What Really Killed Silicon Valley Bank

The lesson of the great bull market of 2009 to 2021... What really killed Silicon Valley Bank... Two bad things happened in 2022... It only took three days... 'Confidence' in the U.S. banking system... The presidential 'night owl' and his cronies protest too much... The reign of terror is just beginning... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] The lesson of the great bull market of 2009 to 2021... What really killed Silicon Valley Bank... Two bad things happened in 2022... It only took three days... 'Confidence' in the U.S. banking system... The presidential 'night owl' and his cronies protest too much... The reign of terror is just beginning... --------------------------------------------------------------- Cheap money kills... I (Dan Ferris) am one of the only folks talking about it so far. But that's the lesson of the great bull market of 2009 to 2021... Interest rates were super low for a long time. The Federal Reserve smashed the federal-funds rate down to a range of 0% to 0.25% from December 2008 to December 2015. Then, it did it again from March 2020 to March 2022. Money got so cheap during this period that [a Danish bank offered to pay borrowers]( 0.5% per year to take on a mortgage in 2019. And [interest rates hit 5,000-year lows]( in 2020 – the cheapest money going all the way back to ancient Mesopotamia. Heck, even when the Fed raised rates in between those two periods, savers didn't benefit. The rate increases never filtered through to bank depositors. That's why it has been impossible to earn a decent return on your savings for at least 15 years... When banks are paying 0.05% in savings accounts, you can't leave your money in one without feeling like an idiot. Some folks could probably find more money in their couches. So... Many folks went into the stock market to try to make some money on their savings. They eventually turned to the crypto market. For a while, scores of novice investors rode "meme stocks" and cryptos "to the moon." But the good times never last forever... Many small speculators have been ruined over the past couple years. [Cathie Wood's ARK Innovation Fund (ARKK)]( is down about 75% from its February 2021 peak. And in 2022, U.S. Treasury bonds had their worst year in history. We've talked a lot about the stock market and a little bit about the bond market in the past. And now, [the failure of Silicon Valley Bank last Friday]( gives us a reason to talk about the consequences of both of those markets getting crushed at the same time in the wake of ultra-low rates. It all comes back to those three words at the start of today's Digest... Cheap. Money. Kills. Cheap money killed Silicon Valley Bank... How did it do that? Silicon Valley Bank's situation is cloaked in all kinds of technical bank jargon and the vague language that all corporations tend to use in press releases. My colleague Corey McLaughlin has done an excellent job trying to unpack everything for Digest readers this week. What happened is really simple. But it does take a minute or two to spell it all out... Tech stocks were soaring before the COVID-19 pandemic. And as its name implies, Silicon Valley Bank was a tech-focused bank in Silicon Valley... It lent money to and took deposits from risky tech startups. Heck, its website still says it's the "go-to financial partner for investors in the innovation ecosystem and beyond." Awkward. With most of Silicon Valley Bank's clients thriving in the early days of the cheap-money era, it also did well... The bank had $62 billion in deposits and $71 billion in assets at the end of 2019. It earned $1.1 billion in net income that year. Then, things really got interesting... The pandemic hit in early 2020. And after a one-month bear market, a frenzied speculative stock market boom began... It began because the government told millions of hardworking Americans that they were unnecessary members of our society. Then, it gave out free money in the form of stimulus checks and loans through the Paycheck Protection Program (which a lot of businesses used to pay people to sit home and not work). The folks sitting at home didn't have anything better to do. So they speculated on stocks. And since money was cheap, they threw it at anything with a ticker symbol. A lot of companies went public during the boom. And many of them were money-losing tech garbage that never would've seen the light of day in a more rational environment. These companies had unproven business models and unproven products and services. And they burned through cash the way Snoop Dogg burns through blunts. But the facts hardly matter during an irrational boom... In a world awash with cheap money, these companies raised billions and billions. And they deposited much of it into their accounts at Silicon Valley Bank. By 2021, Silicon Valley Bank looked like it was run by geniuses... The bank's deposits more than tripled in just two years to $189 billion. And its total assets tripled to $211 billion. Its revenue nearly doubled during the period – from $3.3 billion to $5.9 billion. And its earnings per share soared 50%. And of course, investors fell in love with the stock. SVB Financial (SIVB), Silicon Valley Bank's parent company, rocketed from a March 2020 pandemic low of $131 per share to a high of $755 per share in November 2021. The bank's management decided to do the smart thing. They wanted to keep all this new money safe... So the bank put 43% of its assets into mortgage-backed securities ("MBS"), many of them guaranteed by the government. Housing was booming along with everything else... so what could go wrong? And it put the rest of its money in loans and U.S. Treasurys. Earlier this month, the bank claimed that only 3% of its loans were in the riskiest category. All of this good stuff happened to Silicon Valley Bank and its clients in the cheap-money era. It happened with interest rates effectively at zero and when nobody could earn a penny on their savings. But two things happened in 2022 that were both bad for Silicon Valley Bank... First, all the risky tech startups' stocks crashed. These companies could no longer raise money in the stock market. Since they didn't have any cash flow and relied solely on their ability to sell shares, their fortunes reversed. They went from rapid growth innovators to cash-burning dumpster fires in a span of several months. They previously had tons of money in the bank, which they were able to boost by issuing more shares any time they wanted. But now, they were drawing down their cash hoards to pay bills, operate their unproven business models, and try to sell their unproven products and services. That brings us to the second bad thing for Silicon Valley Bank that happened in 2022... Interest rates went up. The Fed raised the federal-funds rate from its previous range of 0% to 0.25% to a range of 4.25% to 4.5% by the end of the year. It was the fastest pace of tightening since 1980. Now, I know what you might be thinking... Rising rates should be good for banks, right? I mean, they make all their money from interest. So more interest should mean that they make more money, right? And of all the people in the world, you would have to put a bank's management team right at the top of the list for managing a changing-rate environment well, wouldn't you? Knowing how to make money from interest rates is literally their No. 1 job... A bank's management team should be the most skilled people on the planet at that. If a bank can't do it, who can? More to the point... who would want their money in any bank that couldn't manage a changing-rate environment well?! Well, apparently, Silicon Valley Bank's management wasn't so good at it. (They all got fired when regulators took over the bank at the end of last week.) The key thing to remember about bank deposits is that you put your money in the bank... but the bank acts like it owns the money. It uses the money to buy investments and make loans. It's like if you were moving into a new house but needed to store your furniture while you were between houses. So the moving company – legally, mind you – filled its employees' homes with your furniture. But then, one day, you show up because it's time to move into your new home. You take your furniture back, so now the employees need to eat dinner on their dining-room floor and sleep on their bedroom floor. If enough of a bank's customers take their "furniture" (deposits) back, the bank would run out of cash. That's what was happening to Silicon Valley Bank in late 2022 and early 2023. So to get cash, the bank had to sell a huge chunk of its MBS and U.S. Treasurys. But the thing is... Bond prices and yields are inversely related. When the price of a bond goes up, its yield goes down – and vice versa. Since bonds had never performed worse than they did last year, it means yields soared... In fact, rates rose in 2022 at their fastest pace in at least 43 years. That brings us to last week, when it all started unraveling for Silicon Valley Bank... Let's turn things over to the California Department of Financial Protection and Innovation. Here's what it said when it took possession of the bank last Friday... On March 8, 2023, the Bank announced a loss of approximately $1.8 billion from a sale of investments (U.S. treasuries and mortgage-backed securities). On March 8, 2023, the Bank's holding company announced it was conducting a capital raise. Despite the bank being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank. As of the close of business on March 9, the bank had a negative cash balance of approximately $958 million. Silicon Valley Bank lost $1.8 billion turning a huge chunk of its securities into cash. Then, it announced the need to raise $1.75 billion to fill that hole. Depositors freaked out at the announcement and withdrew $42 billion in one day. That resulted in a cash shortage of nearly $1 billion. And finally, regulators seized the bank. Poof... the whole saga was over in three days. Silicon Valley Bank's biggest problems were twofold... First, the decline in value of its clients' shares cut them off from the equity markets. That caused them to draw down their existing cash. And second, the rapid rise in interest rates caused Silicon Valley Bank's securities to decline by $1.8 billion in value. If Silicon Valley Bank operated in a different era, we wouldn't be hearing about it now... Think about it... What if Silicon Valley Bank had bought its U.S. Treasurys and MBS during a period when interest rates were higher and the Fed was cutting rates? The bank's stock would still be high. And it would simply sell more shares or borrow more money to make sure its capital position would remain OK. And most importantly, depositors wouldn't have caused a "run on the bank" with $42 billion in withdrawals in one day. Cheap money fueled the bubble that made Silicon Valley Bank (briefly) rich and flush with cash. And ultimately, cheap money getting less and less cheap crushed the bubble in its clients' shares and the supposedly safe U.S. Treasurys and MBS that the bank held. Don't let the media noise fool you. This saga isn't complicated... Cheap money killed Silicon Valley Bank. First, cheap money lured investors to Silicon Valley Bank's super-risky clients' shares. Then, it lured the companies' deposits into Silicon Valley Bank. Finally, the same thing happened that always happens. Money got less cheap real fast. And after a blowout party, we're now dealing with the hangover. Silicon Valley Bank isn't the only victim of this homicidal maniac, either... Almost the exact same thing happened to Signature Bank (SBNY), which was closed last Sunday, two days after regulators seized Silicon Valley Bank. And earlier this month, Silvergate Capital (SI) – another bank that took crypto deposits – failed and plans to liquidate its holdings. Of course, the usual 'status quo' chorus soon emerged from the financial community and government... They're all telling us that everything is fine. This time, President Joe Biden was the weirdest voice in the chorus. At 9 a.m. Eastern time on Monday morning, he rambled on with a statement that included this declaration... Americans can have confidence that the banking system is safe. That's weird for a couple reasons... First, it's weird that Biden was up at 9 a.m. to begin with. Jen Psaki, his former press secretary, indicated on her MSNBC TV show that he isn't a fan of getting up early... President Biden does nothing at 9 a.m. He is a night owl. So the fact that he is doing this at 9 a.m. anyway speaks to how vital the White House recognizes it is to have his voice out there conveying that to the American public. The second weird thing is that nobody on his staff flagged the word "confidence" as a potential problem. You know... Confidence... as in "confidence game" – known more widely as a "con game." Biden stood there in front of the whole world, half asleep at the podium, and told us all that... The U.S. banking system is a con game. If you don't have confidence in it, it goes broke. Banking isn't like the force of gravity... If you have no confidence in the force of gravity, it will still kill you if you step off the roof of a skyscraper. Your confidence level doesn't come into play. You can never really break the law of gravity. If you try to violate it, you will only break yourself against it. But as President Biden told us this week, our banking system is a pure confidence game. And if enough folks don't have confidence in the system all at once... it will fail. What happened to Silicon Valley Bank could happen to the most well-capitalized banks in the country. It could even happen to JPMorgan Chase (JPM) or Bank of America (BAC). They're holding the same assets as every other bank – loans, U.S. Treasurys, and MBS. It's all the same house of cards. And if enough people blow on it, it will collapse. If enough people show up and want their deposits back, the bank won't have them. It will fall short of cash, need to raise capital, sell bonds at huge losses... and likely get seized and shut down by regulators – just like Silicon Valley Bank. Of course, in the case of perceived "too big to fail" banks like JPMorgan and Bank of America, the Fed will print as much money as it needs to print to bail them out. They'll never actually fail. Banking isn't a workable business plan designed to avoid financial failure... It's a social convention that works as long as nobody blinks. Former U.S. Federal Deposit Insurance Corporation ("FDIC") Chair Sheila Bair knows it's true. In a recent Financial Times article, she said... The government needs to be very careful in its communication, lest its own overreaction causes the very deposit runs it wants to avoid. The heads of the Fed, the Treasury Department, and the FDIC don't seem to agree with Bair. So much for being careful in their communication... Last weekend, these parties issued their own joint statement that was almost as weird as Biden's. In it, they said... Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system... The U.S. banking system remains resilient and on a solid foundation... How can it be "resilient" and "on a solid foundation" if they need to take "decisive actions" to save it? Isn't the banking system the way it is now because they took decisive actions? And make sure you don't miss that word "confidence" in their statement, too... I'm not sure how anybody can call the banking system safe, resilient, and on a solid foundation if it can be taken down by a lack of confidence. Bair is like Queen Gertrude in Shakespeare's play Hamlet. While watching a play at the castle, the queen thinks one of the female players is overacting, And she says... The lady doth protest too much, methinks. President Biden and various financial regulators and officials protest too much. They work too hard to convince us – and probably themselves – that you must have confidence in the banking system... or else it's burnt toast. They know that if folks worry too much about their deposits, they'll take their money and go home. That would cause more bank runs – and not one bank in the U.S. can survive that. When folks were gorging on cheap money and using it to dabble in all sorts of speculative investments, they didn't realize they were sowing the seeds of financial destruction. Cheap money infected everything and everyone. And now, it has become a wrecking ball... Everybody who bought Treasurys and MBS in 2020 and 2021 is in a similar boat. Do we really believe this problem will only wreck a few tech companies and destroy their banks? I don't. Cheap money is a notorious serial killer. And its reign of terror is only just beginning. --------------------------------------------------------------- Recommended Links: # [DOUBLE-Digit Yield Potential... TRIPLE-Digit Capital Gain Potential... Backed by LEGAL Guarantees]( The fallout from the recent bank failures has barely begun. Recession risk remains high. Many will panic – but YOU don't need to. In short, there's a simple way to receive near-guaranteed income – legally owed to you – from outside the stock market. The last time we saw similar market conditions, you could have seen 772% gains. [Click here to learn more](. --------------------------------------------------------------- # [It's Time to Turn the Tables on Wall Street]( The top 1% grew their wealth by $7 trillion following the 2008 crisis... and made $1.7 million for every $1 YOU made during the pandemic. Now, it's playing out all over again. [See their next move here](. --------------------------------------------------------------- New 52-week highs (as of 3/16/23): Hershey (HSY), inTEST (INTT), MarketAxess (MKTX), NeoGenomics (NEO), and NVR (NVR). In today's mailbag, Digest editor Corey McLaughlin responds to a paid-up subscriber's comments on the Fed's projections. What's on your mind? As always, you can send your thoughts, comments, and observations to feedback@stansberryresearch.com. "You mention that the Fed will be coming out with their projections for interest rates, GDP and unemployment next week, and they do it 4 times a year. Perhaps you could look back on their prior projections for a year or two and see how useful and accurate these have been. My feeling is that all their projections and calculations have been useless and a severe waste of time and resources." – Paid-up subscriber Larry B. Corey McLaughlin comment: Your hunch is correct. I don't even need to go back and look at the old numbers. I've written before that most of the Fed's projections – and definitely the ones over the past two years – have rarely been correct... The point is, though, enough people in the markets still believe – or at least, want to believe – what the Fed thinks. And that's specifically true when the central bank projects the lending rate to be moving ahead at any given moment. So that's why I bring it up... For more than a year, on each of these quarterly "Fed projection" days – with the next one coming next Wednesday – we've seen wild trading days. The markets have moved up and down 1% over a few hours in response to updated central-bank expectations. I wouldn't be surprised if the same happens next week as traders and investors parse out the Fed's plans. The projections – correct or not – give everyone a view into what the Fed is thinking. And with several of our analysts saying the stock and bond markets are at a key inflection point, that's important. Good investing, Dan Ferris Eagle Point, Oregon March 17, 2023 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 997.1% Retirement Millionaire Doc MSFT Microsoft 02/10/12 857.8% Stansberry's Investment Advisory Porter ADP Automatic Data 10/09/08 776.5% Extreme Value Ferris HSY Hershey 12/07/07 590.2% Stansberry's Investment Advisory Porter ETH/USD Ethereum 02/21/20 589.4% Stansberry Innovations Report Wade WRB W.R. Berkley 03/16/12 555.0% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 435.5% Retirement Millionaire Doc AFG American Financial 10/12/12 407.0% Stansberry's Investment Advisory Porter ALS-T Altius Minerals 02/16/09 322.1% Extreme Value Ferris FSMEX Fidelity Sel Med 09/03/08 303.3% Retirement Millionaire Doc Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 4 Stansberry's Investment Advisory Porter 3 Retirement Millionaire Doc 2 Extreme Value Ferris 1 Stansberry Innovations Report Wade --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst ETH/USD Ethereum 12/07/18 1,346.8% Crypto Capital Wade ONE-USD Harmony 12/16/19 1,157.6% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,053.6% Crypto Capital Wade MATIC/USD Polygon 02/25/21 933.4% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 566.8% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root Rite Aid 8.5% bond 4.97 years 773% True Income Williams ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. 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