapidly from 50 billion to 180 billion in the 5 years. When big depositors sounded the alarm to others to get their money out of Silicon Valley Bank immediately, it was all over. In 1 day, the bank was closed.

 

I don’t have time to go into the details of the how and why of what happened. Ultimately, the only question that matters is what does it mean for our clients’ investments and what should we be doing to prepare for any fallout from the collapse?

 

It’s late Sunday March 12. We are going to find out Monday and throughout the week and month what happens with contagion, government response and the effect on all other asset classes.

 

On Friday March 9, treasury yields plunged 30 basis points reflecting both a flight to quality (guaranteed assets) as well as a likely Federal Reserve response of slowing the rate of interest rate increases.

 

We have said for quite some time that raising interest rates 5% in less than 12 months is a rate of increase that no financial institution can survive. Rates are just too high. 7% mortgage rates? Way too high to have a functioning real estate market. 5.25% on a 1 year riskless treasury bill? Way too high. Banks who made loans at 3-4% in the last 3 years are now being forced to PAY 3-4% on their deposits or fear a flight of depositors. The unrealized losses on bond and loan positions are substantial. The rate increases should have been done over a period of several years to allow them to take effect slowly and allow businesses time to adjust to the changing rate environment.

 

So the bank collapse will soon show that interest rates this high will have a very damaging effect on the US and global economy, and market rates will come down to more normal levels as the entire economy grapples with the fallout from bank failures.

 

There are numerous asset classes that could see fallout from the bank collapse.

 

First, we will see if there is widespread panic among investors. S and P index investors have trillions parked in passive equity investments. If they start to redeem like the Silicon Valley Bank depositors, then the SP can crash. Is this likely? I would say no, but clearly there is cause for alarm based on the speed of collapse of Silicon Valley Bank.

 

As we know and we have reiterated many times, our investors own durable, professionally managed, income producing assets. On Friday, municipal bond funds were up nearly 1% in a flight to quality and to also reflect a potential peaking in interest rates. Credit quality in municipal bonds is very high, default risk is minimal.

 

Other funds we use for taxable fixed income from Nuveen, Lord Abbett and Blackrock are all relatively higher in credit quality and will benefit from lower interest rates. Short term, most fixed income prices of non- treasuries will likely experience declines as people sell anything to get liquid, but longer term, the lower interest rates should be supportive of net asset values of these funds.

 

Bigger picture- what does this signal for the US economy?

 

That will play out over the remainder of the year, but we are well positioned with conservative income producing investments(very few equity positions), no speculative investments in startups, tech stocks or super highly valued assets. We think the US economy will continue to slow as we move through 2023.

 

Income paid from the funds we own is stable and will be growing. Short term anything is possible from a value perspective, but longer term, there are no changes to be made. We are right where we want to be: investing for the long term with low cost, professionally managed, diversified income producing assets.

 

For anyone following these events closely, we are more than happy to talk more about this historic collapse (the largest since the great financial crisis in 2008- remember Washington Mutual and IndyMac?). We will be following along like everyone else.

 

We have to be the only financial advisors to not receive one phone call on Friday. Being prepared for anything allows us to not have to react to a scary event like this.

 

Best wishes for a beautiful spring season!

 

Chris

 

 

 

 

 

 

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