“Our guard should have gone rocketing up last month — when Mr. Jim Cramer recommended Silicon Valley Bank stock to his listeners,” says Brian Maher, managing editor at our sister publication the Daily Reckoning. 

“That is because the fellow is a nearly perfect ‘contrarian indicator.’ If he says x you can very reliably wager on y.” 

Source: Instagram

“SVB stock was trading hands at $320 that day,” Brian says. “Today it trades hands at $0. It has vanished from existence.

“Silicon Valley Bank — formerly the 18th-largest bank in the United States — has fallen into receivership, defunct, destitute and dead.

“It is presently in the hands of the Federal Deposit Insurance Corporation.

“Its demise represents the largest bank flunking since 2008’s Great Financial Crisis.

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Your Rundown for Monday, March 13, 2023...

Bank Tremors

“Problems for SVB mounted after Peter Thiel’s Founders Fund and other high-profile venture capital firms advised their portfolio companies to pull money from the bank,” Bloomberg says. “The calls followed parent company SVB Financial Group announcing that it would try to raise more than $2 billion after a significant loss on its portfolio.”

“Silicon Valley Bank had a bank run on its hands,” Brian emphasizes. 

A “significant loss on [SVB’s] portfolio”? 

“That portfolio was packed to the gunwales with longer-dated government bonds,” Brian continues. “These bonds occupied some 57% of the bank’s investment portfolio. In contrast, not one of the remaining 74 major United States banks held more than 42% of such securities.

“You may recall that bond prices and yields are related in the way that polar ends of a seesaw are related,” he notes. “If bond prices swing higher, their yields swing lower. And vice versa.

“Meantime, longer-term bonds are uniquely sensitive to changes in the interest rate. They are more sensitive than shorter-term bonds.

“The Federal Reserve has been hard at the business of raising interest rates since last March. This tremendous pushing has worked significant upward pressure on bond yields. But recall, bond prices and bond yields occupy opposite ends of our seesaw.

“As bond yields have taken to the upswing… bond prices have taken to the downswing,” says Brian. “Bond prices — especially long-term bond prices and for the reasons listed — have decreased remarkably.

“The bank sold some $21 billion of these bonds in an attempt to reinvest them in shorter-term bonds… It attempted to raise some $2 billion to cover its flanks, but the operation failed and the bank descended into the oblivion of insolvency.

“Now we come to the question that is worth $64,000: Will Silicon Valley Bank’s failing lead to a cascade of other bank failings?

“It is plausible to assume that the largest banks will prove immune to contagion. They have the wherewithal to absorb a blow,” Brian says. “Yet it is the small to medium-size banks, the regional banks, that may get licked. They lack the wherewithal to absorb a blow.

“The entire SVB affair — particularly with its contagion risk — jams Jerome Powell into a very tight corner,” he observes. “Inflation remains amok, and he is hot to get it under his thumb. He must continue to elevate interest rates to get it there.

“This Powell pledged to do in last week’s congressional testimony. He was very clear about it.

“Yet if he elevates interest rates further, he will further depress bond prices… which could place stupendous strain upon the regional banks… and eventuate additional Silicon Valley Banks.

“Mr. Powell must pick his poison, as the phrase runs. He can opt for one poison or the alternative poison,” Brian ;concludes. “Regardless: Poison it will be.” 

Market Rundown for Monday, March 13, 2023

S&P 500 futures are down 0.85% to 3,865. 

Oil is down almost 5% to $73 for a barrel of WTI. 

But Gold is up $35, above $1,900 per ounce. 

Bitcoin’s rallying almost 4%, over $22,000. 

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