Headline News:
Takeaways from America’s second-largest bank failure – CNN Saturday March 11, 2023
While relatively unknown outside of Silicon Valley, SVB was among the top 20 American commercial banks, with $209 billion in total assets at the end of last year, according to the FDIC.
The Second-Biggest Bank Failure – New York Times, By Karl Russell and Christine Zhang March 10, 2023
Silicon Valley Bank on Friday became the biggest American bank to fail since the collapse of Washington Mutual in 2008, at the height of the global financial crisis. The implosion of Washington Mutual, as well as the investment banks Lehman Brothers and Bear Stearns, was followed by a systemwide failure. From 2008 to 2015, more than 500 federally insured banks failed.
Silicon Valley Bank failed because of three words, MARK TO MARKET. Silicon Valley Bank (SVB) was healthy, they did not break any rules. The assets they held were guaranteed by the US Government, government issued paper and would pay face value if held to Maturity.
The market value of these government obligations dropped in “market value” rapidly in 2022 and 2023 because the Federal Reserve raised interest rates from 0.25% to 4.75% with Fed Chairman promising more rate hikes and stating, “Higher for Longer.” I want to repeat. If Silicon Valle Bank’s government paper were held to maturity, they would be paid the face value in full. When forced by Federal Banking Law to MARK the price of this paper TO the MARKET price, the bank did not have the asset value to back up the rapid withdrawal from the bank. This event is totally the arrogant and mismanagement decision making by the Federal Reserve to correct earlier mistaken decisions to hold rates lower longer than they should have.
How to correct this because many, maybe even most financial institutions have the same “Mark to Market” situation.
Excellent Explanation of What happened at Silicon Valley Bank:
“The Fed Is To Blame For The Collapse of Silicon Valley Bank | Chris Whalen” – Blockworks Macro YouTube 3.10.2023. Excellent commentary.
Detailed Video Summary of what happened at SVB from two government bond traders:
“Panic In The Banking System” Blockworks Macro 3/11/2023 – Alf and Andreas Macro Trading Floor.
Alf and Alfonso discuss detailed accounting description of what happened, how much spillover to other banks will occur and what it might mean to the bond, equity and real estate markets.
What to Do?
Much depends on the Federal Reserve’s actions on Monday next week. Should the Fed stay with its “Higher for Longer” approach to the interest rate cycle hiking, certainly more banks will fail. If the Federal eats humble pie, and pauses or better lowers interest rates, we could have a large percent short-covering rally in stocks and bonds. Certainly, this is positive for precious metals, and I project negative for the US Dollar.
Owning three to seven year treasuries is a safe strategy. Equities and Bonds could have a liquidity squeeze and fall in price. Even Precious Metals and Bitcoin “could” fall from Fridays close but the fastest to recover. Real Estate Investment Trusts will likely be the slowest asset to recover.
Hard assets – still the Theme.
- Energy investment in Quality companies. There are many good companies. LOTM likes and owns, EQT Corp (EQT) $30.35 – Vermillion (VET) $13.85 – African Oil (AOIFF) $2.10 Journey Energy (JRNGF) $4. – Antero Midstream (AM) $10.25.
- Precious Metal companies will be fine. Two of the best large mining companies are Agnico Gold (AEM) $45.24 and Pan American Silver (PAAS) $15.56. LOTM owns & likes many other Physical Mining companies.
As always do your own due diligence Vs your personal financial situation & risk tolerance ability.
We will use market weakness to buy quality hard asset equities to the extent we have funds to do so.
Written March 11, edited March 12, 2023, by Tom Linzmeier, for Tom’s LOTM Blog at https://lotm.substack.com/.
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