Closing Bell - Closing Bell Overtime: Silicon Valley Bank Fallout, Sobering VC warning, Gaming out the Fed 3/10/23

Episode Date: March 10, 2023

Stocks fell hard in the wake of the collapse of Silicon Valley Bank, with broad losses across the board adding to sizable losses on the week. Bob Elliott from Unlimited discusses what happened at the bank and the ripple effects across assets. Y Combinator president Garry Tan explains why he sees this as an “extinction level event” for startups. Plus Bleakley’s Peter Boockvar on the one thing the Fed has “zero chance” of doing at its next meeting in light of this week’s events.

Thank you, Scott. The worst week for stocks of 2023. This is the scorecard on Wall Street, but the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort. Coming up on today's show, we'll be all over the failure of Silicon Valley Bank and what it means for your money with a range of voices, including Y Combinator President Gary Tan, who says this could be an extinction level event for startups. Plus, we are looking ahead to next week's key inflation numbers with a strategist who has a bold prediction on the Fed's next move. But let's get straight into the fallout from Silicon Valley Bank with our first guest. Joining us now is Bob Elliott from Unlimited Funds. He is also a former member of Bridgewater's Investment Committee.

Joins us here on set. Bob, it's good to have you. I was sitting at the airport last night reading your tweet thread about this very topic, about SVB. Break it down for me. How surprised are you to see what we saw today with the FDIC swooping in? Well, we saw a very classic run on the bank. SVB had had a few problems. It wasn't a great bank going into the circumstance. But what we saw was, after the announcement a couple of days ago, basically the venture capital community creating a run on the bank by announcing that everyone should be pulling their money out, and those who could did.

And almost immediately, the FDIC recognized that that didn't make the bank a sustainable enterprise and stepped right in to stop things, mostly in order to ensure that depositors were protected as much as possible. So it was a good thing that the FDIC stepped in to protect the depositors, even though, of course, the equity holders took significant losses. So what really it comes down to, this is a symptom of rising rates and it's a lagging symptom of rising. I mean, these hikes happened last year that caused the bond portfolio of Silicon Valley Bank to be worth less. And now the economic difficulties now, one might argue, are causing their deposit levels to go down. So they had to go and sell those bonds. And now people are freaking out for a somewhat understandable reason. If you didn't get your money out of Silicon Valley Bank yesterday, the day before today, you wish you had.

So what is the broader market market implication here? Because, yes, Silicon Valley Bank is an important story. But where else are we potentially seeing rising rate impacts that, you know, the frog's been boiled up to this point, but it's about to die. Well, I think the big question is whether the Fed steps in and the FDIC steps in to stop any risks to the broader, smaller bank ecosystem. Because right now, basically, you know, SVB is a top 20 banking institution in the country. And I think one of the questions is, do you want to hold your deposits at a bank that isn't one of the big money center banks?

If the Fed isn't going to protect the depositors in the SVB situation, then it calls into question whether you should be holding your deposits anywhere in the smaller banking system as opposed to the big banks. And that could create a cascading effect that really has not much to do with the core banking infrastructure of the U.S. economy or even the activities that those banks are doing. It's a it's a classic bank run. The question is, are they going to actually do what's necessary to help halt that? Because right now, when we look at what's going on in the markets, we're seeing significant repricing of those smaller banks

that might be affected by the secondary effects of this situation. Yeah. And it's not it's the second bank to fail this week. And yes, you can talk about Silvergate and being its own entity and the fact that cryptocurrency was it was at play there and FTX fallout, et cetera. But you did also have this mass mismatch between assets and liabilities at that bank to that cascading effect that you talk about, where there's an emotional element of the potential for so-called bank runs. What does that mean for the Fed and the ability of a central bank to step in, given the fact that we do have this still high inflation environment? Well, the Fed has a long history of managing these sort of banking panics. And in particular, they built a new and effective playbook happening after the financial

crisis and during the financial crisis. So they've done this 500 times over the course of the last, you know, 15, 20 years. But we didn't have high inflation, which I think is what raises the question about what does this mean in terms of the Fed playbook later this month when they meet, given the fact that just earlier this week, 50 basis points was put back on the table by Powell. I mean, it's been a whiplash week in terms of possible policy from the Fed. For sure. When you think about the Fed's mandates, what the Fed has to do is, you know, there's unemployment, which is doing fine. So not the primary concern, inflation, where there's concerns and then also financial stability. And what this does is it brings

financial stability back onto the table for the Fed. And probably what it means is if they're being prudent, they'll back away from probably going 50 and instead pull back to 25 because no reason to go too abruptly unless there's something more meaningful going on. Now, of course, we have CPI next week that could adjust people's ideas about that. And that's sort of where I want to go. We're talking about the Fed. We're talking about banks.

If I'm sitting at home and I'm like, well, I don't own any regional banks. I wasn't into crypto. I stayed away from all of that stuff. I don't see why this story matters to me. Is there potentially are there more shoes to drop both? Well, maybe you've got a kid or a cousin who works for a startup in Silicon Valley that won't be able to make payroll next week because they had all their money at Silicon Valley Bank. Are there things that ripple through the system here? Are there other interest rate

related shocks that could come that, you know, Silvergate with crypto falling off because it was a growth risk asset that's no longer apparently worth what it was worth a year or two ago, and now Silicon Valley Bank. But these are just kind of canaries in a coal mine that aren't just about banking, perhaps. Yeah, these are chinks in the armor of the speed of the overall macro economy, right? And so each one of them marginally slows down the macro economy, assuming that there isn't a broader financial system problem, which I think is totally manageable by the FDIC and the Fed. And so I'd say each one of these things slow the economy, get us closer and closer to that point where the economy has started to weaken enough so that inflation pressures start to moderate. And we're, you know, maybe not that far away from that.

Today's employment report shows some moderation in wages, some softening in various corners of the labor market. And so it may be enough of these things over time build up to the point where it has enough knock-on effects to start to slow the economy and start to come back to that inflation mandate and ease the inflationary pressures. That's why we're probably seeing 25 instead of 50 as we go later this month. Yeah, and of course, just a huge downdraft in stocks. We saw a pile into bonds today and in the last couple of days as well. Incredible volatility in that market, too. Where do you put your money to work, given the conversation we're having and all of the uncertainty, particularly over the next couple of weeks?

Well, when we talked last time, I suggested that cash may be the best asset in the book. And it has had a pretty good run asset in the book. And it hasn't had, has had a pretty good run here in the last couple of weeks. And so, you know, I think for most investors, overweight cash and being defensive in this environment makes a lot of sense. Rather than trying to, this is, you know, given the uncertainty in the market, given the fact that you don't pay a price to hold cash, actually cash is one of the best assets in the book. You know, this is a time where that makes a lot of sense. If you're going to go out and buy risky assets, looking towards the higher quality assets, value stocks,

you know, staples, things like that are kind of the place to go in this sort of environment. But overall, it's not a time to be taking big risk when you're not paying a big price for that. OK, Bob Elliott, we appreciate you starting the hour with us. Thanks so much for having me. Great to have you. Now let's bring in CNBC senior markets commentator Mike Santoli at the New York Stock Exchange. Mike. Hey, John, among the many things we witnessed in the last few days is a little bit of a change in the interaction between stocks and bonds.

Morgan was just kind of hinting at it there. Both rallying together, that is to mean yields down, stocks down. This is the aggregate bond ETF, the AGG relative to the S&P 500 back to the beginning of last year. And you see now they haven't exactly gone in perfect lockstep, but they've largely come back into line when they have diverged. And that's mostly been about the chief fear of equity investors has been the upward margin yields, the Fed tightening. And it's not always like this. Every time I showed this chart, I say, you know, it doesn't always stay this way. Over a longer period of time, the correlations change. And we've seen at least a hint of that right here. Right. So bond values going up. That means people buying bonds, yields going down. At the same time, we saw another fresh leg lower in equities. So what that suggests, at least for the moment, is that investors are more

afraid of, obviously, the contagion fears and the risks to the financial system, perhaps, that are being shown up in the bank failure, but also, in general, the risk to growth and that the Fed is probably closer to done than not, even if they go, you know, 25 or 50 next time. I don't think that's really the big swing factor. But this is something to watch to suggest that, you know, yields going lower may not be good news and maybe bad economic news is going to be bad news for equities as well and vice versa. Good economic news might start to be at least a little bit better. Take a look at another pocket of the bank system somewhat. This is the bank loan ETF. It's corporate leveraged bank loans, mostly floating rates. So when you see the price go down, it's because of perceptions of credit quality going down for the most part

or risk aversion or illiquidity. So it obviously has had a tougher time. This is a two year chart since the Fed started hiking and the economy has slowed. However, you are still up from those October lows. So it's not as if this is a headlong panic out of riskier assets. Back in late 2018, this thing basically went off a cliff. So it's one thing to keep in mind as we try to figure out if the Silicon Valley bank stuff can be sequestered. Nothing yet looks like it's truly systemic. It's much more about the potential headwinds on economic growth as we realize reduced asset values out there. I want to go back to the point you made on the on the first chart, Mike, and that is, you know, yields going lower that, you know, bad news is being reacted to as as bad news. And it's not it's not just the fact that they went lower. It's the fact that they've gone lower so much

over the last couple of days. I know you were talking about this in the last hour with Scott, too, but, I mean, a 40 basis point move lower in three days on the two-year Treasury yield. It's pretty incredible. We don't see that very often. No, we don't, Morgan. And I think part of the explanation is just the unique field position we had coming in. In other words, massive surge in those two-year yields as people tried to price in an even more hawkish Fed and get more concerned that inflation was getting sticky. Also, people heavily short bonds at the short end.

And so it was a little bit kind of spring loaded to have this kind of a move. That being said, you know, when two year yields are crashing and the yield curve is starting to un-invert, so to speak, and that's what's been going on. That, again, is one of those things that says people are bracing for the economy to falter and the Fed to have to become more dovish as opposed to worrying about, you know, yield spiraling higher from here. So then, Mike, scenario-wise, what might happen if, yes, right now people are thinking, oh, no way the Fed goes 50 basis points. Now they've got to go 25. But if CPI and PPI come in hotter than we would like or than some would like next week, then what happens? Maybe the Fed should be a little bit more aggressive, but investors think they can't. Then what's the reaction for bonds and equities?

Well, one thing to keep in mind is we're going to be somewhat in the dark around that because there are no Fed speakers after today until the next meeting, which is week after next. So I do think the market's going to have to kind of read the weight of the evidence to say, was this a real upside surprise in CPI? Does the Fed really feel as if 25 basis points in March rather than in May, six weeks later, is going to be the difference here in terms of finally, you know, putting inflation to bed. So I do think it could be a little bit of a skittish environment. On the other hand, if there's some kind of persuasive solution to the Silicon Valley bank thing, we look at a regional bank index that's been down 18%

this month. My point is there's also room for relief being built in here. I could paint a picture that says we had a 200 billion dollar asset bank that was part of the S&P 500 go under in days and the S&P 500 is only at a nine week low. That might seem like Pollyanna, but my point is you just don't exactly know what's already priced in and what the next shock might be from what direction. All right. Mike Santoli, we'll see more of you this hour. Thank you. After the break, we will talk to Y Combinator president Gary Tan about why he says the Silicon Valley bank failure could be a, quote, extinction level event for startups that could set innovation back by 10 years or more. Overtime's back in two. The Silicon Valley bank collapse rattling the

startup world. One venture capitalist calling this a potential extinction level event for startups that could set innovation back by 10 years or more, adding big tech will not care about this. They have cash elsewhere. All little startups, Tomorrows, Googles, and Facebooks will be extinguished if we don't find a fix. Joining us now is Gary Tan, CEO of startup fund Y Combinator. Gary, welcome. Okay, so this is my question. How many of these startups that have been through Y Combinator, for example, have their cash tied up at Silicon Valley Bank and over this weekend are going to try to figure out how they're going to

make payroll next week. Do they have to go to investors and say, can you front me some cash so that we can stay alive? YC has funded about 3,000 active startups right now. I would guess that this affects more than a thousand startups and about a third of those startups will not be able to make payroll in the next 30 days in the current configuration. You know, as of this morning, Rippling, which many startups use to manage payroll and benefits, you know, transfers were not being processed by SVB for payroll. And so that's a really existential threat for companies broadly. These are founders who are texting me and calling me saying, do I need to furlough my workers next week? Because

I do not have other bank accounts, a Google or a Facebook or even companies farther along with the Treasury Department. They're going to be able to weather this. But if SVB is your only bank, it's actually an existential risk. You're going to go out of business if you can't pay payroll. And that starts Monday. Okay. So game this out for us. What happens? Is this just law of the jungle then? Are investors going through their portfolios and triaging? Who can we scrape together cash for to keep alive first? And are private equity firms swooping in saying, hey, you know, if you can't make it, we're here for you, but here's the price that we're willing to pay? You know, private equity and all of these later stage investors, you know, you're

going to be able to look at, you know, balance sheets and do a lot of diligence. That is not what you can do for a lot of the earliest possible stage. Like we're talking about the things that will become Facebook or Google, but when they're only one or two years into it, they might be 10 or 100 people. You know, these are small businesses today, and many of them will go on to become huge drivers of the economy later. You know, 90 companies out of the 3,000 that YC has funded have become billion-dollar companies. And, you know, that's a crazy stat, but that number will come down very significantly, and this will hurt all of American innovation and our competitiveness in the world if we

allow these startups to go under in the next 30 to 60 days. This is sort of a a short term thing. We really need the help, whether it's from the government or other places, to be able to free up this liquidity crunch. I mean, this is not, some people might be looking at this as a bank problem. Certainly SVB is beleaguered, but you shouldn't be worried about them. You should be worried about their depositors because this is the future of tech in America and the world. Yeah. I mean, and just to put a number around it, at the end of 2022, the amount of uninsured deposits in the U.S. offices of this bank exceeded the FDIAC insurance limit. That exceeded that insurance limit was more than $151 billion, almost $152 billion, to your point.

And we've seen a number of high-profile investors. Now you're starting to see some California lawmakers come out today and suggest and demand that depositors be made whole, even if that means the federal government stepping in to the tune of some sort of a bailout. Is there any reason to believe that depositors aren't going to get made whole in this process? I guess that's a I do not have special access to whether or not SUV is solvent or not. You know, the experts that I talk to say that we're on a path where this, you know, will be resolved in weeks or months. The opinions are sort of all over the place. You know, it's a live situation. We don't know what's going to happen to the depositors long term. But what I can say is that these thousands of currently small businesses that would become big drivers of GDP in the United States over the next 10 years, they're never going to get a chance to actually be that in the future.

And that will be to the detriment of thousands of jobs, if not tens of thousands of jobs in the future. And that will be to the detriment of thousands of jobs, if not tens of thousands of jobs in the future. These depositors will not survive weeks or months without some sort of plan from the government. Gary, could this also be part of a repricing of some of the startup ecosystem that we've been talking about for a while, where, yes, people are maybe avoiding

having to raise more because they didn't want to get their valuation taken down. They didn't want to come public because the public markets aren't. Could this end up where they actually have to get valued in order to get an inflow of cash?

And then various institutions, including public companies that are holding not the seed stage, but some of the somewhat larger startups on their books in their venture portfolios have to reprice that as well. I think the financial world does not have the capability to save these companies. Like, we will just wholesale throw out startup innovation in America if we allow these companies to die in the next weeks. And it really is a matter of next week. I have companies that are calling me saying, how am I going to make payroll? All of my legitimate cash that I was using to plan out my, to be able to even just run the business, you know, was in a bank account that

I do not have access to anymore. And so, you know, what the FDIC really does need to do is take into account these people, you know, these are the small guys who, if we damage them, it hurts us all. And there will be a catastrophic, this is a national security issue because this is a lot bigger. This will splash across all of the economy. So we've gotten some reports that in the last couple of days for the people who, the depositors, for example, who were able to pull their money out of Silicon Valley Bank and put it to work elsewhere,

that some of the other banks within the Silicon Valley ecosystem have been maybe perhaps benefiting from that shift in activity. Is that a situation that's going to continue? Or especially if you're the member of a board and you have a fiduciary duty, are you going to advise the founders in your portfolio to maybe put your money with a too-big-to-fail bank? And does this then potentially cause a risk to some of the other companies and banks that are operating in Silicon Valley, including, by the way, some of these neobanks like Mercury or Brex that have been looking to corner some more of this market? I think boards across the ecosystem and founders

across the ecosystem need to protect themselves against something like this. This has never happened before, obviously. This is, we call it an extinction level event because these are black swan events. And guess what? We've been hit today. And my number one priority is we have literally hundreds and across the startup ecosystem easily thousands of startups that do not know how to pay their workers starting today and Monday.

Yeah. Gary Tan, sobering assessment. Thank you. Thanks for having me. What troubles me, one of the things that troubles me about this, I talked to a number of people today, CEOs, who really didn't have a sense of what has happened with Silicon Valley Bank and what the follow-on implications are. But so many of the VCs who they deal with and the people in their circles have money there. So some are saying, oh, I'm sure it'll be fine. Somebody will step into that role. But also saying, but I'm not exactly sure what's going on. It's going to be quite a week.

It's going to be quite a week. I was talking to Arjun Sethi over at Tribe Capital about all of this earlier today. And, you know, he had been advising some of his company, you know, some of the companies that he works with to maybe start to diversify away from the bank a couple of days ago. And one of the things he was saying is he thinks that this is a shakeout that's going to take three to six months. And hopefully it is only three to six months. And hopefully it is only three to six months and hopefully it's sooner than that. But we know from other bank fallouts in previous eras, and I realize those are very different circumstances and very different situations, but that unfortunately these things can take a very long time. Yeah. Hopefully that's not the case here. Well, up next, the two financial stocks

that one expert says are buying opportunities in light of the fallout of this situation. As we had to break, check out the scorecard for the week on the major averages. It was the worst of 2023 so far. And take a look at the Russell 2000 small caps index. It fell 8% this week, gave up nearly all of its gains for the year. We'll be right back. Welcome back to Overtime. It's time now for a CNBC News update. And for that, we turn to Seema Modi. Hi, Seema. Hey, Morgan. Here's what's happening at this hour. Five people have been arrested

in connection with the kidnapping of four Americans last week in Mexico. They are charged with aggravated kidnapping and intentional homicide. Two of the Americans were found dead and the other two are now back in the United States. Green investments were on the agenda today as President Biden met at the White House with European Commission President Ursula Van Der Wijn. The two stressed to reporters how they are aligned on climate change, but there have been complaints in Europe that the clean energy subsidies in Biden's Inflation Reduction Act give American companies an unfair advantage. And authorities in Oregon have released surveillance video of a murder suspect's running escape from a courtroom. A 28-year-old man suddenly made a break for the door, leading to two sheriff's deputies in a chase throughout the courthouse's corridors. He did manage to get away, but was arrested about two

hours later after allegedly breaking into an unoccupied apartment. There you go. Morgan, back to you. All right. Seema Modi, thank you. Let's check out the biggest decliners this week in the S&P 500. SVB, of course. Signature Bank, First Republic, Charles Schwab and Lincoln National all round out the top five. Perhaps unsurprisingly, let's get to Mike Santoli at the New York Stock Exchange. He's taking a closer look at Schwab specifically. Hi, Mike. Hi, Morgan. Yeah, this has been an overhang on Schwab. This idea that a lot of their customers have been taking their cash deposits out of Schwab's bank

and sort of shoveling it over into the money market instruments and other yield bearing cash like accounts. And that's kind of raising their cost of funding. So you see, it was sort of weak, but then plunged. Schwab shares have relative to the S&P 500, but also relative to the broker dealer index or the broader kind of securities brokerage index. Now, I don't want to put Schwab directly in the same category as Silicon Valley Bank. This is mostly about what they call customer cash sorting within Schwab, as opposed to kind of people just shutting down their Schwab accounts and going away. And there's also the analysts saying that Schwab has plenty of cash and borrowing capacity to be able to meet any of this activity and deal with the higher funding costs without having to sell assets at a loss, for example. But it does show you that investor

behavior changing is influencing the institution. So this is total money market fund assets. This goes back, obviously, to 2007. We basically hit five trillion dollars for the first time ever. And you see, this is when yields were nothing and the Fed started tightening. And obviously, it's drawn a lot of cash that way. Now, I'd be sometimes tempted to say so many people piling into money market funds, maybe as a contrarian play, is bullish for stocks because everybody is shunning risk and going into cash. The problem is here at the bottom in 2009 of the stock market, when the great financial crisis culminated. You had about $4 trillion in money market assets. So we're up 20% in assets total, while the equity market value is up by

like five or six times since then. So the point is, as a percentage of stock values, we do not have a tremendous cash cushion yet, but it is building fast. Yeah. Thanks, Mike. Remember Tina? She was fun, but she's gone. Our next guest sees this as a buying opportunity for Schwab. Joining us now, Bill Stone. He is chief investment officer of Glenview Trust. Bill, good to see you. So you view this as an opportunity. I wonder, though, is this a moment when investors are waking up

to the idea that they can get yield elsewhere, and so margins are going to get squeezed by Schwab and others? Is all of that priced in? I think a lot of it's priced in. So you're right. I think that that's the differentiation with the Schwab that I think makes it interesting. And I agree. It's probably, you have to think to be a long-term investor because short run, I think there's a good chance that the earnings are squeezed. It's an earnings issue

because of the large amount of essentially banking that Schwab does now, like you mentioned, in terms of earning money on cash with them. But I don't think it's any sort of, I'm highly confident it is no sort of liquidity issue. So I think if you

look at a high quality company with a great brand like Schwab and you can buy it at times like now when it's really gotten crushed due to what are clearly short-term headwinds here, this whole cash sorting issue, I think in the long run, you'll be real happy. Again, short run, it probably continues to be a bit choppy at best. So I've been trying to think about other potential impacts from rising rates with these chickens coming home to roost from that. And I was wondering about leveraged bond funds and closed end funds. Are we going to start seeing with these interest rate pressures, either the payouts going down on closed-end funds or, you know, some bond funds that use leverage getting into some trouble for a similar reason

of Silicon Valley Bank. You know, the bond assets on their balance sheet just aren't worth what they used to be. Well, I think it's a great analogy because essentially a part of the problem at Silicon Valley was it was essentially a leveraged bond fund, right? So you're taking deposits in, which is kind of easier leverage, right? And then you're buying a bond portfolio. And it's kind of the exact same thing. So I don't know what else to say. But, yes, I think you're right.

I generally advise I don't care what's going on. It's generally a good idea to avoid those over the long run. All right. Have you been fielding calls today, given the fact that we've had this big sell off in the market? We have all these concerns about about, you know, whether there's whether there's contagion to be had around SVB today. Have you been fielding calls? And if so, how are you counseling the folks that that have money with you? And what are you telling them to put their money into right now versus what to avoid? Yeah, so we've had a few, and I put together a little note for all of our investment principals, really to talk about the

fact that I, you know, I guess I'm a chorus of people you've probably heard from. I don't think this is a systematic issue. I tried to lay out why I think Silicon Valley failed and why it's different from, say, a Schwab, which we own for clients, a Bank of America, a JP Morgan. And I think there are very explicit differences. Now, that being said, I think it continues to our theme, which we've talked to clients for, you know, maybe, you know, longer than they'd like, which is you have to stick to quality here because I think, you know, the rise in rates and the economy uncovers these kind of cracks. So you want to stay to high quality companies and avoid, you know, the lower quality and more cyclical kind of companies. So you'd be buying into some of those quality names on a day like today, for example? I think, yes. I mean, I think you've

given up essentially all the gains for 2023 in the S&P 500. So, yeah, I mean, I think as a long term investor, it's while it may get worse in the short run, you know, certainly, like I mentioned, I think you're uncovering some companies like, you know, Schwab or even a Bank of America that's, you know, essentially 40 percent off a tie and selling at a multi-year kind of low book value. Bill Stone from Glenview. Thank you. Thank you. Well, let's bring in CNBC's David Faber on the news line with the latest on Silicon Valley Bank. David, what's going to happen from here? I imagine it's going to be a weekend filled with news and fast-moving events.

I think you're right, Morgan. I think that's very likely. I mean, obviously, a lot of questions still right now. But certainly what I'm hearing is, the first question is, what about the uninsured depositors at Silicon Valley Bank? I know you guys have hit on that a bit. You've got a lot of businesses that rely on it that have deposits there. How do they manage their business and their checking accounts? Again, those uninsured depositors are key, and that's obviously a concern more generally and one reason why we're seeing weakness in some other of these banks that have a large percentage of their deposits above the $250,000 mark, meaning where they're insured to, and maybe sort of

specialize in some of their lending. But specific to the weekend, you know, if the FDIC can find another bank to take on those uninsured deposits, that would be a good thing. That would mean those people will see their money a lot sooner. If not, the question then becomes, how long will it be? I think there's still an expectation that those deposits will be money good, but it could be some time. There's going to be a lag time and perhaps a significant one. And so you're also going to start to see a market develop in people who are willing to buy those deposits at a discount for those who need liquidity. So, David, are you hearing anything about, if not a bank, or at least in the nearer term, who might come in to rescue, to bail out some of these little companies, innovative little companies,

which is what Silicon Valley was built on, who are running out of cash fast? Yeah, no, I don't. I'm not hearing that, those names. What I'm hearing is more, will the FDIC be successful in finding a bank, another large financial institution, to take on these uninsured depositors and therefore eliminate that concern that you're raising, John? Specific otherwise, that's going to be an issue. How do you make sure that these businesses do have the liquidity they need? And that's yet again,

something that the Fed or the FDIC and the government's going to have to deal with. You know, there is going to be losses here, clearly, on the portfolio of assets that needs to be sold. But that will be borne most likely by the equity holders, as we know. And beyond that, then there's also the question of bondholders at Silicon Valley Bank. Those claims have also been trading at a significant discount to par. But as for the specific answer to what you're raising, John, I have not heard specific names in terms of how are you going to deal with these businesses that need access to money, essentially, that is locked up, if you want to call it that, because they can't get to their deposits.

Right. David Faber, on vacation, yet also on the story. Thank you. Sure thing. Now to the break. Why the SVB failure could be an open, it could be opening up, sorry, a hacking threat. Here's a warning you need to hear from cybersecurity. Next.

Welcome back. With chaos comes danger. Today, I spoke with two late stage security startup CEOs about how geopolitics and the Silicon Valley bank collapse are creating cyber risk in phishing and ransomware. Here's Cohesity's Sanjay Poonen. Schools are very vulnerable because then parents are very freaked out that they're getting at their kids, you know, school grades or whatever have you. And if you looked at the recent attack at medical systems or hospital records in Ireland, there was one that was very prominent. You know, the Irish government medical records were hacked by nation state actors from Russia. And they ended up having to pay the ransom because the recovery of the data, they figured, would take six months.

Arctic Wolf's Nick Schneider says confusion around SVB could open an attack vector. Any time there is change, especially change that's happening in mass, you know, across the entire industry or the entire community, there are opportunities for the attackers to exploit that. And they'll look to exploit it through phishing campaigns that have, you know, language that is similar to an email that they might expect to get from the bank or from their CFO or from their board member or fill in the blank. One more thing for folks affected by the events of this week to now keep an eye on and be concerned about. Well, coming up, more potential investment opportunities in one space, our next guest says could provide a great inflation hedge. We'll be right back. Welcome back. Let's take a break from the banks and talk about another rate sensitive sector, real estate. Our next guest says she's looking for opportunities in apartments and industrial REITs. Joining us now, Uma Moriarty, Center Square senior investment strategist. Good afternoon to you. Apartments and industrial REITs, walk me through why you see opportunity there right now. Yeah, great to be here. You know, as it relates to REITs in the

public space more broadly, something I think applies across all sectors is that we've seen a pretty big repricing because of that rate sensitivity that happened already in 2022, right? So at this point, we're looking at fairly de-risked valuations. Apartments, one of those areas where we think have a lot of really great secular demand drivers as home ownership continues to be very unaffordable. So you're seeing people remain renters for longer, especially in some of the coastal markets where there are elevated barriers to new supply coming into the marketplace. A lot of these rental options, that's really where people are elevated barriers to new supply coming into the marketplace. A lot of these rental options, that's really where people are going, right? So that presents

a really good opportunity here for us today. Industrial, you mentioned, we're looking at a retooling of supply chains globally. We've seen so many external shocks to supply chains that a lot of U.S. companies are really looking at how they can make sure their goods can be where they need to be when they need to be there. And industrial real estate is really the backbone of that supply chain. So still seeing really strong demand for industrial real estate on the ground today. Yeah. You mentioned public, public REITs. I mean, there's public REITs and then there's the private REITs. Have we seen the same sort of right sizing in the private REITs or is there still more, I guess, more pain to be had in that part of the market?

Sure. So private REITs are really valued the same way that private real estate is valued. What we've seen historically over and over again is that the public market bottoms at the same time when the private market peaks, right? So we've seen that bottom here in the public market. We've seen that peak in the private market. So we're seeing some pain ahead coming through for private real estate. But we've really seen most of that already happen in the listed market, which is presenting a really good opportunity for investors today. Yeah, we've had a number of folks on our air in recent weeks, Sam Zell, other folks from real estate who have said that they think that within commercial real estate, the shoe is yet to drop. And I realize there's many different areas when you're talking about commercial real estate. We just talked about two.

But where would you be steering clear? Absolutely. You know, across the commercial real estate space, one of the areas where we're pretty concerned is the office space, right? There's a lot of uncertainty as it relates to people coming back into the office, what the value really is there for an office building anymore in terms of demand and things like that. And so office is a place where we're pretty concerned. But as we think about the broader listed real estate market, something I think that's really important to note today, which is very different than what we've seen in prior downturns, is that balance sheets, which is something really important today, right,

really right-sized across the REIT space. Broadly speaking, we're looking at listed REITs at some 30% leverage. Almost 90% of that is fixed rate. So fairly low exposure in the listed real estate space to some of the interest rate risks that we're seeing more broadly out there. And when I say office is an area to be concerned about, in the listed real estate space, the exposure to office is sub 5%, right? A lot more exposure to some of these areas like rental, residential, like industrial. Healthcare is another area where we're really bullish about. Those are spaces within the listed real estate space you can get a lot of exposure to today. And we've seen, again, you know, prices really being de-risked at this point because of what we saw last year in the space. And at the same time, demand drivers that are very secular

in nature and less so sensitive to some of the economic ups and downs that we're experiencing today. Okay. Some good context there. Uma Moriarty, thanks for joining us. Thanks for having me. Coming up, we're going to talk to one expert who says the odds of a 50 basis point hike are evaporating. Plus, we're going to hear from the CEO of cloud company HashiCorp, as that space takes a major hit in this week's sell-off. HashiCorp, ticker HCP, down big today with the NASDAQ and growth tech overall, but reported results yesterday that beat the street and guided to improving margins. I spoke to CEO Dave McJanet about how belt tightening is helping them in phase one of cloud,

where customers were rushing to get in. Now, in phase two, they're scrambling to get efficient before the next leg of growth. Our products, in a real sense, are how people provision and compute on all these different clouds, for example. And so in that phase two moment, generally, that's when our products get brought in, where they go, hold on a second. I can't have 400 Amazon accounts. I need four, and I need to broker access to it. So I think that's really the catalyst, actually, for how people get their cloud spend under control. A little silver lining there on the cloud route, Morgan. I see what you did there. And let me just say, you really own the cloud space. Thank you.

You are, I'm trying to find a pun and I just can't. It's true. Okay. Well, after the break, Goldman Sachs chief economist Jan Hatzius was asked about on CNBC today about the odds of a 50 basis point hike at the Fed's next meeting. Here's what he said. I think it is possible. I mean, you know, Jay Powell put it on the table clearly in his testimony. But up next, strategist Peter Bukvar tells us why he says there's now, quote, zero chance the Fed goes 50. We'll be right back.

Welcome back. Predictions about the Fed's next rate hike have been changing rapidly this week, but our next guest says one move in particular is definitely not happening. Joining us now is Bleakley Financial Group CIO Peter Bukvar. Peter, great to have you on the show. You say 50 basis points is off the table. Why? Because of everything we've seen play out in financials the last two days? Well, the Fed's already downshifted.

They went 75 four times. They went to 50. They went to 25. And then to ramp up to 50 I see is definitely not happening, especially after this week where the ripple effects of SVP on the entire venture capital community should be enough for the Fed to look themselves in the mirror and say, wow, we've done a lot. Maybe we only got a couple of rate hikes left. Or at least just take a lay of the land and see how the economy acclimates to this, what I call, shock therapy rate increases.

So, Peter, you and I have had this conversation that there are three stages to a bear market, and that when you're entering the third stage, something typically breaks. Are we entering the third stage of a bear market right now? Well, I still think the second one being the economic consequences of the very sharp rise in interest rates. I think we're still in the middle of that. The third phase will start to be when investors just start throwing in the towel and don't want to own stocks again. So I still think that there's a road ahead before we even get there. What's the impact of CPI and PPI next week, you think, without the

Fed speak? Well, up until the SVP news, it's clear that the stock market was solely trading on where they thought the Fed would move rates. And the bond market and stock market correlation was pretty tight, as opposed to the stock market trading on fourth quarter earnings over the past month plus. So CPI, PCE, and payrolls are the three most important data points that the market's obviously going to focus on. And any hint of further disinflation will be celebrated by the market. But that said, at what point does the stock market start to focus on the recessionary situation that we have building here and that bad economic news would actually be bad for stocks?

And I think maybe this week could be the first sign that we're shifting towards that with stocks down and interest rates lower. Is that what you think investors should be focused on? I do. Well, if stocks over time had any relationship to earnings, then yes. I do think that the market needs to take their attention away from, oh, how many more rate hikes do we have, to understanding that just higher for longer is a rate environment that itself is going to be a continued form of tightening. Earnings recession is going to continue as the quarters progress. And we need to further re-rate this market to take that into

account. Peter, quickly, what's the bond market telling us given the moves we've seen? Well, with the curve inversion further deepening, to me, it's clearly saying recession and more so possibly a hard landing than a soft landing. I mean, just ask the VC community today. There's no soft landing there, and you have the potential of this spreading to other parts of the economy. Okay. Peter Buchbar, thank you for joining us. Thanks.

A down day for the markets, a down week for the markets. It's the worst week for the year for the major averages. And we are certainly keyed up to see what comes next week, including, as we just talked about, that CPI number on Tuesday. How much of a valuation reset do we all get? Not just Silicon Valley. I mean, that's a big concern, what's potentially happening with startups there. We'll continue to track it. We will.

That does it for overtime. Fast Money starts now.