Rich Excell's avatar
$16.9m follower assets
Chart of the Day - action
“Now in matters of action the reason directs all things in view of the end” - Thomas Aquinas, "Summa Theologica"
I know what you are thinking, he is pushing the envelope if he thinks he can tie Thomas Aquinas to the fincl mkts. However, it is a Friday during Lent, so I have to try.

Today in the markets, we finally got some action. Believe it or not, participants were actually using some reason to deduce the end game.

“The science of mathematics treats its object as though it were something abstracted mentally, whereas it is not abstract in reality.”

The mathematics here are the mathematics of the banking system. Banks take in deposits & make loans, trying to capture a spread in this borrow short/lend long position.

It doesn't always work as planned. Ask George Bailey at the Bailey Building & Loan. As customers come & demand the deposits back, banks need to sell down some assets to cover this liability. That is why banks are meant to keep high quality liquid assets.

Except not all banks do that. This week we saw two banks fail to take in enough selling assets to cover the liabilities & therefore steps had to be taken.

The top chart shows you the 3 mo vs. 5 yr part of the yield curve in blue. It has inverted like the rest of the curve. It is a proxy for bank net interest margin in purple - it leads this.

The stocks know this and that is why the XLF's relative performance to SPY follows the yield curve. As the curve flattens, fincl stocks start to lag the mkt.

"Nothing can be known, save what is true” - Silicon Valley Bank loans to the VC crowd - founders & companies. As you can imagine, there isn't the same robust secondary mkt for shares in start-ups as in the public mkts.

It therefore had to sell stock in itself, at more than a 50% discount (because investors were marking down the assets on the balance sheet) to get the necessary capital. Not good.

Silvergate Capital chose to have its assets in a different illiquid medium - crypto. It was great the last few years when crypto went higher. When crypto crashed, and customers wanted the deposits, there was nothing to do but turn to the FDIC.

Why was this bad for the mkt overall? Because banks are the veritable canary in the coal mine. The banks will feel the effect of higher rates. Banks are the transmission mechanism of tighter Fed policy.

In the bottom chart, you can see that in this hiking cycle, smaller regional banks lead the SPY. Those banks, led by the two above, were crushed today. What does that mean for the overall mkt? Especially if the Fed is still hawkish due to inflation?

Success & money are fleeting. In fact, Aquinas also says you won't find happiness in money, honor, fame, power, or pleasure. If this is your goal in the fincls mkts, you will be disappointed. I will vouch for that.

Use reason, take action if necessary and most of all, Stay Vigilant.
#markets #investing #stocks #yieldcurve #banks

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Joshua Simka's avatar
$SIVB's drop was just brutal 🤯

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Nathan Worden's avatar
Your comment about banks being 'the canary in the coal mine' was interesting— what other fallout do you think could happen from Silicon Valley Bank closing down?



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