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SVB's Collapse Explained 📉
On Friday the first Silicon Valey Bank collapsed and ended up in FDIC receivership. The reason for the collapse is pretty simple. As interest rates increased, banks like Silicon Valley took non-cash losses on their bond portfolio, resulting in their shareholders equity decreasing. In addition, their loan book deteriorated from their customer’s businesses incrementally getting worse as VC funding dried up. Finally, as interest rates increased across the board depositors for the first time were able to find higher risk-free yields in treasuries, leading to a decrease in deposits.
This is a tripled edged sword that sent Silicon Valley Bank’s equity to zero. The collapse of Silicon Valley Bank put investors on high-risk mode and financials across the board, especially other regional banks, sold off hard. Making matters worse, individuals over the weekend were seen in multiple videos standing in lines across multiple regional banks, pulling as much money out as they could. We are experiencing a modern-day bank run.
The Federal Reserve responded to the bank fallout by implementing a massive multi-billion-dollar bailout to the entire banking industry. In short, the government is allowing banks to post collateral, owned treasuries, and banks can borrow against it. What makes it incredibly interesting is the banks can use the par value of the treasuries rather than the value of the assets as collateral. This is akin to an individual buying a stock for $100, the stock selling off to $70 and then the government saying they will honor the purchase price your stock at $100. It is a perverse incentive that will lead to banks taking even more risk as they literally have zero downside.
All of this free money could eventually lead to higher inflation and quantitative easing. Now the question is do additional regional banks go under over the next few months? If so, does a financial crisis moves through the economy which leads to the Fed printing money to cure the crisis, leading to hyperinflation and the destruction of the U.S. Dollar?
This is a pivotal moment in financial markets and the next few months will be key to see what occurs with asset prices. Eventually the net effect of zero percent interest rates and high debt loads will catch up to us. Now is the time to own real assets. GOLD 0.00%↑ SLV 0.00%↑ ETC. More coming soon.
Good luck out there