I’ve been managing money for 26 years and there have been few times during that period when the economic picture has been so complex. Today the markets are dealing with the failure of Silicon Valley Bank (SVB) and the flight of their deposits. Apparently, their capital base was comprised of private technology stocks and duration bonds, both of which have plummeted in value. Given the capital requirements of banks, SVB couldn’t meet regulations and the stock is now halted. The good news is that there are measures in place for the banking system to handle these events and deposits under $250,000 are FDIC insured. The bad news is that the jolt in rates driven by the Fed is now creating fissures as noted by SVB.
The trouble with jacking rates with such fervor is that anyone that owned long-duration bonds back in 2021 is underwater with those bond valuations. Some of those owners were banks. Banks can hold those bonds are maturity value, but their real market value may be 25% less. That is a problem. In summary, the Fed is trying to lower asset prices and it's working. Anything leveraged by declining assets needs to be examined thoroughly. That is why we don’t use leverage and we pay attention to fundamentals. Of course, all of this occurs during a time when the Fed is jawboning about higher rates to smother inflation and that is what makes this period so confusing. Declining assets and inflation can’t exist forever. From my experience, the former will lead to the collapse of later eventually.
Our advice now is to look at the balance in your personal and business checking accounts and keep it under $250,000. There are ways to secure balances above that amount and we are doing such for many of our clients. Contact our team here at Warcap to help. We will continue to be diligent and attentive during all cycles. As always, I appreciate your continued trust and confidence.