UPDATE MARCH 15, 2023 – An interesting investment class. Over the past 10 years, this is how this asset class has moved. From June 2013 to July 2016 it went up 26%. A simple annual increase around 8.5%. From July 2016 to October 2018 it declined 21%. A simple annual decline around 10%. From October 2018 to July 2020 it went up 33%. A simple annual increase around 18%. From July 2020 to October 2022 it went down 34%. A simple annual decline around 15%. That is a sum of 114% in moves up and down, which equates to about 11%/year. If you could have only timed those moves, you would have made a killing. As an investor, how would you rate this asset class? Low risk? Moderate risk? High risk? The point is the next time someone says U.S. Treasuries are a ‘safe’ haven, tell them about the above data. The next time someone says U.S. Treasuries represent a ‘safe’ rate of return, tell them about the above data. The above movements were made by the 30-Year U.S. Treasury Bonds. With the yield over the past 10 years probably averaging around 3%, that means you either gained or lost 3x-4x that simply due to the movement of yields!!!! Our government made treasury bonds act like a risky asset. It is not a low-risk asset. It is doubtful it ever will be again.

UPDATE MARCH 14, 2023 – We will see if Monday’s low in the SPDR S&P Regional Bank ETF (Symbol: KRE) at $41.92 is the panic low for banks. If you want to see a neat chart of an index slowly going over the waterfall and then collapsing look at KRE for the past month. You can see people were bailing out well before last Thursday when the news about SVB became a headline. As an aside, for those curious about this, I heard that depositors at SVB had requested $42 Billion in withdrawals. As many banks loan out over 100% of their deposits, SVB obviously didn’t have the funds available without selling their unhedged, unrealized losses 30-year treasury bonds. BTW, KRE declined 46% from its all-time high in late 2021. That is when the market predicted interest rates would increase significantly. It declined 36% in the past few months. This is into the low on Monday.

The pundits are predicting the next sector to get hit hard will be commercial real estate (CRE). And banks with a large portfolio of CRE loans may be the next to go under. So, for those interested in the banks with the highest CRE Loans/Total Assets ratios they are as follows. The only one above 50% is Valley National Bank. Home Bancshares and Glacier Bancorp are just below 40%. Signature Bank was at 30%. EastWest Bank is at 30%. Those between 20% and 30% include Webster Financial Corporation, First Citizens Bancshares Inc., M&T Bank Corp, Prosperity Bancshares, Western Alliance Bancorp, and Central Pacific Financial Corp. That doesn’t mean these banks will go under. Many other factors come into play. Most importantly, how large on their reserves. What are their Tier 1 Capital Ratios. That said, history shows that banks with the highest CRE Loan ratios are more likely to fail in a significant economic downturn. I have not looked at their stock prices. But, I wouldn’t be surprised these stocks are down the most already. It isn’t like this is new news to investors. If any of the above close down, you at least knew about it as of today:) FYI, SVB was down near 0% for this ratio. That wasn’t their weakness obviously.

UPDATE MARCH 13, 2023 – Total deposits in American banks is about $18 Trillion. I heard that about 1/3 of those deposits are NOT insured. Thus, about $6 Trillion in deposits at financial institutions are at risk if banks close in mass. If those deposit holders decide the risk of losing 100% of their money is too real and start withdrawing their funds, there simply is no way our banking industry can survive. To return those funds, banks would have to sell their treasury bonds and realize the unrealized losses (about 30%-40% of the original purchase price) they have – that is what was happening to SVB in its last days. Somehow the FED has to convince the holders of the $6 Trillion in uninsured bank deposits not to move their funds elsewhere. If they fail, the 2008 Crisis will look minor in comparison. I think they will succeed…for now. Afterall, where would the $6 Trillion move to that would be any safer than where it is now? Fun times eh:)

MARCH 13, 2023 – I have long said that the simplest solution to prevent financial institutions from making bad loans, poor policy decisions, etc., is to eliminate FDIC insurance for deposits. That simple.
If the public knew that every dollar they put in a bank or credit union could be lost, they would be extremely careful where they deposited their money.
Financial institutions would have to be beyond 100% transparent and show convincingly they were 100% safe. There would be no liar loans, 120% LTV loans, etc.
The companies that deposited more than $250,000 in SVB deserve to lose their money. How can an unnamed company put $480 million of cash in one bank? That CFO wouldn’t have a job if I were in charge. All of these startups are crying about their deposits at SVB. Did they overlook the FDIC Insurance print on every SVB document? $250,000…hello…$250,000 maximum. What is it you don’t understand about that!
I seriously doubt we will get rid of FDIC deposit insurance in my lifetime. But, it would solve alot of problems if we did.
Lastly, SVB was unique in that it had less than 10% of its deposits from retail customers and chose not to hedge its interest rate risk. The data does not suggest any other banks in America are like it. Signature Bank of NY was closed over the weekend and it also had less than 10% of its deposits from retail customers. But, I do not know if it refused to hedge its interest rate risk. The only remaining bank with less than 10% of its deposits from retail customers is Citigroup. But, they have probably been like this for 40+ years as they mainly deal with governments around the world.
I do not expect any other banks to go under from a run on their deposits. As usual, we shall see.
Shalom,
The Mann