Lantz Team Perspective on Silicon Valley
Greetings everyone and happy spring – soon, hopefully? If you’re in the Midwest I think we’ve had more snow storms in March than the rest of winter combined. And, this past few days we saw a bit of a different storm in the economy and the markets so we wanted to bring you our thoughts and try and provide some perspective on what we’ve been seeing. I think each of us have sat through a few hours of conference calls and webinars and read through dozens of pages of commentary the last few days.
Let’s start with the banking news late last week and over the weekend which unfortunately stirred some not so great feelings from the 2008 and 2009 financial crisis. Although banks do fail from time to time including during the pandemic, the FDIC seizure of Silicon Valley Bank last Friday and Signature Bank over the weekend were two of the larger closures since 2008. As you may have seen there were concerns developing over the weekend of whether the issues for these banks would spread to other banks throughout the financial system. In an effort to calm nerves, the Federal Reserve and FDIC acted on Sunday to insure that all depositors will have access to their funds even those exceeding FDIC Limits, and according to reports those funds were available on Monday. It’s also important to note that while bank closures are always unnerving, we’ve learned there were some specific factors that made these banks riskier than many others including a concentration of uninsured deposits (according to the news, over 80%) and heavy focus on loans to very specific sectors including cryptocurrency in the case of Signature bank and Tech startups and venture capital in the case of Silicon Valley Bank. So once confidence in those institutions was shaken in those sectors it snowballed particularly fast given the age of tech and the nature of the depositors.
What Silicon Valley and Signature have in common with other institutions is the fact that many banks over the last few years purchased longer term investments such as treasury and government issued mortgage bonds to try and reach for yield when rates used to be low. As you all know from listening to us and your own portfolios, those low rates have risen sharply in the last year. Because bond values decline as market interest rates increase, those securities on bank balance sheets have gone down in value as rates have risen. This is not a big deal in most cases because the bonds will come due at full value when they mature. However, if the banks are forced to sell these bonds early and realize the losses when depositors start to rapidly demand funds, now you have a problem. That’s what appears to have happened here.
Many other banks have seen their stock prices decline even though the Federal Reserve and FDIC have made it clear deposits are protected and have set up facilities to make sure it happens. However, as we best understand it, the protection of depositors will come at the expense of bank shareholders and bank profits. Banks will have to pay more into the FDIC insurance, and they will have to pay more interest at some point to depositors as well which will reduce their profits for a while. This reduced outlook for banks in light of the recent events may be responsible for some of the declines. Its also possible that some additional banks could be shut down but, again, depositors should be protected.
Some of you have also contacted us about Charles Schwab who’s stock price has also declined. The information we have received from Schwab is that a high percentage of their bank deposits are below existing FDIC insurance amounts, they have consistently increased their asset base month over month, and they have access to ample liquidity to meet any depositor needs. All signs of strength. We are posting some additional links to information from Schwab about their financial strength and their brokerage account protections and insurance. More importantly for you, we have worked to make sure that the accounts we directly manage do not have bank deposit reserves above FDIC limits. Based on individual client goals and objectives, risk comfort levels, and client specific plan and portfolio needs, we have utilized FDIC insured certificates of deposit, treasury notes, short term bond mutual funds and exchange traded funds, highly liquid exchange traded funds, and municipal government bond money markets and US treasury money market funds to make sure cash balances do not get excessive. This is something we do as a standard practice in managing accounts and not just a reaction to recent events.
The other questions that are starting to come up is what does this all mean for the economy and what will the Federal Reserve do from here. Well, we cannot really be sure for the moment although many will claim on both sides that they know what the Fed HAS to do. Many have talked about the Fed continuing to raise rates until something breaks which begs the question – is this it? At the same time, as anyone who’s been to the grocery store knows, inflation is not dead yet so perhaps rates will continue to increase. We’ve seen no shortage of “expert” opinions on what the Fed will do from here, just like we’ve seen no shortage of opinions, mostly wrong, over the past year. It seems likely that regardless of what the Federal Reserve does in the short term, tighter lending conditions, higher rates, and consumer reactions to inflation will continue to effect the economy. Trying to guess the motives or complain about the actions of the Fed is something for a TV personality and doesn’t help very much anyway. Instead we will continue to work with you to understand your short term needs, have those funds in an appropriate investment, and help you plan for your longer term goals and objectives and invest accordingly with a comfortable level of risk.
As always, please do not hesitate to reach out to us with any questions or concerns. Additionally, watch the assets you have at banks. If you are concerned about FDIC limits or just unsure that your bank accounts may have excess cash, talk to us, and we can set up a solution for you.
The Lantz Team
Here are Schwab’s comments:
Schwab’s brokerage account protections: