What's going on with the US Banks?

Good morning

The big news from yesterday was obviously the pressure on the banking sector after SIVB had to sell their bonds at a loss to cover their deposit claims.

"The Federal Deposit Insurance Corp. in February reported that U.S. banks' unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion as of Dec. 31, up from $8 billion a year earlier before the Fed's rate push began." - DJ

The issue was that SIVB had a lot of their money parked in treasury bonds and when the Fed rates the value of these bonds fell and they were sitting on unrealized losses.

Being a VC and tech-focused bank, their clients have a high rate of cash burn and the bank needs deposits to cover the liquidity demands from their clients. Furthermore, they haven’t really been paying a high enough rate to attract deposits. And even Jamie Dimon lamented about paying more to attract more deposits.

Liquidity is key in these markets. And we’ve been steadily seeing the money supply decline. M2 data for January 2023 was at -1.726% YoY; December 2022 was -1.31% YoY.

Peter Thiel's Founder's Fund has advised companies to pull money from the Silicon Valley Bank (SIVB) and shares of the bank are down further in pre-market trading.

None of this bodes well for SIVB and there is certainly the possibility that there is a “bank run”, where depositors rush to pull out their money. With the liquidity situation already weak at this bank, it could mean the bank shuts down. Whether this creates a contagion and credit risk event, I don’t know. But, it’s certainly something to think about with the regional banks in the US.

And it’s not just about the unrealized losses on their bond portfolios that may cause this but, it could even be corporate and consumer defaults. Collateral values are falling and that’s what caused the banks to collapse in the 80s.

Having said all of this, there are measures in place by the FDIC and the Federal Reserve that are meant to prevent a collapse of the banking system. This is not a Lehman moment and I don’t see a Fed pivot on this. But, I would remain vigilant and careful. Banks will take a hit in share prices over the next few days.

I know this is not what you want to read first thing in the morning but, it’s something I wanted to address. I have been discussing warnings signs in the macro and it’s time to also heed the fundamentals, along with the technicals.

I promise you this is still not the time to go all in. Trade to make money in the interim but, we’re not starting a new bull market and we just want to make sure you manage your risk appropriately.

To be fair, this is not an environment where we want to make a lot of money but rather, protect our hard earned capital.

The big news for today is the jobs report. Goldman Sach’s predicts a better than expected February jobs report but, then you never know. Initial claims came in hot yesterday and the Challenger report is starting to inch. I think today’s report is not one we want to predict or trade around.

Here’s wishing you safe investing.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.