You don’t need me to tell you how bad today was. Today was the worst single day for bank stocks since ’08. The failure of Silicon Valley Bank represents the largest bank collapse in the US in over a decade. I wish I could emphasize that SVB had a unique client profile and business model. However the duration risk faced by SVB isn’t exactly unique, most banks are sitting on an unrealized loss for their bonds. Saying Silicon Valley will be the only victim might be optimistic. On the other hand using words like “spreading contagion” probably is farming for clicks via fear-mongering. There is a outcome when the dust settles that the strong banks will still be standing and a few banks with cracks or weakness will crumble.
Quick Primer on SVB
Just before noon today, news broke that regulators where shutting down Silicon Valley Bank (SVB) and the FDIC was winding it down and paying depositors. SVB was a bank that focused primarily on tech startup founders. They provided financial solutions for these young and adventurous companies.
As previously discussed, when interest rates rise existing bond portfolios lose value. SVB recently announced it had to sell 21 billion dollars in bonds at almost a 2 billion dollar loss. This spooked many depositors and yesterday Peter Thiel, a founding partner of Founders Fund, advised clients to pull money out of SVB. This bank run resulted in SVB having insufficient capital and regulators having to step in to shut it down. Depositors have been told they will be able to withdraw the FDIC insured deposits no later than Monday and SVB assets will be sold to repay as much of the non insured deposits as they can.
Oh-Eight over Again?
Let me try to settle some nerves. Today should not change any investor’s long term outlook on stocks as an asset class. If you were bullish on stocks long-term yesterday you should still be bullish today. If you wanted to buy stocks to build a retirement portfolio then you should just look at this as a cheap buying opportunity. The risks presented today are far lower than during the GFC. Regulation for the banking industry was overhauled to insure nothing on that scale could happen again.
Fate of the Fed Funds
The scarier narrative is how the Fed will take this development into consideration. After today the probability of a 50 basis point hike has subsided and a 25 basis point hike is more likely. The Fed has to balance not hurting bank’s bond portfolios (which, ironically, they’ve been required to hold ever since the Great Financial Crisis) and combating inflation.
This is worrisome because it is another complication on the Fed’s path to a “soft landing”, this ideal situation where inflation is tamed without a recession. The Fed’s job, as they have mentioned, is not pandering to stock market investors. Their job is protecting the working class from having the purchasing power of their wages eroded. If they turn dovish because of this recent development then inflation could remain high for longer. In the long run that could hurt the working class more. It should go without saying collapses in the banking system is not good for working Americans either. It is a delicate balance the Fed has to strike. I am not envious of the task ahead of them. I’m glad the most I have to do is educate my clients on what is happening to their portfolio and help them stay invested and on track.
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