A week ago, traders were pricing in a Fed rate hike of 50 basis points at its March 22 meeting.
Now, after all the bank failure fears, I have no idea what the Fed will do.
But whatever the Fed does, I bet it spews more chaos than calm.
Treasury Secretary Janet Yellen — government finance’s version of Anthony Fauci — loudly proclaimed on Saturday that the feds wouldn’t bail out Silicon Valley Bank.
On Sunday, however, they announced jointly with the Fed and FDIC that they were bailing out SVB’s depositors — although not the shareholders or creditors — while insisting it wasn’t a bailout at all.
Inconsistency instills fear.
The media says SVB’s failure was the second-biggest ever and that New York-based Signature Bank’s was the third-biggest. Scary.
But they weren’t really No. 2 and No. 3. Yes, SVB was $200 billion-plus in deposits, and they are No. 2 measured that way.
But in relevant economic impact — what really matters — SVB, for example, was only about 4% as big relative to the economy’s size in 2023 versus what Bank of the United States was when it failed in 1931.
That’s despite the fact that SVB was roughly 1,000 times bigger in dollars than New York’s Bank of the United States.
Nominal GDP (not inflation-adjusted) growth since then accounts for the difference. Relative to contemporary GDP, Signature and SVB were smaller than 1984’s Continental Illinois failure — relative pimples, not huge hemorrhages.
Britain’s finance minister Jeremy Hunt, boasting that the UK saved the roughly 3% of SVB’s assets parked there, claimed that if they hadn’t stepped in, “strategically important (UK) companies would ‘be wiped out.’”
Such statements instill fear. But name one UK company that would have been wiped out. You can’t. He can’t, either.
President Biden said failing bank managements should be fired. Again — scary. But when?
If upper management had been fired last weekend the FDIC would have had nobody to talk to at SVB to enable customers to redeem deposits. Chaos would reign.
Later, Mr. President, on that firing blather.
SVB’s main problem? Its depositor base was way too concentrated in firms and employees from the venture capital realm.
When VCs started urging their portfolio firms last Thursday to pull their SVB deposits before others might, it launched the “run” on SVB from among those firms, employees, families and friends.
Almost no American bank has nearly so concentrated a depositor base as SVB. First Republic Bank — same size as SVB with a heavy geographic overlap, but with a far more diversified depositor base by industry — fell heavily Friday and early Monday because of all the fear.
But then it stabilized then soared.
Banks use deposits to fund long-term loans which fall in value when long-term interest rates rise — as they did from 2023’s rising inflation fears.
SVB’s marginal balance sheet couldn’t take it as of last week. Ironically, 10-year rates have just now fallen by 0.5% —actually now down a bit overall in 2023. SVB got caught in between.
Most banks don’t because of their diverse depositor base.
Big banks are in far better financial shape than small ones.
But, overall banks are close to the best condition, (measured by total loans relative to assets) in my 50-plus year professional investing career.
Stocks are up this year as I expected but down since February.
There is lots I don’t know—like where stocks will be in 45 days.
I do know that once you get to bank failures, stocks are hugely higher two years later.
Sentiment shows (like comments to my March 5th column) overwhelming negativity and fear.
As Warren Buffett said, “You should be fearful when others are greedy and greedy when others are fearful.”
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