Two Key Lessons From the Banking Crisis

Two Key Lessons From the Banking Crisis

By Chris Mamula  March 20, 2023

Investing & Taxes, Uncategorized

The failure of Silicon Valley Bank (SVB) and the general health of banks has been all over the news recently. There are many fascinating aspects of this story. One is parsing out the roles different parties and policies played in the bank’s failure. Another is the short and long-term implications as to how this crisis is being dealt with.

While interesting at policy and societal levels, these issues are out of our control and generally irrelevant from a personal planning perspective. However, there is one aspect of this story that every reader of this blog planning for or navigating their retirement should be paying close attention to: risk management.

How did SVB’s poor risk management lead to its failure and set off the ensuing cascade of events? Are you making similar mistakes in your own retirement portfolios and plans, setting yourself up for catastrophic outcomes.

Volatility and Liquidity Risk

Too often, the terms volatility and risk are used interchangeably when discussing investments. This is incorrect. Volatility is only one investment risk.

During your accumulation phase, volatility actually works to your advantage when asset prices drop. Most successful investors develop a systematic way of deploying their money as they get it.

A common example is dollar cost averaging the same amount of money each pay period into retirement accounts. When asset prices drop, the same amount of dollars buy you more shares of the same asset than they did the prior cycle.

As you approach retirement, and especially once you are in it, the opposite is true. Volatility becomes a massive risk. A dramatic drop in asset prices when you need to sell those assets means you will need to sell more to produce the same amount of income.

This brings us to liquidity risk. This is the risk that you will be unable to meet your short-term obligations when you need to do so. An investment may lack liquidity because you can’t access your money or because the value of the asset has dropped in the short term due to volatility.

SVB could not meet customers’ rapid withdrawal demands and became insolvent in a day. In the case of individual retirees, if you have to sell too many assets too quickly, especially early in retirement, you will deplete your portfolio to the point where it can not recover.

This is basic risk management 101. Yet those charged with managing risk for the 16th largest bank in the nation fell victim to it. We should all be humble enough to recognize our own potential risk management blind spots. Let’s learn from this risk management failure.

Duration Mismatch

Why was SVB in a position to be vulnerable to a bank run? SVB was a bank that catered to venture capitalists and start-up companies. When times were good, they had an abundance of deposits.

Part of the reason times were so good for this bank was because interest rates were so low. This spurred record levels of investment in the start-ups and left those companies flush with cash to deposit.

As every bank does, SVB was looking for ways to make money off of these deposits. In a low interest rate environment, the bank bought U.S. government treasuries with intermediate to long durations to try to squeeze a little extra yield out of their investments.

These are extremely safe investments IF you can hold them to maturity. This wasn’t a repeat of the subprime mortgage induced banking crisis. SVB wasn’t using customer deposits to buy Bitcoin or other highly speculative investments out of extreme greed.

Under anything but outlier conditions, SVB would have gotten away with their poor risk management. However, these were not normal circumstances. Interest rates increased rapidly. This led to a considerable loss in the value of bonds with longer durations.

Despite the paper losses, SVB would have still been OK if they could have held onto these assets until they matured and could be redeemed for full face value. However, they were not able to do so.

Depositors caught wind of SVB’s precarious situation. They started withdrawing their money. They then told others who quickly followed suit. This created a bank run.

In a single day SVB customers made $42 billion of withdrawals. SVB couldn’t meet demands and was out of business the next day.

Lesson 1: Limit Volatility Risk and Maintain Liquidity

To continue reading, please go to the original article here:

https://www.caniretireyet.com/retirement-risk-management-bank-lessons/

What Happens to My Mortgage If My Bank Fails?

What Happens to My Mortgage If My Bank Fails?

Nicole Spector   Mon, March 20, 2023

Since the abrupt collapse of Silicon Valley Bank, questions around the safety and integrity of all things banking have been swarming. One of those questions is: “What happens to my mortgage if my bank fails?” There’s good news here. If the bank that holds your mortgage goes under, the status of your loan won’t change because it will be acquired by a new lender, according to reporting from The Wall Street Journal. So there’s no cause for stress. That said, you do need to be diligent and take certain steps to protect your finances in the event that your mortgage lender goes belly up.

Check Your Mortgage for a Section on ‘Sale’ or ‘Assignment’

According to Freedom Law Firm, you’ll want to check your mortgage loan for a section that explains what happens in the case of a “sale” or “assignment.” This document should state that the terms of the mortgage remain in force regardless of bankruptcy of the lender.

Keep Up With Monthly Payments as Usual

If your lending institution goes bankrupt, that doesn’t mean you get a break from your obligation to your mortgage. You must continue payments as normal. Do not miss a month.

Maintain Diligent Records

If your mortgage provider is in trouble, its customer service wing will probably take a beating, making it difficult to get a hold of someone to walk you through the goings on. Make sure you have all your ducks in a row by keeping track of all documents your lender is sending you to keep you in the loop. Keep a paper or digital record of your mortgage payment history just in case an issue arises down the road (e.g., your bank hasn’t been paying off the loan properly on your behalf).

Check That Your Payments Are Clearing

To continue reading, please go to the original article here:

https://finance.yahoo.com/news/happens-mortgage-bank-fails-120514492.html

What Is the State of Women & Money in 2023?

What Is the State of Women & Money in 2023?

Gabrielle Olya GoBankingRates

Women have been making major strides in the worlds of personal finance and careers. A recent LendingTree analysis found that single women now own more homes than single men. And in January, Fortune reported that women CEOs run more than 10% of the Fortune 500 companies for the first time in history. Still, the gender pay gap persists and women continue to be less likely to invest than men — even though data has shown that they tend to be better investors.

To get a complete look at women’s financial standing in 2023, GOBankingRates surveyed over 1,000 American adults who identify as female about their financial obstacles and goals, career priorities and attitudes about money. Here’s a look at what we found.

Women’s Primary Financial Goal Is Covering Basic Expenses

Over the past year, women have shifted their financial priority from saving for the future to getting by right now. In 2022, the majority of women (30%) said their primary financial goal was saving for retirement. Now, the majority (26%) said their primary goal is covering basic expenses, with an additional 20% prioritizing paying off debt.

Nearly half of women (47%) said that a lack of money is the biggest obstacle to reaching their financial goals. Additionally, the majority of women (39%) cite inflation/not being able to afford everyday expenses as their biggest financial stressor. This percentage is slightly higher among women who are parents — 41% cite everyday expenses like groceries as the cost they are most overwhelmed by.

Most Women Are Not Actively Investing

The GOBankingRates survey found that 57% of women are not actively investing. When asked why they are not investing, one-third of women (33%) cited a lack of money.

The most popular investment vehicle among women is work-sponsored retirement plans (16%). Less than 10% utilize a brokerage account, IRA or investing app.

Women Are Dissatisfied With Their Career Opportunities

To continue reading, please go to the original article here:

https://www.gobankingrates.com/money/financial-planning/what-is-state-of-women-money-now/?utm_term=incontent_link_6&utm_campaign=1215480&utm_source=yahoo.com&utm_content=7&utm_medium=rss

The US Government Has Doubled In Size. Are You Better Off?

The US Government Has Doubled In Size. Are You Better Off?

March 21 2023  Simon Black, Founder  Sovereign Research & Advisory

If you’re old enough to remember— think back to the year 1999.

Some of the year’s most popular movies included The Matrix, Fight Club, and Star Wars: The Phantom Menace. The euro made its international debut. Vladimir Putin became Prime Minister of Russia. And over in the US, President Bill Clinton narrowly escaped conviction in the Senate for obstruction and perjury charges related to his sex scandal.

1999 was also one of the last years of an unprecedented economic boom in the United States; the economy was so strong, in fact, that the federal government managed to run a significant budget surplus of around $128 billion (worth roughly $230 billion today).

Total federal spending for FY99 was $1.7 trillion; that’s about $3.1 trillion in 2023 dollars. I bring that up because, recently, the guy who shakes hands with thin air released his latest budget proposal for the next fiscal year.

It calls for nearly SEVEN TRILLION DOLLARS in federal spending.

So, even after adjusting for inflation, the Big Guy’s budget is more than TWICE as big as the federal budget was in 1999.

What exactly are taxpayers receiving in exchange for all that extra spending?

You’d think that if the government is spending twice as much, that taxpayers would be receiving AT LEAST twice as much benefit… or would see twice as much government service.

Are there twice as many federal highways? Is the military twice as strong? Is Social Security twice as solvent?

After SVB, are you worried about that your bank could be the next one to collapse suddenly?

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Quite the contrary, actually. The highways are crumbling, the military has grown weaker, and Social Security is set to run out of money in a few years.

And this trend doesn’t just apply to 1999. If we fast forward to 2013— 10 years ago— we can see, for example, that Defense spending totaled roughly $520 billion. That’s around $650 billion in today’s money.

The Big Guy’s new budget proposal, however, calls for nearly $900 billion in Defense spending. And that doesn’t include all the money they’re shoveling out the door to Ukraine.

That’s an almost 40% difference in Defense spending, after adjusting for inflation. But is US national security 40% better than it was in 2013? Is the military 40% stronger today than it was 10 years ago?

Probably not.

In 2016, Obama’s last year in office, federal spending was $3.2 trillion… which was considered an outrageous sum at the time. Adjusted for inflation, that would be $4.1 trillion today. This means that the Big Guy is proposing to spend nearly 70% more than his former boss.

What’s really incredible is that if the government had merely held spending constant (in real terms, after adjusting for inflation) from 2016, the US would have had a $1 TRILLION SURPLUS last year.

This is nuts. The government was already way too big in 2016. And if they had done nothing else but kept it the same size, the US would already be on the road to fiscal recovery.

Yet somehow they can’t manage to do that. They can’t find anywhere to cut. They only know how to spend more… even though they having nothing positive or tangible to show for it.

All we know for sure is that they’ve created a lot more rules, regulations, and bureaucracy. In fact back in 1999, the entire Code of Federal Regulations consumed about 130,000 pages. Today it’s closing in near 200,000 pages.

That’s an almost 50% increase in the amount of regulations in the Land of the Free since 1999… which is pretty amazing when you think about it—

It’s not like the US was on the verge of anarchy in 1999; America wasn’t some lawless society full of criminals and vigilantes. Life was pretty orderly and civilized.

Now the rules that we all have to follow have increased by nearly 50%. Is society 50% better off? 50% safer? 50% more civilized?

Absolutely not.

It’s ironic that, out of the ~70,000 new pages of regulations since 1999, 849 of those pages came from the Dodd-Frank banking reform that was supposed to prevent another bank crisis. So, many of the regulations are clearly pointless and ineffective.

So is the excessive spending. However high and noble their intentions, these people just keep making things worse.

The good news is that the solutions shouldn’t be difficult.    Again, all they have to do is go back to 2016-levels of government spending and there would be a big surplus. That’s hardly a radical proposal. But don’t hold your breath for them to figure it out.

To your freedom,  Simon Black, Founder  Sovereign Research & Advisory

https://www.sovereignman.com/trends/the-us-government-has-doubled-in-size-are-you-better-off-146473/

5 Things You Should Discuss During Your First Meeting With a Financial Advisor

5 Things You Should Discuss During Your First Meeting With a Financial Advisor

Gabrielle Olya   Mon, March 20, 2023

A financial advisor can be an excellent resource to help you make a plan for your money both now and in the future. But if you’re new to this world, you might not know how to make the most of your time during an initial meeting. In today’s “Financially Savvy Female” column, we’re chatting with Jane Voorhees, CFP, director of financial planning at ALINE Wealth, about how to prepare for a first meeting with a financial advisor and what topics you should be discussing.

What To Do Before Your Meeting

Before an initial meeting with a financial advisor, do some research into who they are and how they work.

“Go to the advisor’s website and read through it,” Voorhees said.

She recommends looking for the answers to the following questions:

What are the advisor’s credentials (education, professional designations and licenses)?

What is the overall wealth management philosophy that is coming through or being portrayed?

Does the advisor have a team and if so, what role does each team member play?

Does the advisor work as a registered investment advisor (RIA) or do they work under the umbrella of a brokerage firm?

“Understand that RIAs operate under a higher fiduciary standard than broker-dealer firms,” Voorhees said.

What To Bring to an Initial Meeting

Once you’ve done some basic research to ensure you feel confident about the advisor you are meeting with, it’s time to set up the meeting. To make the most of this first meeting, come prepared with the proper financial documents.

“Bring investment and bank account statements, insurance policies, statements/details on debts you owe, your most recent tax return and a budget (if you have one),” Voorhees said.

What To Discuss During Your First Meeting With an Advisor

To continue reading, please go to the original article here:

https://news.yahoo.com/5-things-discuss-during-first-130017129.html

Get Ready for the Distressed Equity Bonanza

Get Ready for the Distressed Equity Bonanza

March 20, 2023  Simon Black, Founder  Sovereign Research & Advisory

This isn’t over yet.  Last week after Silicon Valley Bank went poof in a matter of hours, I wrote that this financial catastrophe is just getting started:

“Like Lehman Brothers in 2008, SVB is just the tip of the iceberg. . .”

Within days, several other banks were on the verge of collapse. And now today, of course, major banks in the United States (including JP Morgan) are rallying to save the troubled First Republic Bank. 

The amazing thing about this rescue plan is that JP Morgan, Bank of America, etc. have pledged to deposit $30 billion of their customers’ funds at First Republic.

In other words, the big Wall Street banks have promised to transfer their customers’ money to another bank that everyone acknowledges is insolvent.

This is not only extremely unethical, it’s a major violation of the big banks’ fiduciary obligations to safeguard their customers’ savings.

It also strikes me as borderline illegal; JP Morgan can do what it likes with its own money. But it shouldn’t bail out a failed bank using its customers’ money.

This bank panic has also spread beyond the US.

Over the weekend in Switzerland, banking giant Credit Suisse had to be taken over. And I can only imagine the calamity that will ensue if depositors start to scrutinize the weak, under-capitalized banks in Italy.

(Perhaps that’s why Italy’s Economy Minister, Giancarlo Giorgetti, said last week that he hopes European authorities will intervene if there are more bank runs.)

Anyhow, let’s pretend for a moment that the bank runs are over for now. There are still a lot of risks lurking in the financial system, and it’s easy to understand why.

Last week I explained that Silicon Valley Bank had been insolvent for months. And they didn’t keep it a secret. SVB provided the Federal Reserve and FDIC with regular financial reports on their solvency and capital.

And they published their annual financial report back in mid-January, announcing their insolvency to the world.

For two months, nobody seemed to care about SVB’s massive unrealized losses. Then, practically overnight, a worldwide banking crisis began.

This sudden, dramatic change in market behavior is the critical issue here; in the field of ‘chaos’ mathematics this is known as bifurcation-- the point at which a small change causes an entire system to shift from stable to unstable.

That’s what happened with SVB; the global financial system was perfectly stable until about 10 days ago, when SVB made a minor announcement that they had sold some bonds at a loss.

Then suddenly everything fell into chaos. It was a minor change that led to major instability.

But bifurcation isn’t limited to commercial banks-- there are plenty of other potential bifurcation events lurking out there.

Think about it-- if investors and market participants can suddenly shift from CONFIDENT to PANICKED about commercial banks, why can’t they react the same way about sovereign governments, central banks, or even businesses?

With hundreds of billions of dollars in its own unrealized losses, even the Federal Reserve is insolvent.

(I’ve written numerous times about this, stating that the Fed “will eventually engineer its own insolvency.” Well, mission accomplished.)

At the moment, however, the market doesn’t seem to care that the Fed is insolvent… just like no one cared about Silicon Valley Bank’s insolvency back in January.

But who can guarantee that investors won’t suddenly care about the Federal Reserve’s horrific balance sheet? Just imagine the consequences that would trigger.

The same goes for US government finances. After all, the Treasury Department’s own annual report shows a NET financial position of MINUS $34 trillion. Sure, today, nobody really cares. Can we be so sure they won’t care next month? Or next year?

The larger point is that these potential bifurcation events are everywhere, and the system can shift from stable to unstable very quickly.

There are also key issues beyond these bifurcation points.

One obvious consequence of the SVB fallout is that banks are going to have to slash their loan and bond portfolios… starting now. This is normal practice when banks are in trouble.

Remember that, according to the FDIC, banks across the US have already suffered more than $600 billion in unrealized losses on their bond portfolios. And now that this has turned into a mini-crisis, banks will likely respond by slashing their lending and investing activities in order to conserve cash.

That’s bad news for most companies; even healthy, successful businesses often rely on loans, credit lines, and bond issues to fund their operations or major investments.

Businesses are already having to deal with the negative impact of significantly higher rates. But if banks suddenly reduce lending, that’s going to leave countless businesses in a really tough spot.

That means canceled projects, job cuts, and possibly financial distress, forcing many businesses to raise capital by issuing new shares at fire sale prices.

Objectively speaking these distressed equity opportunities can be incredibly lucrative for investors who are willing to pounce-- the chance to load up on high quality assets at deeply discounted prices.

But this distressed equity bonanza might not last.

I’ve argued before that the Federal Reserve will soon find itself between a rock and a hard place, i.e. they’ll have to choose between inflation versus financial catastrophe. And we’ve just witnessed the opening measures to financial catastrophe.

It will probably take them time to figure out; after all, it took the Fed more than a year before they finally realized inflation was a problem. And it’s probably going to take them time to realize that their rapid interest rate hikes are creating financial catastrophes.

But once they figure it out, the Fed is likely going to start cutting interest rates again (and allowing higher rates of inflation) in order to prevent full blown economic catastrophe. And that will put an end to the distressed equity bonanza.

So keep an eye out for this one, because it might not last long.

To your freedom, Simon Black, Founder  Sovereign Research & Advisory

https://www.sovereignman.com/trends/get-ready-for-the-distressed-equity-bonanza-146467/

6 Reasons To Spread Your Money Around Multiple Banks

 6 Reasons To Spread Your Money Around Multiple Banks

Andrew Lisa    Mon, March 20, 2023

Although you should always look for ways to declutter your financial life, it sometimes makes sense to have accounts scattered across more than one bank.

The following is a look at situations where you’d be wise to divide your money among two or more financial institutions simultaneously. If any of these scenarios apply to you, consider spreading your money around, even if it means keeping track of another routing number.

Banks Incentivize Bundled Services

Like insurance companies, banks offer better rates, deals and discounts for customers who partake in more than one of their offerings. In many cases, all you need is a free checking account to access the incentive that interests you.

“There are times when a bank may offer a special deal on a home equity line of credit for existing customers,” said 20-year lending industry veteran Eric Jeanette, president of Non-Prime Lenders. “In just that one example, you may miss out on an opportunity if you did not have an account with that bank.”

There are many other scenarios — including the pursuit of cheaper loans, higher savings yields or better CD rates — that could spur you to open a new account that you don’t really need.

“Some banks also have different fees for services like wire transfers or safe deposit boxes,” Jeanette said. “If you have a relationship with more than one bank, you have an opportunity to choose.”

Different Banks Excel at Different Things

Keeping all your accounts with one institution is convenient, but that’s not always what’s best for your money. For example, you might want a checking account that gives you early access to direct deposits and free peer-to-peer (P2P) transfers to friends at different banks. But the bank with the best savings rates might not offer those features to its checking customers.

In that scenario, the only way to get all of what you want is to join two banks, and that’s fine — decide where to stash your cash based on the merits of the account, not the institution that hosts it.

“One bank may provide higher interest rates on savings accounts, while another may offer superior credit card rewards programs,” said Andy Flynn, vice president of finance and treasury with a medical device company called SpryLyfe. “By maintaining accounts at many banks, you can maximize your financial status by taking advantage of various incentives.”

You Might Want To Establish a Hometown Branch If You Move

To continue reading, please go to the original article here:

https://news.yahoo.com/why-accounts-multiple-banks-130203107.html

More Money Doesn’t Make You Better at Managing Your Finances

More Money Doesn’t Make You Better at Managing Your Finances

Posted March 17, 2023 by Ben Carlson

There were a lot of surprising details that came to light from the Silicon Valley Bank fiasco.

It was surprising how quickly a bank run took hold for such a large institution.

It was surprising how quickly the bank’s customers fled one of their most trusted partners.

It was surprising how seemingly little oversight this now systemically important bank had.

It was surprising the Fed was kind of asleep at the wheel in terms of understanding how their interest rate hikes would impact the financial sector.

And it was surprising how many individuals and businesses were so bad at cash management.

Matthew Klein put together this chart that shows interest-bearing versus noninterest-bearing deposits at Silicon Valley Bank as of year-end 2022:

Klein explains:

As late as the end of last year, only half of SVB’s U.S. deposits ($82 billion) even paid any interest! For some reason, large and ostensibly sophisticated entities were still lending almost $80 billion to SVB at the end of 2022 even though their claims were unsecured and earning nothing.

That is bizarre. Even before I realized how many of those deposits earned zero interest, when the possibility of uninsured business deposits getting wiped out first presented itself last week, my first question was: why would any company have had that kind of unsecured exposure to a bank in the first place? After all, there are plenty of alternatives to bank deposits, especially for entities with money and even a tiny amount of sophistication.

Only half of the $82 billion in deposits earned any interest on their money.

And according to Felix Salmon, nearly 94% of those deposits were uninsured, meaning they were more than $250,000:

That’s a lot of money with no money management behind it.

To continue reading, please go to the original article here:

https://awealthofcommonsense.com/2023/03/more-money-doesnt-make-you-better-at-managing-your-finances/

Banks in Distress: What You Need to Know About the Safety of Your Money

Banks in Distress: What You Need to Know About the Safety of Your Money

Patrick Villanova, CEPF®   Fri, March 17, 2023  SmartAsset

In less than a week, the U.S. banking system has suffered two of the largest collapses in American history. Regulators shut down Silicon Valley Bank on Friday after customers rushed to withdraw their money as fears rose about the bank's liquidity.  Two days later, regulators shuttered Signature Bank following a similar run on deposits. (Disclosure: SmartAsset, the publisher of this article, has a customer relationship with Silicon Valley Bank.)

To prevent more bank runs, federal regulators quickly moved to insure all deposits at both banks – even accounts that exceeded the Federal Deposit Insurance Corporation's insurance limit of $250,000.

While the extraordinary action meant customers could take some comfort from the government intervention that effectively removed the cap on the FDIC's insurance limit of $250,000, some banking stocks have plunged in recent days amid fears of ongoing instability. With that in mind, we've set out to answer some questions you might have about the safety of your money.

A financial advisor can help guide you in times of economic uncertainty.

What Is FDIC Insurance? Does It Only Apply to Savings Accounts?

Historically, FDIC insurance protected depositors up to $250,000 per bank per account ownership category in the event that an insured bank goes under. FDIC insurance covers money held in deposit accounts, including savings accounts, checking accounts, negotiable order of withdrawal (NOW) accounts, money market deposit accounts, certificates of deposit, cashier's checks, money orders and other official items issued by a bank.

What Doesn't FDIC Insurance Cover?

The FDIC does not protect investments, even if they were purchased through an insured bank. Stocks, bonds, mutual funds, life insurance policies, annuities and other investments are not covered by FDIC insurance.

While insurance companies that sell annuities aren't FDIC-insured, it's worth noting that annuities are protected in a different way. Each state has a nonprofit guaranty organization that insurance companies must join. If a member company fails, the other companies in the guaranty association help pay the outstanding claims.

Meanwhile, the Securities Investor Protection Corporation (SIPC) protects customer assets in the event that a brokerage shuts down. SIPC insurance covers up to $500,000 in assets per customer per institution.

Should I Limit My Deposits to $250,000 Per Bank?

Here's What You Should (and Shouldn't Do) In Response to Banking Turmoil

To continue reading, please go to the original article here:

https://news.yahoo.com/banks-distress-know-safety-money-172504871.html

Silicon Valley Bank's Collapse Proves The US Is In Obvious Decline

Silicon Valley Bank's Collapse Proves The US Is In Obvious Decline

March 17, 2023  Simon Black, Founder  Sovereign Research & Advisory

Throughout history, whenever there has been a major shift in the world, it has usually been accompanied by a single iconic event that is associated with that change.  For example, historians often point to 476 AD as the year that the Western Roman Empire fell, when Odoacer and his barbarians forced the abdication of the Emperor Romulus Augustus— even though it was obvious that Rome was in decline way before 476.

People also often associate the start of the Great Depression with the stock market crash of 1929 (even though there were many signs of economic distress well in advance of that).

But these clean, precise dates are only chosen in retrospect. People experiencing the events at the time rarely understand their significance.

I think it’s possible that future historians may look back at Silicon Valley Bank’s collapse as one of those iconic events that signals a major shift... potentially the end of American geopolitical and economic dominance.

I’m not making this assertion to be dramatic; rather I think that anyone who takes an objective look at the facts—

the appalling $31+ trillion national debt

the government’s addiction to spending and multi-trillion dollar deficits

social dysfunction and “mostly peaceful” protests

the decline in military strength

rampant inflation and central bank folly

extreme government incompetence

insolvency in major programs like Social Security

— will reach the same conclusion that the United States is past its peak and in decline.

Now on top of everything else we can add a loss of confidence in the US banking system.

Obviously I take no pleasure in acknowledging the US is in decline. But that doesn’t make it any less true. And this has been Sovereign Man’s core ethos since inception back in 2009.

Back when I started this company it was considered extremely controversial when I said the US was in decline, or that there would be larger problems in the banking system, or that the breakdown of social cohesion would only get worse.

But today these challenges are so obvious that they’re impossible to deny.

You can never solve a problem until you first admit you have one.

And most of the corrupt sycophants masquerading as political leadership are incapable of admitting problems, nor discussing them rationally, let alone solving them.

But you and I do not have that disability. We are free to exercise the full range of human ingenuity and creativity with which we have been fortunately endowed.

So while the people in charge continue to never miss an opportunity to demonstrate their uselessness, we have a whole world of freedom and opportunity at our disposal.

This is the topic of today’s podcast.

First I review the huge issues with the Silicon Valley Bank collapse. Honestly when you look at it from a big picture perspective, it’s littered with mind-numbing incompetence.

The politicians who received donations from SVB’s Political Action Committee missed it. The Wall Street hot shots missed it. The credit ratings agencies missed it. The regulators missed it. The Federal Reserve missed it.

But now the Federal Reserve has launched a new program that exposes the US dollar— and everyone who uses it— to significant risk.

Think about this from the perspective of foreign governments and central banks.

Foreigners bought boatloads of US government debt over the past few years, especially in the early days of the pandemic.

In fact foreign ownership of US government debt has increased by $1 trillion since the start of the pandemic, and now amounts to more than $7.6 trillion.

But thanks to Fed policy, these foreign institutions are in the same boat as Silicon Valley Bank— they’re sitting on huge losses in their bond portfolios. They’ve also suffered from pitiful returns, high inflation, AND exchange rate losses.

In short, any foreign institution that bought US government bonds over the past few years is sitting on huge losses.

Plus now they’re watching with bewilderment as US politicians prove completely incapable of solving their debt crisis.

And on top of everything else they’ve just witnessed multiple bank runs in America, followed by the Federal Reserve’s pledge to put the dollar at further risk.

If you were a foreign government or central bank, would you want to continue buying US government debt? Would you want to continue holding your national savings in US dollars?

Probably not. Rather, they’re probably sick to death of all these histrionics.

We won’t know until years into the future, but SVB’s collapse (and the Fed’s response) may end up being the final nail in the coffin for the US dollar’s dominance.

You can listen to the podcast here.

To your freedom,  Simon Black, Founder  Sovereign Research & Advisory

https://www.sovereignman.com/podcast/silicon-valley-banks-collapse-proves-the-us-is-in-obvious-decline-146340/

Is My Money Safe?

Is My Money Safe?

Posted March 16, 2023 by Ben Carlson

A reader asks:  If a brokerage fails, what happens to a customer’s holdings there?

Another reader asks:  My wife and I have the bulk of our investments (401k & trading) in basically 2 accounts. Is this a dumb practice? Should we be more ‘diversified’ with our institutions? We’ve been discussing this for a while, and then with SVB, it’s definitely brought the discussion back to the kitchen table. Understood that FDIC insures up to $250k, but once you get north of that, any best practices for what to do?

Still another reader wants to know: 

The Federal Home Loan Bank (FHLB) of San Francisco has a lot of exposure to SVB and other similar banks based on public SEC filings ($30 billion to $50 billion by my count). My money market fund had approximately 20% of its holdings in FHLB securities as of February 28th. Should I be concerned? I understand FHLB is a GSE, just like Fannie and Freddie who I’m sure you remember from the GFC. The second largest bank failure in US history is enough of a low probability event for me – just want your thoughts on if I should be concerned with other low probability events like something non-crypto breaking the buck because of SVB?

Here’s one more:

I’m considering keeping our emergency fund in a money market fund. Is this too risky with out it having FDIC insurance?

You get the idea.

There were a lot of questions like that this week.

People are worried about the safety of their money and it’s not something they ever really thought they would have to worry about.

Carl Richards once wrote, “Risk is what’s left over after you think you’ve thought of everything.”

The true risks are never really known ahead of time.

No one had a bank run as the biggest risk to the financial system in their 2023 outlooks. A Wall Street strategist writes an annual outlook and God laughs.

There are plenty of known risks when you invest — inflation, deflation, recessions, rising interest rates, falling interest rates, bear markets, crashes, losses, etc.

No one can predict these things in advance but this is what you sign up for when putting your money to work in risk assets.

When you sign up for a bank account you’re not planning on taking any risk. This is why bank accounts don’t pay nearly as much as stocks or bonds. In fact, most bank accounts don’t pay you anything.

No one really worries about the money they have in the bank. And while plenty of investors worry about the performance of their portfolio, few people ever worry about the financial institutions that custody their assets.

The finance industry likes to quantify risks through measures such as standard deviation, tracking error, alpha, risk-adjusted returns and various ratios.

Most normal people care more about qualitative risks that aren’t easy to quantify:

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