It’s the dot-com bust and the 2008 crisis rolled into one…
On Friday, Silicon Valley Bank (“SVB”) became the biggest U.S. bank to collapse since the Lehman Brothers bankruptcy in September 2008.
SVB was the nation’s 16th largest lender with $190 billion in deposits.
And it was key part of the Silicon Valley financial plumbing. Roughly half the Valley’s tech start-ups… as well as about half its venture capital (“VC”) firms… banked with it.
And SVB wasn’t the only bank to hit the wall over the last few days. So did New York-based Signature Bank. It’s a well-known lender to crypto companies.
Over the weekend, both banks were hit by bank runs.
Depositors rushed for the exits at once. The banks didn’t have enough cash to meet all the withdrawal requests. And yesterday, the government stepped in to avoid further contagion.
In a joint statement, Treasury Secretary Janet Yellen and Fed chief Jay Powell said Washington would guarantee uninsured deposits and make account holders whole.
I’ll have more for you on this later this week, including about the big swings the SVB debacle is causing in the crypto market.
Today, we’ll look at the driving force behind SVB’s collapse… why it’s bad news for the economy… and how it fits with the prediction I shared with you last Monday from veteran market timer Mason Sexton.
SVB was Silicon Valley’s favorite bank…
It’s easy to see why.
It didn’t just take in deposits from startups and provide them with regular banking services. When a start-up got funding from a VC firm, SVB would throw in an extra 5% or 10% in venture loans in return for banking with it.
SVB even arranged mortgages for tech company founders.
It also loans money to VC firms. And it counts publicly traded tech companies such as metaverse gaming company Roblox, stablecoin issuer Circle, and crypto lender BlockFi as clients.
As you can imagine, SVB’s share price soared during the 2020–2021 tech boom.
But it suffered along with the rest of the tech sector after the boom turned to bust.
And last Wednesday, the bank’s plunging share price… coupled with its losses on the billions of dollars in bonds on its books… caused SVB’s CEO, Greg Becker, to do something he’ll regret the rest of his life.
Becker put out a seemingly innocent press release…
He reported that SVB had sold $21 billion in assets at a $1.8 billion loss. Becker also said SVB planned to raise more than $2 billion by selling stock and preferred shares.
The move was supposed to show the world that SVB was playing it safe by raising cash.
The problem for Becker was when that press release hit the headlines. It came out the same day crypto lender Silvergate announced it was going under because of its exposure to failed crypto exchange FTX.
SVB depositors began to worry if their bank was the next link in a chain of bankruptcies. And they all tried to withdraw their cash at once.
During the bank runs of the 1930s, people formed lines around the block outside bank branches. You had to physically talk to a teller and take out physical cash in a briefcase. That slowed down the pace of a collapse.
Thanks to mobile banking, SVB customers were able to yank out about $80 billion in deposits overnight.
That’s almost half SVB’s deposits… more than 90% of which aren’t insured by the Federal Deposit Insurance Corporation (“FDIC”).
SVB didn’t have that much cash… or the ability to raise it. And the rest, as they say, is history.
What does this mean for your money?
Sunday’s move by the Treasury and the Fed basically extends FDIC deposit insurance above the usual $250,000 threshold.
The FDIC now covers ALL accounts at SVB and Signature Bank. And the expectation is that the Fed will step in again if there are concerns over other banks.
This kills off some of the more immediate contagion risk. But it doesn’t mean the coast is clear.
Regardless of the bailout, credit conditions are set to tighten… and that could send the economy off a cliff.
That’s according to Chris Igou. He heads up Stansberry Research’s DailyWealth Trader. And he worked at the Bank of New York Mellon before joining the team. So, he knows the banking business from the inside.
Here’s how he explained it to his readers…
With interest rates on the rise, banks can earn more by letting cash sit in low-risk accounts. So, they’re less incentivized to lend. Put simply, they can afford to say no to riskier loans.
Now that interest rates are in the range of 4.25% to 4.50%, banks can afford to be really discerning. Loans are only going to the absolute best applicants. The flow of cash is narrowing to a drip… and that’s another leading indicator of a bad recession.
You can see this relationship in the next chart. It tracks the net percentage change of U.S. banks reporting tightening lending standards. And it compares these moves to past recessions.
You can see that lending standards shot up in 1990, 2001, 2008, and 2020. Each time, it coincided with a recession.
And Igou warns that this time will be no different. He calls it a “big warning sign of a hard landing.”
So, if you haven’t already, make sure you’re playing defense as well as offense in your portfolio. That means plenty of cash in a large bank, with accounts no larger than the FDIC limit of $250,000.
You can also use short-term bond exchange-traded funds (“ETFs”) for some of your cash savings.
The SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL), for example, yields 2%. And the WisdomTree Floating Rate Treasury ETF (USFR) yields 2.5%.
One person who’s not surprised by these events is Mason Sexton…
As I showed you in last Monday’s Cut, he’s a market timer who became famous for predicting the 1987 stock market crash… as well as several other major market moves.
He believes history often repeats and that markets move in natural cycles. And he sells his insights to some of the world’s top hedge funds.
And last Monday, he predicted a “crushing decline” in stocks would begin the next day.
I’ll admit. I was skeptical when Mason told me he uses natural cycles… including planetary ones… for his analysis.
But last week, he predicted the exact day turmoil would begin in the markets – March 7. And he’s been making that same prediction for months. He mentioned it back in January during a meeting with some of my colleagues and me.
So if you’re skeptical, I get it. But he nailed this prediction… and we owe him our attention.
So far, the market is playing out as Mason predicted…
Last Tuesday, Jay Powell told the Senate Banking Committee he was prepared to raise rates higher than expected.
And stocks took a dive. Take a look…
And since Mason made his prediction, the S&P 500 is down 4.6%.
Naturally, I was curious to talk to him about this. We had another call this morning. And he told me he sees more pain ahead this week. Mason…
Sadly, we’re going see this crisis intensify. My research shows that by this Friday, March 17, it will be obvious to everyone we’re in a true crisis.
In fact, work I did over the weekend points to noon, Eastern Time, on Friday as a time when we get a major government announcement. It will crystallize the view I have that we’re at the beginning of a new phase of the crash.
We’ll be keeping an eye out to see if Mason’s next prediction comes true. The bank lending story could be a catalyst for a bigger down wave for the market.
Editor, The Daily Cut