The Dividend Cafe - The DC Today - Monday, March 13, 2023

Episode Date: March 13, 2023

Today's Blogpost - https://bahnsen.co/3mQzT2N There is really only one story in financial markets right now, and that is the collapse of the Silicon Valley Bank and various ramifications from that. We sent a special Dividend Cafe on all of that and more this morning!!! If all you do is read one thing, read that. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the DC Today, your daily market synopsis of the Dividend Cafe, brought to you every Monday through Thursday to bring you up-to-date information and perspective on financial markets. Well, hello and welcome to the DC Today. It is Monday afternoon and it has been such a bizarre few days and even kind of a bizarre Monday in terms of our normally scheduled programming. I'd like to just real quickly tell you what's going on. I, this morning between 3 a.m. and about I think 6.30 a.m., completed a special Dividend Cafe all on what's going on with Silicon Valley Bank, with the FDIC, with the Fed, and just the kind of sudden boost of distress and issue into the banking system. And it was a nonstop action over the weekend. So we did a whole Dividend Cafe that hopefully you received. It wasn't a podcast.

It wasn't a video. I'm going to do that right now where I'll talk about some of the things that were said. But if you go to DividendCafe.com, you'd be able to find some of those takeaways, that particular article. I think it had a lot to say. Then in the meantime, of course, I had been doing a normal DC Today over the weekend and that has now been published. Our kind of standard, the DCToday.com has some info on the markets and housing and the Fed and policy. And it really

would have been a pretty robust and interesting one. You had an employment number on Friday. You have this deal with Iran and Saudi Arabia, different updates on the housing sector. That's all there. But I don't think that's what you want me talking about right now. For those of you that don't read the things that come out that you're kind of captive to only a podcast or video, I want to make sure I address the issues going on on the banking front, which is certainly one of the larger financial news stories we've had in quite some time. So all that to say, at DividendCafe.com, you have this article devoted entirely to this subject. At the DCToday.com, you have the normal market update. And then now I'll make a few comments and leave it there. On Dividend Cafe, by the way, on Friday, our normal Div Cafe at the

end of the week, we're going to be completely devoted to Q&A. Already we have kind of about 10, I think, different questions that have come in. And I did this maybe a month ago. I'm just going to devote the whole Div Cafe to various questions. So if you have any, you want to get in on that, get it to us as soon as you can. get it to us as soon as you can. Look, I got to think most of you listening right now or watching are not just tuning in from what really began as a story last week. So I don't want to spend too much time giving the setup. But the largest bank failure since the financial crisis, since Washington Mutual's failure in 2008, has taken place. Silicon Valley Bank started with the threat of a Moody's credit

downgrade on Friday. They went to stem some of the issues from that by going to raise capital. Word got out they were trying to raise equity capital and that caused a whole bunch of depositors to pull money out. A whole bunch of depositors pulling money out caused them to not be able to raise equity capital. And by Friday morning, they had an upside down cash position. And the FDIC took over the bank. They did spend some time this weekend. I don't know how serious it was, but they did attempt to find someone to take over the entire bank. They held an auction and nobody participated.

I still suspect there could end up being some transactions with other financial institutions for parts of or all of this particular failed bank, as well as other banks that are experiencing certain distress right now to solidify their deposit position. But all that to say, the vulnerability intensified and then it led the FDIC to join forces with the Fed and the Treasury to announce that they were backstopping all uninsured deposits. So FDIC has an insurance limit of deposits at $250,000. And they protected all those balances above and beyond. There was a crypto company that had $3 billion on deposit. There were publicly traded companies that had $400, $500 million on deposit and an awful lot of tech startups and VC-backed companies that were supposedly at risk of not being able to make payroll. They've now been given access to

their own cash and the FDIC is backstopping that as people inevitably withdraw funds. And then, of course, we wait and see what happens through the resolution process. Do I believe this is indicative of a whole lot of other banks? I most certainly do not. Does it matter? No, not really. Because if you get a run on the bank in a fractional reserve banking system, it's a self-fulfilling prophecy. When banks have went out $7, $8, or $9 for every $1 deposits and you start having deposits withdrawn, it doesn't take a long time to bring a bank down.

And that's the fear that will happen in regional banks. The difference with Silicon Valley was that their deposit base was never particularly solid. It was largely very concentrated in one geographic region and especially one industry. And that led to just an utterly unreliable depositor base. But they raised a ton of deposit monies throughout 2020, 21, 22. You know, you had this boom, really more 20 and 21 as there were all these SPACs and IPOs and venture capital firms. You had very low cost of money, a lot of liquidity sloshing around and a lot of firms in a capital raise, both debt and especially equity. And it just led to a really bizarre,

idiosyncratic bank that then proceeded to not manage their own balance sheet well at all. And their mismatch of assets, which is what they were doing with their capital by long-dated treasury bonds and mortgage bonds in particular, and then their liabilities, which is primarily their deposits. Their deposits are an asset for their depositors and their liability for them. And that mismatch created this problem and the vicious cycle that they found themselves in. So will it be systemic? I think that that was the intent of the feds to say we're going to backstop uninsured deposits to keep it're going to backstop uninsured deposits to keep it

from going systemic. I won't in this forum offer the comments I have on the policy decision made, which are a bit more nuanced than just a I support it or I don't support it. There's a lot of complexity to it. And there's other comments I made in the article this morning that will help reveal where I stand on those things. I do believe that some of the regional banks under a lot of distress are very, very, very oversold and that they have a capital position and a business model that will allow them to come out of this in a very strong position. But right now, the sentiment is totally going against them as people are just thinking there's three or four banks in the country they can trust and the rest they don't.

That sentiment will have to change and we'll see what happens in the days ahead. The bond market has rallied ferociously. I'm not kidding when I say the one year Treasury bill was over 5% a couple of days ago and it's at 4% now. So you had a huge rally higher of bond prices the one year, the bond prices, the one year, the two year, the five year, the 10 year, the 20 year, et cetera. The 10 year is now back down to about 3.5%. It had been at four. And so especially on the short end of the curve,

but really all across the term structure, you got significant downward pressure and yields that put upward pressure on prices. And I would add that the terminal rate is now peaking at 5%, the high level the bond market is expecting, which is not a surprise given the fact that the Fed funds futures are now pricing in a 0% chance of the Fed hiking half a point next week. Instead, about a 60% chance priced in of a quarter point and a 40% chance of no hike at all. That's how severe some of the tightening has taken place in the last

couple of days. And one of the positions I am taking now is that the quantitative tightening is very much in jeopardy. I don't know how they can proceed with quantitative tightening when this amount of withdrawal of excess reserves has already taken place, particularly from small and regional banks. So all that to say, expect ongoing equity volatility. Expect some backlash in crypto. Expect some backlash. And by crypto, I mean the crypto ecosystem more than whatever the price of these stupid coins may be. Expect some backlash in the state of California, which has more vulnerability than a couple of these large banks, both that have already failed or are vulnerable right now in terms of their positioning. I do not expect any

depositor failures at all. I think that they have provided that backstop and that at this point it would be incomprehensible that they would say we're covering uninsured deposits for these banks, but not these. I don't know how long that'll last and I don't know what clarity we're going to get. But I mean, this is for sure a indication that for the time being, you know, depositors don't have to worry about such a thing. But what happens with the equity and debt valuations of some of these banks and their capital structure, we shall see in the days ahead. The DCToday.com has more on housing and other related issues, but I just wanted to limit my comments to this stuff with Silicon Valley Bank.

It's been, gosh, some of the best research I've read in a while. I really feel blessed for some of the resources I had over the weekend. Even some of the media reports that I generally am real critical of, there was some good stuff. There was some real not good stuff too, but that comes with the territory. So I assure you, my entire investment committee is deeply committed to continuing to track this and find where there may be opportunities, where there may be vulnerabilities. I think we're doing the right things as we go, but there's risk in everything right now and we're going to continue watching and I'll keep you updated. I'll be back to you tomorrow with another DC Today and reach out in the meantime with any questions you may have.

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