Big Crisis?
1. SVB failed with $200 billion in 24 hours
2. Stock markets lost $2 trillion in 5 days
3. Crypto markets lost $100 billion in 24 hours
4. U.S. banks lost $100 billion in 2 days
5. Bonds post biggest move since 2008
This week, not only are we dealing with the collapse of SVB, but we are receiving crucial inflation data.
This week will dictate both market sentiment and Fed policy.
With markets closed, this is like Bear Stearns in 2008.
On a Friday, Bear Stearns collapsed from liquidity issues.
2 days later, JP Morgan acquired them.
If no one buys SVB this weekend, prepare for a brutal week.
Key points –
- 50% of all venture-backed startups in the US have accounts with SVB.
- More than 2,500 funds have accounts with SVB.
- Regulators are racing to sell Silicon Valley Bank’s, $SVIB, assets to free as much capital as possible before Monday.
- Regulators know this weekend is their only chance to save the system.
- Once the market reopens, a plan must be in place or the bank run will spread.
- Those with $250,000+ at any bank now know of the danger of uninsured deposits.
- Nothing is stopping the bank run from continuing this week.
- SVB collapse marks the 2nd largest bank failure in U.S. history
- Total U.S. credit card debt set to cross $1 trillion with interest rates at a record 25%
- Interest rates are rising at their fastest pace in history
- Mortgage demand at a 30-year low with home prices falling at their fastest since 2011
- Total U.S. mortgage debt now double the 2006 peak
- 36% of Americans have more credit card debt than saving
- Average American spending a record 46% of their income on house payments
- U.S. government debt on track to hit $50 trillion in 10 years
- Inflation has been above 5% for 21 straight months.
How Silicon Valley Bank Failed
On Friday, Silicon Valley Bank, a lender to some of the biggest names in the technology world, became the largest bank to fail since the 2008 financial crisis. The move put nearly $175 billion in customer deposits under the control of the Federal Deposit Insurance Corp.
Regulators take over the bank.
The California Department of Financial Protection and Innovation shut down Silicon Valley Bank on Friday, less than two days after the bank tried to persuade clients not to pull their money over concerns it was running low on available cash. The regulator appointed the Federal Deposit Insurance Corp. as the receiver.
Bank was caught by higher interest rates.
Flush with cash from high-flying startups, Silicon Valley Bank bought huge amounts of bonds more than a year ago. Like other banks, Silicon Valley Bank kept a small amount of the deposits on hand and invested the rest with the hope of earning a return.
That had worked well until the Federal Reserve began raising interest rates last year to cool inflation. At the same time, startup funding started to dry up, putting pressure on many the bank’s clients — who then began to withdraw their money. To pay those requests, Silicon Valley Bank 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.
Will it lead to a banking crisis?
Silicon Valley Bank is small by comparison with the nation’s largest banks — its $209 billion in assets pales next to the more than $3 trillion at JPMorgan Chase. But bank runs can happen when customers or investors panic and start pulling their deposits. Perhaps the most immediate concern late this week was that the failure of Silicon Valley Bank would scare off customers of other banks.
Young companies scramble to get their money out of the bank.
As the startup ecosystem tries to make sense of Silicon Valley Bank’s implosion, some entrepreneurs whose funds are frozen at the bank are turning to loans to make payroll. Silicon Valley Bank provided banking services to nearly half of venture capital-backed technology and life-science companies, according to its website, and over 2,500 venture capital firms, including Lightspeed, Bain Capital and Insight Partners.
Impact on Equity
Equity risks are on rise and markets may not offer any positive returns for a substantially long period even in countries which are not closely integrated with US economy.
Best Option for Safer Returns in Bearish Markets
Hedged short term trading is the safest option to generate real positive returns. Look at a brief note here.
Regards,
Rajesh Sharma
Trikaal Capital