#184 - Silicon Valley Bank Collapse, Canadian Dollar Devaluation and What The Oilers Should Do With Its Brand

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* Market update

* SVB collapse and whats next

* Why is the Canadian dollar plummeting vs the USD

* Oilers are really good and its making me nervous

* Recommendations and Predictions

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📈📊Market Update💵📉

There is an old saying…‘Cash Is King’.

Unfortunately that is outdated.

It should read…’Treasuries are King’ or ‘Cash is King up to $250,000.00’

This past weekend we watched as Venture Capitalists cried contagion and spread FUD to anyone who would listen. For the first time in this long tightening cycle, something actually broke. I think this matters.The president and his FDIC/Fed came to the rescue of those VCs and their portfolio companies.

What this means for interest rates?

It’s quite likely that this is the end of FOMC members and governors spouting off about inflation.

Powell is trying to engineer the impossible. And his lackeys have done a terrible job staying in line.

Yesterday evening, Powell and Yellen went big to save their system, pulling on the all important “its better to go big and move swiftly, than to act late” stings they have available.

All the while, the CBOE VIX Index made a near 4-month high on Friday, closing at 24.8.

Despite all the SVB drama, Futures are still pricing in more aggressive FOMC rate hikes in March and May than a week ago. Past those meetings, this interest rate/bond market is turning more dovish.

Despite taking 3.7% out of their 2023 earnings estimates over the last 3 months, Wall Street analysts still expect record S&P quarterly earnings in Q3/Q4. At least Q1 estimates look reasonable.

Last Friday’s Jobs Report and this Tuesday’s CPI release are very likely economic bookends, reflecting a similar narrative of US wage/price inflation that is only slowly diminishing. (Not Fast Enough)

The CBOE VIX Index and S&P 500 returns.

The chart below shows the VIX (blue line) and S&P 500 price returns (red/green numbers) as the index cycled between 20 and +30 from 2022 to the present:

* As you would expect, there is a clear relationship between a rising/falling VIX and equity returns. When the VIX rises from 20 or below to 30 or above, the S&P drops. As the VIX declines from +30 back to 20, the S&P rallies.

* There is solid data as to why these levels matter. The VIX’s long run average (1990 – present) is 20. The standard deviation around that mean is 8 points. A VIX of 20 in the current still-uncertain macro environment is too low, so stocks tend to top out when the index hits that level. As “fear” pushes the VIX to 28 – 36, equities bottom out.

* The VIX has been relatively flat around 20 since December 1st 2022, when the S&P 500 closed at 4,077. As of Friday’s close, the S&P is down 5.3 percent from those levels.

The CBOE VIX remains a relevant market signal about near term tradable and/or investable lows. On the one hand, it is heartening that even the failure of a large bank did not push the VIX to 28. Even still, recent history (December 2022 – present) shows there’s not much money to be made in US large caps when the VIX remains between 20 and 28. We would wait for the VIX to hit at least 28 before adding equity exposure.

Sources:

FDIC Failures by Year, 2001 – Present:

2023 Fed Stress Test: https://www.federalreserve.gov/publications/2023-Stress-Test-Scenarios.htmCommodities -

Emerging Market commentary -

💸Reformed Millennials - Post of The Week

What happened at Silicon Valley Bank: Simple Terms

The FDIC made a major move as of Sunday March 12th 6:00EST

What happened in very basic terms:

The recent bank run on Silicon Valley Bank (SVB) highlights the interconnectedness of the tech ecosystem, and how a bank run can have ripple effects throughout the Startup world… and to a lesser extent, the banking world. 

SVB is a bank that specializes in lending to Startup’s and venture capital firms. 

It played a key role in the growth of the tech industry over the past 4 decades. It’s asset base exploded in 20/21 as tech stocks IPOD and deposits rolled in. 

However, as interest rates rose and the tech bubble burst, SVB's assets began to decline, and depositors started to withdraw their money. 

This, combined with a critical duration investment error created a black hole. The chain reaction of depositor pulling cash and interest rates skyrocketing blew their models to smithereens. Startup’s, who were already struggling to survive in a tough funding environment, began to panic and withdraw their cash from SVB. All of this happened while their reserve assets got smoked in a generational tightening cycle. 

The bank had a pile of illiquid underwater assets, which made it more vulnerable to a bank run. 

The depositors and investors lost trust, a banks biggest/best asset. 

The bobbling of the equity issuing and capital raise was the end. That needed to be done perfectly. The fear of insolvency was terminal. 

The write-down by itself wasn’t enough to make the bank insolvent, but the shift in trust spooked enough people into thinking that even bigger write-downs were in the near future… 

The FDIC stepped in to take over the bank and pay back depositors. This has now extended to coverage of deposits above 250k.

In a way, this is just one more shoe dropping in the slow deflation of the Second Tech Boom. This ISN’T 2008.

The broader financial system is not as exposed to SVB's debt and assets. The U.S. economy has remained strong despite the tech slump, and there's reason to believe that it will continue to do so after this bank run… 

The big lesson for me, as a Canadian looking in Startup’s should be aware of the risks of relying on a single bank or financial institution, and to have contingency plans in place for worst-case scenarios such as this. And for investors, it's a reminder of the importance of diversification and being aware of interconnectedness in the tech/banking ecosystem. 

Many Startup’s/businesses were left in a precarious position, unable to make payroll and fearing the worst. 

The FDIC promised to pay SVB’s depositors an “advance dividend” to make payroll. To do this, they’ll either find a buyer for all of SVB’s assets or sell off some of SVB’s ++ marketable bonds in order to send depositors enough $$ for payroll until they can comp the broader sale. 

The FDIC has a strong incentive not to let Startup’s vaporize over the next few weeks because they can’t pay their employees. 

In 2020, we built a lot of secondary rails for the problems we’re seeing at SVB today. 

People should be optimistic we can move forward stronger after this with alternative banking and financing models that are better suited to the needs of Startup’s. 

Nothing cleans a system like a good bank collapse. 

The SVB crisis is a sobering reminder that even the most innovative and dynamic industries are not immune to financial challenges. 

But… it's also a reminder that the tech industry is full of resilient and adaptable people who are capable of finding solutions to even the toughest problems.

The equity and debt holders of the bank are likely zero. Signature bank and Silvergate look to be next.

My favorite threads on the SVB Saga: from Bob Elliott

* How the banking system is built and how SVB problem arose.

* What the regulators did to shore up the run on the Banks:

* US HOUSING: The monthly mortgage payment needed to buy the median priced home for sale in the US has increased from under $1,500 2 years ago to over $2,500 today.

🎙Podcast & YouTube Recommendations🎙

* Presocratic Philosophy - This episode they discuss “Out of Africa Theory”, the adversity of early humans, the term “Pre-Socratic”, the first philosopher Thales, the meanest philosopher Heraclitus and Democritus, the godfather of the theory of atomism.

* Sharp China - What to think about the opening of Asia

🔮Best Links of The Week🔮

* I really liked this Morgan Housel piece -

The more successful you are, the nicer you should be. The better things are going, the nicer you should be. That’s probably the best – or only – way to guard against entitlement, which is the main thing that blindsides you when luck turns the other way. It’s like an automatic stabilizer that keeps you in check and keeps your social circles solid – both of which probably lead to sustainable, durable, non-lucky success over time.

* "Federal regulators rolled out emergency measures Sunday night to stem potential spillovers from Friday’s swift collapse of Silicon Valley Bank, including measures to backstop all depositors. Regulators announced the action in a joint statement from Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and Federal Deposit Insurance Corp. Chair Martin Gruenberg. The group said that depositors at SVB will have access to all of their money on Monday." Source: WSJ

Marc Rubinstein from Net Interest - the first bank run of the digital age’

* "One of the hottest collector’s items these days is a preowned luxury watch. Expensive secondhand watches from brands such as Rolex and Patek Philippe have become increasingly popular in recent years, particularly with younger buyers, according to a report published this month by Boston Consulting Group. Preowned luxury watches became more valuable as demand grew but supply remained tight, BCG said. Those watches have become so coveted that the market for them has outpaced the overall stock market, growing about 20% annually from mid-2018 through this January, compared with the S&P 500 index’s yearly growth rate of 8% during that period, BCG said." Source: WSJ

👉 For specific investment questions or advice contact Joel @ Gold Investment Management.

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