Dear valued clients,
Markets lodged gains this week (1.5%) despite fears of the global banking system being on shaky ground after the collapse of Silicon Valley Bank and the fragile state of Credit Suisse.
As the CEO of BlackRock said in his annual letter this week, “Rapid interest rate increases are exposing cracks in the financial system.” I would add a caveat; higher interest rates are exposing cracks in financial institutions that have failed to plan for such an event. After all, it is their responsibility to do so. SVB did not.
SVB was the 16th largest bank in the United States, catering to a very niche tech startup clientele, with $209B in holdings. In essence, there was a mismatch between the lifespan of their deposits and the yield/duration of their assets. Rather than keeping enough cash on hand, SVB bought several billion dollars worth of bonds when interest rates were near-zero. As interest rates increased over the past year, the tech companies needed to withdraw more money to meet their liquidity needs, and SVB was forced to sell their bonds at a massive loss ($21B). Word quickly spread that the lender would soon be insolvent, igniting a bank run ($42B in withdrawals) that lasted 24 hours. This was a case of bankers not having the foresight to deal with an environment of higher interest rates.
In the case of Credit Suisse, issues stemmed from years of mismanagement and scandals. Their stock cratered at the beginning of the week when their largest shareholder, the Saudi National Bank, said it would no longer provide them with financial support. Regulators stepped in to provide a safety net as Credit Suisse stated on Wednesday that it will borrow up to $54 billion from the Swiss National Bank to shore up liquidity (imagine the interest payments on that loan!). Their shares rebounded as a result.
In economic news, inflation came in at 6% in the month of February (compared to 6.4% in Jan., 6.5% in Dec., and 7.1% in Nov.). Though it is decreasing, it is still well above the Fed’s 2% target. The consensus is that interest rates will be raised by 0.25 percentage points next week, compared to the 0.5% increase the EU Central Bank announced on Thursday.
If you think our inflation is bad, Argentina’s reached 100% this month.
For college basketball fans, it’s the most wonderful time of the year! Unfortunately, my bracket is already busted… I had Virginia winning the whole thing.
Who are your picks for the Final Four?
Have a terrific weekend,
PW
