Why The Banking System Should Heal And Boost The Economy

With the bank run at Silicon Valley Bank, the entire banking system went into chaos. Signature Bank went under and then Credit Suisse got taken under by UBS. Now First Republic Bank is getting bought out as well.

Despite the events, let me share why I think the banking system should actually improve over the next 12 months.

Sure, there will be a temporary decline in lending given banks are still uncertain about the stability of its deposits. But deposits should actually start flowing back again.

I certainly don't think we're going to experience another 2008 global financial crisis.

Surviving The Latest Banking Turmoil

Recently, I temporarily went broke because I had a couple of unanticipated capital calls to the tune of $80,000. After being quiet for the last six months, a venture capital and a venture debt fund I'm an investor in both decided to make several new investments. 

Usually, I'm able to absorb these capital calls with better planning, however, I had been plowing all my remaining cash into Treasury Bonds once yields surpassed 5%. As a result, I had to scramble for the next six weeks to come up with the required cash. 

If you are a private fund investor or plan to invest in private funds, it's worth reading, How To Better Manage Your Private Fund Capital Calls

The entire process is eye-opening into how venture funding works, especially given it happened during the recent bank runs. 

A Potential Positive Turning Point In The Banking System

A few weeks after my capital calls, I finally felt relief as new cash flow replenished the coffers. As a result, I decided to log onto my online brokerage and buy more 5%+-yielding Treasury bonds. 

However, below is what I found. 

Latest bond and CD rates March 26 2023 - Treasury bonds collapse

Dang! Where did all the juicy 5%+-yielding Treasury bond options go?! 

Although 4.67% for a 3-month and 4.63% for a 6-month both look OK, their durations are short. They don't look nearly as attractive when we could have gotten 5.2% just a couple of weeks ago.

Notice how the 10-year Treasury bond yield has also tanked to 3.37% from 4%. As a result, we're also talking about a large ~0.75% in average mortgage rates declines.

Therefore, instead of buying more Treasury bonds this week, I decided to invest in the S&P 500 and in a private real estate fund.

I'm pretty sure other investors who were regularly plowing money into Treasuries are now reconsidering as well. Such is the power of declining opportunity cost. The federal government is no longer “crowding out” as private capital thanks to a decline in Treasury bond rates.

SVB literally sold $21.5 billion worth of long bonds at the top of the market! In fact, its sacrifice may have helped us all. 

Banks Should Heal Eventually 

Did you notice anything else from the bond table above? Certificates of Deposits from 3-months to 10-months are all yielding over 5%!

As a result, the flow of safety capital will stop leaving banks for Treasuries and back to banks. As a result, overall system deposits should eventually increase, thereby strengthening financials. Remember, everything is relative in finance.

The chart below shows how the Fed funds rate is much higher than the national average interest rate on savings accounts and checking accounts. However, as the spread narrows (decline in Treasury bond yields, rise in money market rates and CDs), the outflow of bank deposits will stop. 

As deposits flow back to banks, there will be more stability, more liquidity, and more lending. All these things are positives for the economy and risk assets. Although in the meantime, banks will likely be more cautious with their lending and charge higher rates. Further, CD rates will eventually decline as well.

Divergence between Fed funds rate and interest rates for checking and savings accounts

In Search Of Investment Opportunities

As usual, those with capital during times of uncertainty tend to profit more long term. During the SVB meltdown, I spoke to a General Partner of a venture debt fund.

He said SVB was one of their most prominent competitors that often offered lower interest rates with flexible loans. The GP believes they have a “once-in-a-generation opportunity” to purchase some of SVB's loans at a significant discount. They also see more demand for venture debt as credit availability declines and equity funding rounds take longer. 

Something similar is happening in real estate. My contact at Fundrise reminded me they launched an Opportunistic Credit Fund recently to take advantage of the temporary dislocation in the market due to the rapid rise in interest rates. 

At the beginning of the year, when I spoke to Fundrise's founder, Ben Miller, he said roughly 20% of the $3+ billion under management was in cash. 

“The strategy of the Fund will be to focus on maintaining a healthy margin of safety in the investment it makes, concentrating on high-quality assets with creditworthy borrowers, who are more so experiencing circumstantial hardship as a result of the rapid rate hikes. 

The Fund will offer “bridge” loans to Sponsors in the midst of value-enhancing activities such as construction, renovations, or lease-up, and simply need more time to follow through with their business plans before they reach stabilization and are ready for long-term, fixed-rate debt.”

One of the biggest hurdles for the Credit Fund, however, is its $100,000 minimum investment. Therefore, if you can't afford that level of commitment, you can always invest in one of Fundrise's main funds which only has a $10 minimum. The investment committee is being very opportunistic now. 

Real Estate Clearly Rebounding

February existing home sales rose 14.5% in February 2023, the largest monthly percentage increase since July 2020. 

Further, mortgage rates were ~0.5% higher on average in February than they are in March (<6% now for 30-year fixed). Hence, we should expect a continued rebound in existing home sales in March. 

Anecdotally, I'm getting more alerts from Redfin that homes fitting my filter are getting sold too. Are you seeing the same? 

The problem is a lack of inventory and a lack of quality inventory. If you don't have to sell, it doesn't make sense to sell now, especially if you have a sub-3% mortgage rate. 

The next 3-6 months seem like the opportune time to look for bargains because here's another positive chart. As real estate rebounds, more business with flow to banks with new loans and refinances. This will further help the banking system.

Retail investors are sitting on more cash than the pandemic high in 2020. Eventually, this money will be put to work as interest rates decrease.

Money market fund assets - So much cash means the economy can withstand more shocks and the banking system should hold on

RIP Credit Suisse

Finally, my old employer, Credit Suisse, got taken under by archrival UBS. After I left in 2012, Credit Suisse made too many mistakes that cost it billions in profitability. 

The first lesson is to always regularly sell company stock to reduce concentration risk. Even if you work for a great firm that is doing well, I'd still regularly sell if you still plan to work there. The acquiring of Credit Suisse should lead to more cost-cutting and banking efficiencies.

The other lesson from Credit Suisse's demise is to make sure the company you're working for is worth working for! 

Imagine spending 30 years of your life working at a firm that goes bankrupt. You may feel that all your hard work was for nothing, especially if you didn't save aggressively and diversify away from your company stock to pay for a better life. 

The reality is, so much of your company's future is out of your control. Most of us are just cogs in a wheel. Therefore, it's important to do a deep-dive, objective analysis of your current company and understand all its flaws. 

Legacy Management

As you get older, you will think more about your legacy. I suggest shifting more of your legacy's destiny toward the things you can control and away from the things you can't. 

Ideas include:

  • Donating to a cause
  • Starting a charity
  • Volunteering for a cause
  • Starting a business
  • Joining a board of a great organization 
  • Being the friendliest person on the pickleball court who is always willing to play with anybody
  • Becoming a mentor
  • Writing a book

Eventually, your time at your company will end. The best you might get is a golden plaque and a going away party. Then it's onto the next employee. Choose your time wisely! 

To Your Financial Freedom,



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