Recent Bank Failures: A Canary in a Coal Mine?

The volatility of the market has been making headlines recently. As of this writing on March 13^th 2023, Silicon Valley Bank and Signature Bank recently failed which has understandably caused a spur of questions and interest in the financial sector as well as the general public. The is the first FDIC-insured institution to fail since 2020 and the largest assets since Washington Mutual failed in 2008.

Financial media and journalism undoubtedly love the increased interest and attention this is bringing them, and I’d like to provide you my two-cents so you aren’t overly influenced by all of what you are likely getting barraged with. 72 FDIC-insured banks have failed over the past 10 year, and I believe the two recent banks are rather unique experiences and don’t indicate something larger going on systematically.

Silicon Valley Bank had more of a niche in their business model and had much higher variance in customer cash flow needs than normal, and they also should have hedged their interest rate risk appropriately and did not. How they decide to allocate their assets and what investments they chose was a major factor in their failure. In a similar way, Signature Bank appears to have gotten caught up in the cryptocurrency crazy and allocated more of their assets into cryptocurrencies and got burned when cryptocurrency prices plummeted.

Hence, I do not think this is a “canary in the coal mine”. In fact, I don’t want you to get distracted from recent headlines or get too zoomed in that you confuse the “forest from the trees”. The greater problem lies in the Federal Reserve having bad monetary policy and ignoring how the money supply effects inflation. The money supply exploded in 2020 and 2021, and peaked in early 2022. Then, with the Federal Reserve being behind the 8 eight ball, they raised interest rates rapidly which has caused a shock to the economy and I believe we will soon see the effects of doing so. In general, economists estimate a general timeline of roughly a 12-month delay or lag to see the effects on the economy after raising interest rates. Raising rates as much and as quickly as the Federal Reserve did, is similar to slamming the breaks on a car in motion, only with the economy.

Just in case it may seem like I’m on both sides of the fence, I want to be clear what I’m trying to articulate. I do not see the recent bank failures as a larger, systemic problem and do not think it’s as signal of a greater problem ahead with our financial system. At the same time, I believe the actions taken by the Federal Reserve in combination with our current and future state of the economy, will mean we will go into a recession. Most experts and analysts since the beginning of the year have been giving it an increasing probability that we will not go into a recession – I disagree with this and think it is highly probable. However, the length and depth of the recession will probably not be as bad as the media will paint it to be if they switch their stance in the future.

Please know that the (likely) future recession is a natural and necessary ebb and flow of the economy making a correction back to equilibrium. At this time, I think it is prudent to remember an axiom you may have heard me cite before: “Successful investors are goals-focused and planning-driven. Unsuccessful investors are market-focused and reactionary.” Don’t let the recent events and financial journalism plant seeds of doubt into the prudent planning process we have conducted, which will ultimately lead you to successfully fulfilling what is most important to you in your life.

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‍The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal. No strategy assures success or protects against loss. The economic forecasts et forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.