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A Run on a Bank

The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.” — Fed Chairman Jerome Powell to Senate Banking Committee on March 7, 2023

California State Banking Regulators take over Silicon Valley Bank and appoint the FDIC as receiver for disposition of assets – March 10, 2023

Conventional wisdom in the financial industry is that the Federal Reserve will raise interest rates until something breaks. Well, mission accomplished, I’d say. What I wouldn’t say is that the Fed (or the White House, or the Congress, or the Department of the Treasury) is through breaking things in this “inflation taming” cycle. I would also say, “Stop spending/printing money we don’t have,” but nobody in Washington seems to be listening.

I go on to say that I am amazed by the surprise expressed by our financial gurus and alleged leaders when SVB and other banks failed. What? You didn’t think rising interest rates would cause this when this is exactly what rising rates are designed to do? Okay, I’ll concede that it is a by-product of what rising interest rates are attempting to accomplish, but that is splitting hairs, and very narrow ones at that.

I admit the nuances of macroeconomics are over my head; unfortunately, it appears to be the case with 99.9% of the people tasked with operating in that arena. Sigh. Faith in our institutions of higher learning and commerce would hopefully give us confidence in our banking system, but am I foolishly faithful?

Let’s review: in the most basic terms, Silicon Valley Bank failed because, at a time when interest rates were at historic and artificial lows, they loaded up on long-term debt. +

What could possibly go wrong? Oh, rising interest rates. And then a not-so-good, old-fashioned run on the bank. Poof. Liquidity gone. Note to myself: The system has not failed; a number of banks have. The Federal Government has stepped up to prevent a system failure. So this is good, is it not?

But are the people at the banks simply stupid? There’s a case to be made…but I think it is more likely that smart people can do inexplicably stupid things at times. That ability, as I’ve said before, I believe to be in all of us. It’s much like I’ve referenced before from Ferrol Sams’ book Run with the Horsemen:

“It’s not that he’s a bad boy, it’s just that I can’t think of enough things to tell him not to do…”

Last year was brutal for investors – I’ve read that it was the first time since 1969 that both stock and bond prices were down in the calendar year, but I’m not sure I really believe that.

I didn’t remember a safe haven in 2008, but I don’t care enough about the specifics to look deeper into the historical numbers when I’m satisfied that it is rare when both stock and bond prices drop in a 12-month period. So this must mean that having both down two years in a row must never happen, right? No, it doesn’t mean that. Rare is not the same as never. Don’t rule it out.

So what can we take from this as information we can use as individual investors? Perhaps these thoughts may be of help:

  • Remember, we are investors, not speculators. We measure success in years and decades, not in short-term results.

In Ron Baron’s (Baron Funds) December 2022 letter to shareholders, he wrote, “In the 40 years since Baron Capital’s founding … the daily news cycles have been mostly awful.” He also goes on to point out “the Down Jones Industrial Average increased 41.7 times from around 800 to over 33,000!!!!” (His exclamation points, not mine)

Your author firmly believes the stock market is dictated (over time) by two things: profits and interest rates.

All else is noise. Ignore the noise. While we wait for a return to positive markets, we can prevent a run on our personal bank by living on a budget and predicting expenses. We can use cash to mitigate emergency expenses in a 1 to 3-year time frame. We can also exercise patience, both in discretionary spending and in monitoring our net worth(s).

But I know I’m preaching to the choir here. You already do all those things, or you wouldn’t have reached the level of financial success you have achieved over your lifetime. I’m just here to remind you that the things you know and do, the things that have always worked for you, they still work.

Any picture is difficult to interpret without a step back…and perhaps a deep breath and a reminder that when others choose to be stupid, we don’t have to follow that particular crowd.

April 2023

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.


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