A BANK FAILURE
Is this an isolated incident or the begging of a new economic disaster?
The Silicon Valley Bank on Friday became the biggest American bank to fail since the collapse of Washington Mutual in 2008. At the height of the global financial crisis, in 2008, the implosion of Washington Mutual, as well as the investment banks of Lehman Brothers and Bear Stearns, was followed by a system-wide failure of banks. To avoid an economic collapse, a big government bailout was initiated by the government and paid for by the tax payers, This started the US debt soaring by the trillions. From 2008 to 2015, more than 500 federally insured banks failed. The big question bothering investors today, is. this indicative of ‘the canary in a coal mine,’ or is this just an isolated incident?
It’s unclear whether the collapse of Silicon Valley Bank (SVB) will spread to the broader industry. SVB was best known for its lending to technology start-ups and it had $209 billion in assets at the end of last year, making it the nation’s 16th-largest bank. But that is still small in comparison with the top three BIG banks, which hold some 50% of total bank assets and have a much more diversified business model and customer base. But SVB and other Regional Banks (see 10 troubled banks below), do not have the same regulatory oversight as the BIG banks, as in 2018 President Trump signed a bill that lessened scrutiny for many regional banks. If some of the smaller regional banks continue to fail, this could be the beginning of a surprising sequence that will topple an economy, which has been built on escalating debt.
I believe there will be no big immediate fallout from this SVB failure. On the short run. there will be a Federal Rescue Plan of some kind. However, on the long run, every CEO’s competency can now be questioned, if he puts the company’s money in a Regional Bank. ( Roku will have to wait to obtain any part of its almost $500 million dollars.) This run to pull money out on SVB was caused by a ‘Twitter’ panic post, which could happen again to any Regional Bank. In my opinion, in the long run, the SVB failure will cause further consolidation to the 5 largest Big banks .This will not be good for the Regional Banks or the health of the US economy. What happened to the Saving and Loan Banks, Community Local Banks, Regional Brokerage firms and non-bank owned Brokerage Firms and Mutual Funds??? All gone! Wall Street wins + Main Street looses = An eventual economic disaster!
All economic disasters are a surprise and can start with something as simple as the SVB failure and escalate! Don’t’ forget the classic THIS TIME ITS DIFFERENT by Carmen Reinhart: It tells the story of eight centuries of Financial Folly. Each time after a catastrophe, (such as the Great Depression or 2008), economists agree that it could never happen again. Who could be so stupid as to let 10 banks control 70% of the US assets (to big to fail) and allow all the US economic growth go to the top 1%, while eighty people own 50% of the world’s wealth?
It is the Fed (KISS)
As I said in ISL #743, (with the Dow at 35,000), the reason that I believe the stock market is ready to resume it downside trend and turn into a true ‘Bear Market’ are many, but the main one is that the Federal Reserve is depending on higher interest rates to stop inflation. My worry is that the ‘cure’ may kill the patient. Also, I believe that investors should be worried as the Federal Reserve quickens the pace at which it removes one of its primary pandemic supports, quantitative easing, or QE.
The Fed’s balance sheet ballooned from a little over $2 trillion in early 2008 and $4 trillion in 2020, to a peak of nearly $9 trillion 2022. While QE brought investors back to the stock market and inflated stock prices, it also helped stoke inflation. Now, the Fed is reversing course through quantitative tightening, or QT, pulling back its support for financial markets while it raises interest rates to quell inflation. Investors should worry that the quickening pace of the Fed’s pullback could become too much for markets to bear, undermining the safety and reliability of the Treasury market.
If demand for Treasuries can’t keep pace with the supply, it could pull bond prices down. This could put banks and may BBB rated business in trouble .Prices move in the opposite direction to bond yields, a measure of borrowing costs. Higher Treasury yields would put more pressure on borrowers and investment portfolios already grappling with the Fed’s campaign to lower inflation by raising interest rates. I am worried that we are putting Q.T. on top of these rate hikes and it will have consequences that could push us into recession or worse.
See how the Fed’s actions to raise interest rates had a devastating effect on SVB:
What Happened at Silicon Valley Bank?
As interest rates have risen, many banks have become more profitable, because the spreads between what they earn on loans and investments and what they pay for funding has widened. But there are always exceptions; flush with cash from high-flying start-ups, SVB bought huge amounts of bonds more than a year ago. Like other banks, SVB kept a small amount of the deposits on hand and invested the rest with the hope of earning a greater return. That had worked well until the Federal Reserve began raising interest rates last year to cool inflation. At the same time, start-up funding started to dry up, putting pressure on many of the bank’s clients, who then began to withdraw their money. To pay those requests, SBV was forced to sell off some of its investments at a time when their value had declined. In its surprise disclosure on Wednesday, the bank said it had lost nearly $2 billion.
SCB showed contracting margins over the past year. A Warning Sign:
|Bank||Ticker||NIM – Q4 2022||NIM – Q3 2022||NIM – Q2 2022||NIM – Q1 2022||NIM- Q4 2021|
|SVB Financial Group||SIVB||2.00%||2.28%||2.24%||2.13%||1.91%|
|Source::Market Watch FactSet|
10 Banks to Worry About
So now, the question is, which other banks might face pressure because their net interest margins have contracted, or because their margins have only expanded slightly. Below is a list of the 10 banks showing contracting margins over the past year, or the smallest expansions of margins:
|Bank||Ticker||City||Net interest income/ avg. assets – Q4 2022||Net interest income/ avg. assets – Q3 2022||Net interest income/ avg. assets – Q4 2021||One-year contraction or expansion|
|Customers Bancorp Inc.||CUBI||West Reading, Pa.||2.61%||3.10%||4.03%||-1.42%|
|First Republic Bank||FRC||San Francisco, Calif.||2.28%||2.53%||2.50%||-0.22%|
|Sandy Spring Bancorp Inc.||SASR||Olney, Md.||3.10%||3.34%||3.29%||-0.19%|
|New York Community Bancorp Inc.||NYCB||Hicksville, N.Y.||2.10%||2.06%||2.20%||-0.11%|
|First Foundation Inc.||FFWM||Dallas, Texas||2.35%||2.98%||2.41%||-0.07%|
|Ally Financial Inc.||ALLY||Detroit, Mich.||4.04%||4.20%||4.09%||-0.05%|
|Dime Community Bancshares Inc.||DCOM||Hauppauge, N.Y.||2.98%||3.20%||2.95%||0.03%|
|Pacific Premier Bancorp Inc.||PPBI||Irvine, Calif.||3.34%||3.34%||3.27%||0.07%|
|Prosperity Bancshares Inc.||PB||Houston, Texas||2.72%||2.78%||2.65%||0.07%|
|Columbia Financial Inc.||CLBK||Fair Lawn, N.J.||2.69%||2.78%||2.60%||0.09%|
|Source::Market Watch FactSet|
TAKE A LOOK AT ISL #729 ABOUT BANK STOCKS ( AN EARLY WARNING 3/14/2020)
“As stated above I worry about defaults on corporate debt and loans. What worries me most is the collapse of many bank stocks, such as Deutsche Bank (DB), HSBC Holdings, (HBC1.BE), Credit Swiss (CS) and Barclays PLC (BCS). Credit Swiss is down from 78 in 2007 to 8.16. My 25 year charts doesn’t show the stock ever being so low! Barclays was as high as 55 in 2007, now 5.40.That’s a 35 year low! DB was as high as 149, now 5.97. Each rally is met with another new low! What are these falling bank charts telling me? Trouble!”
FOR MORE, SEE ISL #742 (summarized below)
Trouble in China There is trouble in China. The Chinese Hang Seng Index has hit a new 10 year low. Also the China’s Consumer Confidence Index is at a record low. Something is wrong. Confidence in China’s economic foundations could cross a threshold, beyond which it becomes far more difficult to recover.
World debt $226 trillion up from $74 trillion in 2019. My concern is in the world’s ocean of corporate debt, worth $226 trillion up from $74 trillion 2019. US corporate debt has climbed during the same period from $18 trillion to $30 trillion. Two-thirds of non-financial corporate bonds in America are rated “junk” or “BBB”, the category just above junk. The growth in debt has now stopped, because suddenly investors are worried and interest rates are high and going higher
US federal debt to GDP was in 1980 34.5%, 2000 57.9% and in 2021 100% The US Federal debt is over $30 trillion dollars and is growing. It took the US from 1789 to 2016 to get to $15 trillion and only 6 years for it to double. With the spending of that kind of money, we could have eliminated US poverty and given health care for all. Now, we are just stuck with the problems, in addition to the debt! Total US and State debt to GDP is 142%. ANNUAL INTEREST ON DEBT; is $450 BILLION AND IS RISING AS INTEREST RATES GO UP. Here is the scariest statistic: OTC Derivatives are $600 trillion (10 TIMES WORLD GDP). $600 trillion is at about the same level that caused the 2008 trouble in the banking system. And now there is talk in Congress to let the US default on its debt. When you play with fire, you can get burnt!
Our DOWNSIDE PROJECTIONS ARE: a DOW of 28,000 to 27,000, NASDAQ 9,000 to 8,000, S&P-2,900 to 2,700. Don’t fight the Fed!
Dow 31,909, NASDAQ 11,138 S&P 500 3,861
Carl M Birkelbach
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com