A Bank Run, More Jobs, and an Interesting Tourist Destination


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March 12, 2023

STRONG JOBS REPORT:  For the month of February, the U.S. economy added 311,000 jobs. More people jumped into the job market, so the unemployment rate actually rose to 3.6% from 3.4% the month earlier.  Because this was more new jobs than was predicted, it created “fear of the Fed” jitters on Wall Street.  Most of the new jobs last month were in service industries such as leisure and hospitality which is the only major job sector that still has less jobs than before the government shutdowns, by 410,000 jobs.  Construction employment also increased.  Wage growth was fairly weak (which the Fed will like), rising only 0.2%.  Over the past twelve months, average earnings are up 4.6%.  The amount of people in the 25-54 age group who are in the work force went from 82.7% in January to 83.1% in February, a healthy increase.  This is back to the level before the pandemic government shutdowns.

SILICON VALLEY BANK COLLAPSES, SECOND LARGEST BANK COLLAPSE IN U.S. HISTORY:  At Stonecrop, we have been asked by a venture capital firm to help invest its money that sits around before they find a home for the money.  What do they insist on?:  Very, very low if any risk, liquidity, and the best return possible given the first two constraints.  If an opportunity to invest this money in a target company arises, the money needs to be liquidated immediately.  I mention this because Silicon Valley Bank (SVB), which collapsed on Friday, managed deposits from lots of venture capital firms and tech firms, and was not quite as careful in how it invested these dollars.  SVB grew from $211 billion in assets at the end of 2021 from $116 billion a year earlier, so almost doubling in a year.  It had grown to be the 16th largest lender in the U.S.  Unfortunately, as this money was rolling in, it was investing in bonds, and generally longer term bonds to get higher yield.  As they went on this long-term bond shopping spree, the Fed began their rapid interest rate rising maneuvers, and these bonds went way down in value.  This could have turned out okay if the depositors didn’t need their money.  If you hold onto a bond that has decreased in value until the end of its term, you get your principal back.  But if you need to sell that bond in a down bond market, and 2022 was an awful bond market, then you will lose money.  While holding these depreciated bonds, the clients of SVB began running into a slowdown of new cash, and began making withdrawals.  As SVB began to sell securities at a loss, and properly reporting this activity, the stock price began to crater, and depositors began to withdraw more, and faster due to worries about the bank’s health.  One of the things that made SVB particularly vulnerable to a bank run is that only 2.7% of its deposits were covered by FDIC which only covers the first $250,000 of depositors’ money. SVB’s customers had much larger deposits than most banks.  The $250,000 FDIC protection, on average, covers about 50% of deposits at U.S. banks.  Those SVB customers with $250,000 or less will have access to their money on Monday.

SVB SUMMARY:  I read an article over the weekend which included a paragraph which cogently summarized what happened to SVB:

“And so if you were the Bank of Startups, just like if you were the Bank of Crypto, it turned out that you had made a huge concentrated bet on interest rates. Your customers were flush with cash, so they gave you all that cash, but they didn’t need loans so you invested all that cash in longer-dated fixed-income securities, which lost value when rates went up. But also, when rates went up, your customers all got smoked, because it turned out that they were creatures of low interest rates, and in a higher-interest-rate environment they didn’t have money anymore. So they withdrew their deposits, so you had to sell those securities at a loss to pay them back. Now you have lost money and look financially shaky, so customers get spooked and withdraw more money, so you sell more securities, so you book more losses, oops oops oops.”

(Matt Levine, bloomberg.com/opinion/articles/2023-03-10/startup-bank-had-a-startup-bank-run?sref=wOrDP8KX)

BAD WEEK FOR U.S. STOCKS:  Stocks began falling early in the week when Fed Chair Jerome Powell stated that the Fed may go back to 0.5% interest rate hikes in the future, and things accelerated negatively with the strong jobs report and the fall of Silicon Valley Bank.  How will the fall of SVB affect the banking system, the economy and the markets?  Obviously, SVB ripple effects and follow up stories will not go away any time soon.  The banking sector will be looked at with suspicion by investors for a while.  There will likely be some governmental (Congressional?) examination of what happened and why bank regulators didn’t jump in more quickly.  It does seem as though the U.S. bank regulators keep the largest few U.S. banks under its thumb due to the existential threat their demise would cause to the overall financial system, but SVB makes it clear that perhaps they are a bit more hands off with “smaller” banks.  In fact, with bipartisan support, Congress voted in 2018 to loosen regulations on large regional lenders (like SVB) as compared to the megabanks like Wells Fargo, JPMorgan Chase and Bank of America.  It looks like SVB may have been okay if depositors did not panic.  Therein lies the challenge for non-megabanks this coming week and the FDIC in general.  If a bank looks at all shaky, depositors with more than $250,000 are going to consider their options.  We may see even more bank consolidation in the coming months.

It is quite possible that by the time this email goes out on Sunday night, there will be more news about SVB.  Will a megabank step in, with encouragement by the government?  Will the government take extraordinary action of some sort?  Will the government backstop more than the $250,000 FDIC limit at SVB (because the bank does have a lot of assets)?  

LONGER-TERM PERFORMANCE:  Below are the annualized three-year and five-year numbers for these same indices.  

THE “NOT YET” RECESSION:  According to the Bank of America, the first quarter will likely see GDP growth of about 0.7%.  Goldman Sachs is more optimistic, predicting 2.0%.  The Atlanta Fed predicts 2.6%.  So the economy keeps growing.  This next recession is now being referred to as the Godot recession (as in “waiting for”) because it keeps getting postponed.  It seems like every time economists get polled, they predict a recession “in six months.”  A mid-year recession is now seemingly too early a prediction as many of the economic indicators still point to growth.

UPCOMING WEEK:  SVB and the stability of the banking system will likely be front and center in economic and market news this week.  But, also watch for the February consumer price index report by the U.S. Department of Labor which is due to be released on Tuesday.  Will the 12-month number come down from last month’s 6.4%?  China is set to release a flurry of economic data on Tuesday as well.  We will also get February U.S. retail sales data on Wednesday.  Lots of market moving items are already known.

INTERESTING TRAVELS:  We have a client who is a business owner and a musician.  You can often find him playing his guitar at a variety of venues in and around Wilmington, Delaware.  He is very talented.  Recently, he decided to take a trip to a very interesting place.  He went to Ukraine where he, along with two others, checked out the city life, especially night life, to see what it is like in war time for an article he was asked to write. Some of the pictures taken in the past few days are quite interesting.  He enjoyed the visit (just wrapped up) and fell in love with the people he grew to know, and he was impressed by the resilience they are showing.  

Have a great week!

Our mission is to help you see the objective, find the path, and navigate past the obstacles to a more prosperous future.

Douglas R. MacGray, J.D., C.F.P. ®
Stonecrop Wealth Advisors, LLC

Direct | Cell | Fax
(610) 628 4545

“If you talk, you only repeat something that you already know.  But if you listen, you may learn something that you don’t know.”  Bud Grant

“The prudent see danger and take refuge, but the simple keep going and suffer for it.”  Proverbs 27:12

 STRONG JOBS REPORT: bls.gov/news.release/empsit.nr0.htm
SILICON VALLEY BANK COLLAPSES, SECOND LARGEST BANK COLLAPSE IN U.S. HISTORY: azcentral.com/story/money/economy/2023/03/10/fdic-silicon-valley-bank-fail/11445464002/ AND www.wsj.com/articles/where-were-the-regulators-as-svb-crashed-35827e1a?mod=hp_lead_pos1 AND https://adamtooze.substack.com/p/chartbook-200-something-broke-the
THE “NOT YET” RECESSION: https://www.wsj.com/articles/godot-recession-federal-reserve-powell-d50ba71f AND calculatedriskblog.com/2023/03/q1-gdp-tracking_10.html
BAD WEEK FOR U.S. STOCKS:  msn.com/en-us/money/markets/theres-going-to-be-more-how-washington-is-bracing-for-bank-fallout/ar-AA18wcLz
UPCOMING WEEK: wsj.com/articles/economy-week-ahead-u-s-inflation-and-retail-sales-in-focus-eeb43229?mod=economy_more_pos2

(c) 2023 A.D., Stonecrop Wealth Advisors, LLC, All Rights Reserved

*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets. 
*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States. 
*Bloomberg U.S. Aggregate: This is a measure of the U.S. bond markets. 

Investment advisory services offered through Stonecrop Wealth Advisors, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission. 



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    Doug MacGray

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    March 13, 2023


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