by Robert Holman | The Defensive Advisor | www.defensiveadvisor.com
STOCK MARKET RATING … 4.0 (0-4 bearish, 5 neutral, 6-10 bullish). I do not see a financial crisis, but I think the market will trend down for a while.
You have NOT heard this anywhere else but here, (I got this by Googling banking speeches) but what precipitated the run of withdrawals on SVB, in my estimation, was a speech by FDIC Chairman Martin Gruenberg on March 6 to the Institute of International Bankers, when he said the following:
The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies. First, as a result of the higher interest rates, longer term maturity assets acquired by banks when interest rates were lower are now worth less than their face values. The result is that most banks have some amount of unrealized losses on securities. <next sentence omitted>
The good news about this issue is that banks are generally in a strong financial condition and have not been forced to realize losses by selling depreciated securities. On the other hand, unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs. That is because the securities will generate less cash when sold than was originally anticipated, and because the sale often causes a reduction of regulatory capital.
My guess is that response to this speech by bank analysts was probably for them to “just do their job” and get to work investigating which bank(s) had the greatest losses, and hence had the greatest liquidity risk (and then maybe they warned their clients of the risk, which information in-turn caused the run on uninsured deposits). At SVB, there were many corporations and business executives with cash balances far in excess of FDIC limits. These corporations and individuals simply were not engaging in active cash management policies of spreading their risk, a type of human inattention that frequently accompanies periods of great prosperity.
I personally would be in favor of insuring corporate bank accounts for $5 million, individual accounts for $250,000 or $500,000, and joint accounts for $500,000 or $1,000,000. How much cash would you have on hand if you sold your house and were not scheduled to close on a new home for 45 days?
Currently, to be expedient, the FDIC is seeking authority to temporarily fully-insure all bank deposits for a year or two, until all this passes. When recession comes, the Fed will start lowering interest rates and the bank portfolio losses will start to shrink, and probably disappear altogether.
Major indices are higher this week following Credit Suisse’s (CS) announcement of a rescue from UBS that was enabled by guarantees from Swiss National Bank (the Swiss central bank). CS had declined steadily from $25 to $2 over the last 24 months as their bank condition continued to deteriorate. Actually, CS was poorly run for around 15 years and everyone in finance knew it. For CS, it appeared to be just a matter of time before it destroyed itself.
Reports continue to persist that major US banks are discussing a rescue of First Republic Bank (similar to the multi-bank rescue and dissolution of Long-Term Capital Management, if you are familiar with that situation in 1998).
I have experience with, and have learned that, being a logical person in an illogical world doesn’t work out well in the short-term. It is so abundantly clear that the Fed should say they are going to pause their interest rate hikes, and just observe what happens during the next six weeks before they meet again.
To make an analogy, taking your foot off the gas petal and taking a look around at the traffic before proceeding through the intersection – that is the only course of action that makes any sense to me. But, again that’s using logic in an illogical world, and 70-80% of Wall Street banking people and money managers think the Fed will raise rates (even though more than 50% of them think the Fed shouldn’t.)
Wow! What a conundrum!
PORTFOLIOS … After reading this report, if you are unsure how to position your portfolio to take advantage of these conditions, call me to discuss your circumstances, I’ll do a complimentary portfolio evaluation, and I’ll explain what ought to be done to help your situation. If you want to get started right now, just click here and input your portfolio holdings and I’ll call you.
TO MY CLIENTS … THANK YOU FOR YOUR TRUST. We’ve had great success since we started this RIA in mid-2018 and are doing better than the market return since that time period.
Excelsior Divitiae. Learn from the Bible: Deuteronomy 10:14 and Psalm 24:1 (taken together), Genesis 12:2-3, Proverbs 15:22, 21:5, 22:3 and 27:12, Ecclesiastes 8:7, Joshua 1:9, Proverbs 3:5-6, Ephesians 1:17, Jeremiah 29:11, 1Chronicles 29:11-13, and 1 Chronicles 12:32. I recommend you read them in this order.
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