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The charts and themes from the past week that tell an interesting story in markets and investing…
1) A Run on the Bank
It’s probably been a while since you’ve heard anything about bank failures. That’s because there were none at all in 2021 and 2022. The last time we had two straight years without a bank failure was 2005 and 2006.
All that has changed in a big way this past week with Silicon Valley Bank ($SIVB) and Signature Bank ($SBNY) becoming the 2nd and 3rd largest bank failures in U.S. history.
It was a classic run on the bank, with depositors racing for the exits, attempting to withdraw an astounding $42 billion from Silicon Valley Bank in a single day (March 9).
What precipitated the panic?
The announcement by SVB of a $1.8 billion loss on the sale of a portion of its bond portfolio (Treasuries and MBS) which had suffered declines due to the sharp rise in interest rates.
In an effort to replenish their capital, SVB then tried but failed to raise equity. The very next day, regulators stepped in to shut the bank down after the withdrawal requests exceeded SVB’s available liquidity. And over the weekend, they did the same with Signature Bank.
On Sunday night, the Treasury, Federal Reserve, and FDIC issued a joint statement guaranteeing deposits at both banks, relieving the fears of many individuals and businesses who held assets at SVB/Signature above FDIC insurance limits ($250k/per account holder). Before the announcement, there had been a panic across the VC/tech space as many businesses held uninsured deposits at SVB (over 90% of assets at the bank were above the FDIC limit).
At the same time, the Fed created a new “Bank Term Funding Program (BTFP)” which offers 1-year loans to banks in need of liquidity. Importantly, these banks can post as collateral the very same securities that Silicon Valley Bank was forced to sell at a loss, and receive par value for the loans even if their current market value shows a significant decline. And with the US Bond Market in the midst of its longest and deepest drawdown in history (31 months and counting), banks are holding trillions of these securities at a discount.
As for the equity holders of SVB and Signature, there will be no bailouts. Barring a sale to another bank, they will likely be completely wiped out. In its last day of trading, SVB closed at a market cap of $6.27 billion, down from a peak of over $44 billion in November 2021. Thus, a bank with a 40-year history was evaporated in a span of 48 hours.
Did Wall Street analysts see this coming?
Not exactly. There wasn’t a single Wall Street firm with a sell rating on SVB Stock, with a consensus rating of “Buy” and a consensus “Price Target” of $337. This should tell you everything you need to know about the value of analyst recommendations and price targets.
Beyond ridiculous are the after-the-fact downgrades that always seem to occur. This time, three analysts downgraded Silicon Valley Bank on March 10, the day the FDIC shut it down and trading was halted. Incredibly, none of these downgrades were to a “sell” rating.
2) Shutting Silvergate
SVB and Signature weren’t only banks to fail last week.
Crypto lender Silvergate Capital ($SI) is shutting down as well, announcing a planned liquidation. In November 2021, Silvergate was was valued at nearly $6 billion. Today that’s down to $78 million, a decline of close to 99%.
3) Fears of Contagion
Fears over these bank failures have naturally spread to other regional banks. We don’t know the deposit outflows at these banks, but given the market value declines in their stocks it’s likely significant for some.
If you have an account above the FDIC limit, human psychology and game theory would predict that you won’t wait to find out if the Fed is going to backstop your bank. Without an explicit guarantee, many will move their money first, and ask questions later.
The 16% decline in the Regional Bank ETF last week was the 4th largest since its inception in 2006. Only the financial crisis (2008/09) and the covid crash (March 2020) saw larger weekly declines.
What was the Fed’s response to these prior periods of banking stress (financial crisis & covid crash)? Cutting rates to 0% and launching massive quantitative easing programs.
What about today?
That remains to be seen. The “Bank Term Funding Program” is certainly an emergency measure, but all eyes will be on the Fed when they meet again on March 22.
4) An Easier Fed
And what the market is expecting at that meeting?
One more hike (to 4.75-5.00%), but a much easier Fed thereafter. Fed Funds Futures are now pricing rate cuts starting in July, with a 2023 year-end Fed Funds Rate of roughly 4% that will drop to 3% by the end of 2024.
That’s a huge shift from last Wednesday (3/8) when the market was pricing in a few more hikes (to close to 6%) and the 6-Month Treasury yield hit its highest level since January 2001.
Will the market be right about the future path of the Fed Funds Rate? Based on history, probably not. The market is often wrong, and we’ve seen that time and again over the years.
These were the projections for the peak Fed Funds Rate of this cycle over the past year…
- Mar 2022: 2.75-3.00%
- May 2022: 3.00-3.25%
- Jul 2022: 3.25-3.50%
- Aug 2022: 3.75-4.00%
- Sep 2022: 4.00-4.25%
- Oct 2022: 4.50-4.75%
- Nov 2022: 5.00-5.25%
- Dec 2022: 4.75-5.00%
- Jan 2023: 4.75-5.00%
- Feb 2023: 5.25-5.50%
- Today: 4.75-5.00%.
What this shows: market participants have consistently underestimated the trajectory of US inflation and the Fed’s resolve in fighting it. Meanwhile, the Federal Reserve has been no better. Not only did they fail to predict any meaningful rise in inflation in their forecasts at the end 2020 and 2021, they were actually more concerned about the threat of deflation. Here were their forecasts for the 2023 year-end Fed Funds Rate back in 2020 and 2021…
- In Dec 2020: 0.1%
- In Dec 2021: 1.6%
5) Back to Even
The bank failures have led to an extreme flight to safety, where the 2-year Treasury yield has fallen over 100 bps in just 3 trading days (from 5.05% to 4.04%). That’s the largest 3-day decline in yields since the October 1987 stock market crash.
The stock market today is not crashing today, but the S&P 500 has given back nearly all of its gains on the year after an 8% pullback. Small caps have been hit harder (13% pullback) while the Nasdaq 100 has held up the best, still up over 8% on the year. Meanwhile, the best performer from 2022 (the Dow) is down over 3% year-to-date.
Volatility is once again on the rise, with the S&P 500 suffering a few large down days in the past week. That’s now 11 days so far this year with a decline greater than 1%, on pace to be well above the average year. Additionally, the Volatility Index ($VIX) rose above 30 on Monday (3/13) for the first time since last October, a sign of increasing fear.
6) Employment Gains Continue
While the financial markets have come under pressure, the labor market continues to exhibit strength. We now have 26 consecutive months of jobs growth in the US, with another better-than-expected report for February.
The gap between actual payrolls the pre-covid trend (+1.5%/yr) narrowed again in February, but is still over 4 million. This likely explains the continued strength in the labor market and the massive spread between the # of job openings (10.8 million) and the # of unemployed (5.9 million). Many industries (particularly leisure/hospitality and retail) are still in need of workers.
And workers are finally coming back, likely a function of persistently high inflation and the waning effects of the stimulus. The Labor Force Participation Rate moved up to 62.5%, its highest level since March 2020. It was at 63.3% before the covid shutdowns and stimulus measures.
As a consequence of more people reentering the labor market looking for work, the US Unemployment Rate moved up to 3.6% in February. That’s 0.2% higher than the January reading (3.4%) which was the lowest rate we’ve seen since 1969.
7) The Housing Downturn Continues
US Home Prices fell in December for the 6th consecutive month (Case Shiller National Index). The 4.4% decline over the last 6 months is the largest 6-month decline since 2011-12 but prices are still 39% higher than they were 3 years ago.
While the case-shiller index showed a 5.8% YoY increase in prices through December, this is lagging data. Real-time sales data from Redfin shows a 1% YoY decline, the largest we’ve seen since 2012.
The Case Shiller 20-City Home Price Index moved down for a 6th straight month, the longest down streak since 2011-12. San Francisco and Seattle home prices were negative YoY, the first time 2 major cities in the index were down YoY since 2012. More downside is likely in coming months.
Why do I say that?
Because of the lack of affordability. Only 1 in 5 US homes for sale in 2022 were affordable. (“affordable” = mortgage payment less than 30% of median income in that area)
Even with the recent declines, housing affordability is worse today than the peak of the last housing bubble. The median American household would need to spend 42.9% of their income to afford the median priced home.
The mortgage payment needed to buy the median priced home for sale in the US has moved up to $2,563, a new all-time high. A year ago it was under $2,000 and three years ago under $1,500.
7.1% of US homes are worth at least $1 million, down from a peak of 8.6% in June 2022 but still much higher than the 4.2% in January 2020. Assuming 20% down, the monthly mortgage payment on a $1 million home in January 2020 was $3,655 versus $5,135 today. But that’s not an apples-to-apples comparison because home prices are up 40% since January 2020. So a $1 million home back then is worth $1.4 million today. That pushes up the required monthly mortgage payment to $7,190, nearly double the payment for the same $1 million home from January 2020.
Here’s a history of US home price appreciation going back to 1891. What stands out of late? 2022 was the first down year for home prices on an inflation-adjusted basis since 2011. In 2023, we could see the first nominal declines since 2011.
Historically, US home price appreciation closely mirrored inflation. That changed during the last housing bubble with real home prices exceeding inflation by 99% in December 2005. After a 22% increase in real home prices in 2020-2021, the current housing bubble surpassed those levels.
8) Falling Rents
The median asking rent in February was $1,937 according to Redfin, up only 1.7% YoY. That’s the smallest increase since May 2021.
With vacancy rates rising to their highest level in two years, we could see further declines in rent growth in the coming months.
And more supply is on the way with a record number of multi-family units currently under construction…
9) On the Move
A record # of US home searchers are looking to relocate…
The primary reason: cost of living. Homebuyers are looking to leave California and New York more than anywhere else, in search of more affordable destinations…
10) Falling Money Supply, Rising Deficits
The US Money Supply has fallen 1.7% over the last 12 months, the largest year-over-year decline on record (note: M2 data goes back to 1959). This was one of the leading causes of the inflationary spike on the way up and will likely lead to further declines in the rate of inflation in the months to come.
While the money supply is contracting, we can’t say the same about government debt. The US Budget Deficit continues to widen, hitting an 11-month high of $1.6 trillion in February (YoY change). Over the last 20 years, government spending has increased at a rate of 5.3% per year, which was double the rate of inflation over the same time period (2.5%/year).
The combination of rising debt and rising interest rates continues push up interest expenses which hit a record $787 billion in February (12-month total).
11) King Apple
The first ETF (S&P 500, $SPY) launched 30 years ago in January 1993. If you had bought and held that ETF at the time you’d have a 1,510% total return gain today. Not too shabby.
How did Berkshire Hathaway do over the same time period?
+4,060%. Impressive.
But what about Berkshire’s largest holding today, Apple, which it first purchased in 2016?
+35,230%. Incredible.
12) The Rivian Reality
Back in November 2021 I wrote a piece showing how irrationally exuberant investors were piling into electric-vehicle maker Rivian ($RIVN) and behaving as if the future had already happened.
Fast forward to today and investors have come to learn that reality often does not meet lofty expectations. Rivian is still losing money, but the difference is investors today seem to care very much about that fact.
Rivian Net Income…
- 2022: -$6.9 billion
- 2021: -$4.7 billion
- 2020: -$1.0 billion
- 2019: -$0.4 billion
The result: its market cap is down over 91% from its peak in November 2021, moving from $153 billion to under $13 billion.
Rivian is not alone. This is the other side of the EV mania…
13) Bacon and Eggs
The cost of a dozen eggs and a pound of bacon in the US has increased 67% over the last 3 years (2020 – 2023). That’s greater than the increase in the previous 18 years (64% from 2002 – 2020).
14) Simply Incredible
While breakfast has become much more expensive, shipping costs are plummeting. Global Container Freight Rates (cost of 40′ Containers) are now lower than they were in January 2020. Simply incredible…
- Jan 17, 2020: $1,581 (pre-covid rate)
- Sep 10, 2021: $11,109 (peak rate)
- Mar 10, 2023: $1,568 (-86% from peak)
15) Beyond Profit, Dashing to Losses
–Beyond Meat continues to lose money and has a lower valuation today than its IPO in 2019…
–DoorDash has shown that its easier to grow revenues when you aren’t focused on making a profit…
And that’s it for this week. Have a great week everyone!
-Charlie
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