SVB run different from earlier shocks

Matein Khalid

There was no way Uncle Sam was going to allow a mass extinction event to destroy thousands of VC funded tech and life science startup to be wiped out due to the collapse of Silicon Valley Bank (SVB). The “flight to quality” trade, illustrated by a steep plunge in the yield of the 2 year US Treasury note from 5.07% last Wednesday to 4.35% is comparable in historical context to the aftermath of Lehman and 9/11. Yet there is no way the classic depositor run on SVB can be compared to either those two financial/geopolitical black swan shocks. This made me certain that the Federal Reserve would shift its focus from anti-inflation zealotry to lender of the last resort Mommykins as his primordial role is to underwrite global financial stability risk.

FDR once said “we have nothing to fear but fear itself” and this could well be the First Commandment of central banking. Goldman Sachs economics team now believes that the Powell Fed will pause at the March 21 FOMC before resuming three successive 25 basis point rate hikes in May, June and July for a terminal Fed funds rate target of 5.5%. The Fed/US Treasury have moved fast to guarantee even the uninsured deposits of SVB/Signature Bank and HSBC has acquired the London subsidiary of SVB for $1. This swift action nips an embryonic bank liquidity crunch in the bud even though it will not avert a risk premium in funding markets for smaller/regional banks or banks with a concentrated industry risk on either side of their balance sheet. GCC banks with 30% property market exposure learned this lesson the hard way during the epic property crash between 2009 and 2020, when real estate values fell 60 to 70%.

Today is already proving a session of epic money making in the global financial markets. Some ideas as I have to scramble back to my Bloomberg screen pronto as its green phosphorescent flicker screams several no brainer trades. One, since the Fed has averted the risk of a classic fear psychosis and a run on King Dollar, it is time to buy high beta currencies leveraged to international banking risk like the British pound or commodities proxies like the Aussie dollar. Two, I have been long TLT since it traded at 101 and expect to book a juicy six full figure profit on this tracker as the yield on the 10-year US Treasury note tanks to 3.50%. Three, banking babies were thrown out with the bath water during the SVB bank run last week, with the KBE index down a ghastly 15%. Higher risk metrics and funding costs will pressure profits/margins but the best of breed global banks are still attractive to me at specific prices. So je’adore BNP Paribas at €54 and Morgan Stanley at 86 to $88. In essence the Fed’s post SVB term lending program is a de facto QE and this is an inflection point in the markets and my macro investment strategies. Four, inflation is still 6% but the Fed has now blinked after JayPo went eyeball to eyeball with his hard money doppelgänger. So I accumulate Dr. Auric, Dr. Copper and Texas Tea proxies.