This continues to be a difficult time for financial markets. We are writing this short note to reassure everyone that our models remain defensive and well-positioned for the current market turmoil. High-interest rates and tightening liquidity conditions continue to weigh on markets. As we have said in prior communications, bad things happen when the Fed raises rates, especially when rates rise rapidly in a highly indebted economy.
The latest casualty of high rates and tight liquidity conditions was the failure of Silicon Valley, Silvergate, and Signature Bank last week (the last two were considered crypto banks). Some banks, including Silicon Valley Bank, face a problem: they invested substantially in long-term bonds in 2021 when interest rates were very low. As interest rates substantially climbed, the value of these long-term bonds declined, giving them substantial unrealized losses on the asset side of their balance sheet. The losses weren’t a problem until depositors, primarily tech and venture capital businesses at SVB, started withdrawing their cash at a rapid rate which essentially caused a run on the bank. According to Bloomberg, most depositors had deposits well over the FDIC limits and were thus at risk if the bank failed, which it eventually did. The expedited withdrawal of these deposits forced SVB to liquidate assets (mortgage and treasury bonds) at a loss, creating a perfect storm that eventually led to insolvency. Had they been able to hedge their interest rate risk or invest in short-term bonds, it may have prevented the run on the bank. We are reporting what we have read and are certain there will be an investigation to determine how this happened and how to prevent this from happening in the future.
The FDIC has taken control of Silicon Valley Bank and is taking special measures to ensure the bank's depositors quickly get access to all their funds, even funds above the FDIC-insured limits. SVB is the second largest bank failure since Washington Mutual failed in the 2008 Financial Crisis. This has prompted questions by many about the safety of bank cash deposits, especially regional banks on the west coast. This isn’t a time to panic. The most prudent thing to do is to ensure your cash deposits are below FDIC limits.
FDIC offers coverage of up to $250K per depositor per bank (so $500k on joint accounts). All TD Ameritrade accounts managed by Lake Hills have the FDIC-insured sweep account for cash in a brokerage account. TD Ameritrade and Schwab take these sweep account deposits and spread them across multiple FDIC-insured banks to increase the FDIC coverage to clients. As it stands, TD Ameritrade’s FDIC-insured sweep account offers FDIC coverage of up to $500k per depositor ($1 Million on Joint accounts). At the time of writing this note, all Lake Hills clients have cash balances UNDER the FDIC limit.
Click here for more information on FDIC coverage limits: https://www.fdic.gov/resources/deposit-insurance/brochures/deposits-at-a-glance/#:~:text=COVERAGE%20LIMITS,in%20different%20account%20ownership%20categories.
Beyond spreading cash deposits at multiple banks, another option is to use the excess cash and buy short-term treasuries with maturities of less than 12 months. We have been doing this with excess cash in portfolios for six months. Short-term treasuries are considered safe (guaranteed by the U.S. Government) and offer a yield that is currently paying more than most money market accounts. The adage that echoes throughout history should be repeated…DON’T FIGHT THE FED. From our perspective, the market still isn’t listening.
Please let us know if you have any questions or concerns.
Sincerely,
Lake Hills Wealth Management