Hello 👋 Family Of Clients,

I wanted to reach out to ease your minds over the recent actions in the market. 

As I am sure most of you have heard by now, we just witnessed the second largest bank run and bank collapse, after 2008. I want to start off by first giving you an explanation on what exactly happened, why; then give you our outlook going forward. 

What was SVB (Silicon Valley Bank)? 

SVB was a commercial bank located in Santa Clara, CA, and despite the fact that most people had never heard of them, they were actually the 16th largest bank in the US and was the hub for start-ups, venture capital and tech funding. Since 2019, we have seen a massive increase in these areas. Not to mention, for the last 40 years, interest rates were low, and money was cheap, which meant more people than ever were starting businesses and borrowing money. SVB was the golden child of banks in the silicone valley area. They were known for taking anything from the smallest of startups to large business and IPOs, like Beyond Meat, Coinbase and Roku. The majority of SVB’s client base was in fact corporations, not individual investors like us. This is important to note because as we all know FDIC insurance covers our deposits up to $250,000, well, many corporations have much more at stake than $250,000. This will be one of the contributing factors to SVBs demise. 

What Actually Happened?

Well, without getting into the nitty gritty of macroeconomics, the simple way to put it is that SVB was strapped for cash and couldn’t provide enough liquid cash (money that is not tied up in investments) fast enough. 

As I mentioned above, this past year the Fed raised rates at an alarming rate. The Fed does this as a tool of monetary policy in order to slow the flow of dollars in our economy. The higher the interest rates, the harder it is to borrow money. It becomes too expensive to get a loan. It increases monthly payments due and makes spending slow down. Just before we saw this massive push to raise interest rates, we had a period of time where interest rates were historically low, tech stocks were on the rise, and start-ups were borrowing money left and right to fund their ventures. This all came slowly to a stop as the rates continued to rise. These smaller start-ups and other business were burning through cash at a much faster rate, thanks to both the rates and inflation. 

Meanwhile, SVB, along with many other banks, was investing deposits made by it’s clients in government bonds – a practice that is neither bad nor uncommon. However, basic economics will tell you that when interest rates go up, bond prices go down. That means that these investments, in safe government bonds, were at a loss. 

It is also important to note the difference between realized and unrealized losses here. SVBs losses were unrealized, which means they haven’t actually lost anything UNTIL they sell. At which point, the loss becomes realized. Bonds, especially government bonds, are very safe- when held till maturity. If you decide to sell prior to that expiration date, well, like anything else, they sell at market value. Again, market value of those bonds today are much lower, thanks to rising interest rates. This loss in value caused a gaping hole in SVB’s balance sheet. 

So when SVB needed to raise about $2 BILLION in capital to meet demands and shore up its balance sheet, they sold those government bonds – at a massive loss. Their investors panicked. The stock price began to fall and shortly after we witness a historic “run on the bank” which means exactly what is sounds like. People were running to the bank to pull out every dollar of theirs that they could. Like I mentioned before, these banks do not just sit on that cash, so it comes as no surprise that the bank could not provide everyone with their cash all at once. This only ensured even more panic, until regulators took control of the bank on Friday afternoon. 

Shortly after, the FDIC stepped in to reassure everyone that they would receive up to $250,000 back by Monday. However, remember how I mentioned commercial customers usually have much more than $250,000?? That would mean thousands of business were looking at bankruptcy and liquidity issues in the coming weeks. Well, because of that, the government stepped in and agreed to bail them out. They reassured SVB costumers that they would all be made whole and paid back any losses incurred. Phew for them- but what about the bigger implication of such a move?

What Do We Do Now?

It seems very likely, at this time, that there will be other banks that will step in and take over the loans and accounts from SVB to ensure that no one, or no business, cannot operate as usual. The markets liked this consensus, because if it wasn’t for this aide, we may have witnessed a much broader economic attack as all the business that banked with SVB felt fiscal pressure and/or went under. However, the backing of the government, along with the selling of the accounts, proves to be a confidence boost for investors. 

What we just witnessed, although very similar in nature to 2008, was in fact very different than the 08/09 banking crisis. Why? Because in 2008 we saw the liquidity crunch when investing in crummy junk bonds and below investment grade garbage. Last week, we witnessed a bank crumble and fall all thanks to poor monetary policy and mismanagement. It had more to do with the Fed and their -in my opinion - way too reactive, instead of proactive, response to 2020, than it did with the actually investment choices made. 

We also just witnessed a much faster response than we saw in 2008. In 2008, it took weeks to do what they did in just one weekend. It proves their dedication to making sure that we, as the consumers, don’t panic and create our own problems. We know that they are preventing us from making a run on all banks, which would be the worst thing we could do right now.

That being said, my biggest advice right now is to not panic. We are not witnessing the start to a crash due to systemic issues; we are not witnessing a banking crisis, we are not even witnessing anything that is groundbreaking or new. SVB is not unlike other banks in their investment choices, they are unlike other banks because of their nature of business. Their venture capitalist and startup client base is the “bubble” that is bursting right now. We saw it months prior to this that the tech industry was hurting. We were seeing tech layoffs, IPOs slowing, and startups being put on hold. So no, I don’t think you should be selling out of the market. In fact, I think this just provides another great opportunity to buy stocks on sale. 

However, if you’re in the tech industry, or thinking of joining a startup, I would suggest double checking those emergency funds, check in on your budget, and prepare for a potential cut back in your industry. 

Remember, it is important to maintain a long-term time horizon in these moments. The one thing history has taught us, when it comes to investing, it’s that the market always recovers. Of course, none of us know what the future holds- but what I do know is that trying to time the market, or trading based on fear and emotions, will always get you burned.

As always, this is a friendly reminder that we are here, watching everything, researching everything, and making sure that we make the best possible decisions for all of you. If you have any questions, or would like to discuss further, I am more than happy to talk. In the meantime, we stay the course and carry onward.

Warmest Regards,

Anna Brockschmidt and the PFS Team