Tumult in the markets! SVB, Signature, and First Republic (banks) all saw various forms of collapse the week of the Ides of March, 13-17, 2023, due to mismanagement, liquidity issues, and overexposure to venture capital assets. Contagion erupted, with most headlines focused on the regional bank sector and their deposit base, and many banks seeing deterioration in their shares to the tune of 20-30%. SVB was momentarily shut down, and First Republic saw share losses of ~60%. Credit Suisse was also bailed out by the Swiss National Bank. And that is only the first sip of Guinness. Memento mori.

Deposits at regional banks have been under particular scrutiny, as SVB’s shutdown left large depositors out to dry upon a bank run, a classic fear of the archetypal bankers, Milburn Drysdale and George Bailey. And bank runs are symptoms of fear in a market. Where has this fear come from?

Inverness’s eye is drawn to a few places:

• During 2022 and into 2023, we have seen rates rise from near-zero to almost 500bps in the credit markets, indicating money itself is becoming more expensive. At the same time, the US was attempting to digest spending of $2.2 trillion under the CARES Act of March 27, 2020, and the $1.9 trillion ARP Act of March 11, 2021. Yes folks, you read that right: the Uncle Sam passed two emergency spending bills totaling $4.1 trillion in less than 1 year using two different presidents. Not to mention the years’ worth of “Quantitative Easing” keeping rates artificially low throughout the 2010’s and the federal student loans inflating the cost of college over the past fifty years. The US balance sheet now sits at Assets of $4.9 trillion compared to Liabilities of $34.8 trillion. The pension liability alone accounts for $10.2 trillion of national liability.
• The S&P lost 11% of its value in the last 12 months, led by Amazon and Google (perhaps the tech layoffs had something to do with that? Or maybe the disruption of the techy way of life following lockdowns?). US banks didn’t help. [1]
• Republicans took control of the house in the second half of 2022, deepening gridlock, which from a constitutional perspective can only be a positive.

To say banks were in a fragile position is a bit of an understatement. Following COVID, the markets never really found a niche and the underlying media market sentiment was one of the Emperor having no clothes. As such, investors’ trust in US leadership ability as global hegemon has suffered, maiming Alexander Hamilton’s beautiful banking system with it. As of time of writing, the SPDR Regional Bank ETF is at the same price level as 4Q 2020.

Now that we have removed COVID and supply chain issues as an excuse for poor performance, Russia has been at war for a year, and JPow has raised rates rapidly, we’ll see some deep cuts. Division has already begun with the mass migrations of peoples away from population centers (at least in the US from NY and CA to TX and FL), but not before workers demanded more flexibility in terms of work location.

This increase in prices (energy, food, and financing) and shift in demographics will drive weaker companies into default, causing mass restructuring of debt covenants around the US and sending the banking world into a further frenzy. These rate moves were thought to combat the inflation seen from significant long-term government spending and a more vulnerable national supply chain.

But our workforce isn’t as bright or motivated as it was even 75 years ago, with our three-quarters of a century of peace creating an avocado toast society.

The prevailing US obsession for the past fifty years has been college, which in turn led everyone to believe the four-year, $200k party was worth the student loans. It was seen in 2015 or so that this business model starting to become obsolete, with schools beginning to hurt for students (the Illinois public universities and small liberal arts colleges come to mind). Student loans continued to grow unabated until 2020, when the debate to forgive them, along with non-traditional methods of education via podcasts and Youtube, cropped up. Despite government artifices on both ends, the college bubble popped with COVID’s onset and the true democratization of the country into its own houses.

Now, large swathes of society are waking up to the idea that there is a lot of work to be done to maintain our national standard of living. We have had the nuclear sword of Damocles hanging over our heads, but have only awoken to its responsibility recently. Memento Mori.

Thank you for reading: I am well aware this broader market commentary is not within the typical confines of this blog.

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[1] Britain moved on from Boris Johnson as Prime Minister to Liz Truss, who only lasted a month and a half in the job before getting the sack in favor of Rishi Sunak, an ex-banker. Ironically, the FTSE 100 is flat for the past year (and was on a tear before these past few weeks of banking contagion).