Please click the links above to read about the recent events and hopefully receive some reassurance.
Yesterday March 13th was a busy day around here as we fielded many calls and notes regarding the bank situations that unfolded very quickly last Friday.
As we have been mentioning - the fallout from the sledgehammer the fed reserve hit the economy with over the last year with the historic, rapid, and unprecedented increases in interest rates is continuing to have repercussions in the financial markets. We are witnessing one of those with the bank failures from late last week.
So, what happened? After a weekend and a day trying to absorb all the media that is out there, the simple answer is:
- SVB, like all banks, needed to have very large reserves and the ratio of reserves to deposits is closely monitored by regulators.
- The bank, wanting to make money on the reserves, invested a large chunk in Govt Bond - one of the “safest” investments out there right?
- In addition, the bank deals heavily in venture capital, start-ups, some crypto and other VERY aggressive investments.
- We have had years of very loose monetary policy with low interest rates coupled with the government printing and pouring billions and billions of dollars into the economy with Covid related “relief” policies. We are then hit with unprecedented demand on almost everything consumer related due to all that cash and cheap money in the system. We then coupled that with Covid related supply chain issues. Add to the mix Fed policy makers and govt officials ignoring basic economic theories about supply and demand AND ignoring early warning signs - calling the early inflation signals “transitory” or “temporary”. These, along with other factors caused the unfortunate “perfect storm” and inflation smacked the economy hard.
- basics of bonds.
- Buy a bond - rates up / bond prices down - who wants that bond? Bond markets ran amuck selling everything and this is where SVB ran into the buzz saw.
- The safe government bonds, that any sane bank portfolio manager would think not cause an issue being a large part of the bank’s investment reserves, are causing HUGE issues as that “safe” 10-year US Treasury down 16.29% and 30 yr us treasury index down 33.42% in 2022!
- Those investment losses are then applied to the bank’s balance sheet that they are to use to show regulators that “hey – we are in compliance with your rules!” Yeah – but not yeah when your balance sheet now shows HUGE losses and is NOT in compliance with the balance sheet requirements of the government. The bank was 2 billion SHORT on its balance sheet and failed to raise the capital needed following the sale of a big chuck of these bonds at a loss as deposits had basically dried up leaving the bank in a bad place.
- OK great - now government policy and bank regulation kicks in the door and says “your reserves are lower than they should be…!!! We are taking over…” After investing in “safe” government bonds that were, in the short term, destroyed by government policies, the bank is no more – a bank that survived the financial crisis, covid and other disasters.
- SVB’s managers made a huge, fatal mistake by not hedging its assets’ interest-rate risk. But it's a mistake they were seduced into making by bad monetary policy that was too loose for too long.
- At this time, the Fed Govt has made a VERY strong statement saying that they will be supporting all deposits – not just insured deposits – but all deposits into the bank. So far – this is very unlike the bailouts that happened after 2008 2009 – where the big banks were bailed out – this time it’s the PEOPLE getting help. Will this lead to other regulatory changes for other banks that were/are making similar decisions – my guess would be yes.
- So now what? A couple of things – I have posted and will continue to post, direct source resources from many of the professionals I listen to for your information on our website. I think my favorite one that I have read from Brian Wesbury at First Trust starts with:
- “Ignore the crazy” - meaning that this is crazy news and not as impactful as other economic policy that is unfolding. The article ends with:
- Expect more trouble ahead, that’s why we have been bearish on equities and the economy. But, without strict mark-to-market accounting in place, don’t expect a meltdown like 2008-09.
- Stock Market –
- Surprising resilience – as we know – trying to guess the stock market is like trying to pick the King of Clubs from a deck of cards. Sometimes we get lucky but most times we will be wrong.
- People were watching the opening bell with great negative expectations due to the news.
- The markets actually opened up a bit and finished basically flat
- Day two – markets are rallying – based on the news – NO one would’ve guessed this. This is EXACTLY why we do not try to guess the markets.
- Continue patience is needed for all investors. This brings me back to 2016 vividly – the day after the Presidential election, speculators had driven the Dow down over 1,000 points – HUGE. The day ended up over 400 points. We cannot nor will EVER try to guess this thing for you. That said, as we have talked, our philosophy going forward is this:
- Retirees and those approaching financial targets:
- As we have shared, we started shaving gains and positioning a portion of traditional equities and fixed income in buffered positions back when it was not very popular in 2021. We continued to do this as things became wacky in 2022 as well as new clients coming in with cash investments.
- We shifted to dividends. Without entirely abandoning what worked in the pre-2022 days (growth), we added to dividend producing equities that certainly worked better than not.
- Younger Clients:
- You are in a position of power as you continue to build your nest egg. Dollar cost averaging every month into investments during uncertain times is 100% the right thing to do and to continue to do!
- For some of our more skittish clients, we did implement some similar changes as we did with our retirees- but on a much smaller scale as we are still very bullish on the markets, capitalism in general and the United States economy.
For existing clients – please continue to touch base and let us know where you are – how are you feeling about all the crazy, are there any changes coming up that could impact your life and really anything we can help with, or anything!
For those that are important to you – we are always open to a no cost or obligation consultation to help them in any way we can. In fact, a I read a report recently that indicated that a full 44% of clients with financial advisors are, not just thinking about, but are PLANNING on changing their advice relationship. This number typically hovers in the 12-13% range and is caused by lack of communication. This time is different. If you know anyone with those thoughts – we are always open to chat with those that are important to you!
Thank you and stay in touch!
Michael Matheson, CFP, CRPC, CFS, CDFA
M2 Financial Group PLLC