Silicon Valley Bank

Most likely they just don’t know what they are talking about. “Big Tech” actually tends to have great balance sheets and generate tons of cash, many of these companies have very little debt/net debt. So to imply some contagion in big tech seems nutso.

Of course if he rephrased it to “VC industry”, then sure, specifically funding of startups in Silicon Valley. This sounds like could be a big deal, to what extent is anybody’s guess. The era of “free money” is over, so any company burning cash (as opposed to generating cash) will have a harder time financing via debt. New companies will still get funded with rates where they are, they will just have a shorter leash.

My other thought is someone did this intentionally, to create a business opportunity? Obviously the bank exposed itself with some bad decisions, but the “run on the bank” may have been a takedown. Like a shark smelling blood in the water.

 

Higher interest rates directly impact the tech sector. Higher rates make their growth “projections” less valuable. Also when you have short term treasuries yielding 5% (risk free rate) people are less motivated to add to stocks in general. It’s a double barreled shotgun for the tech sector that had grown at 20% plus on average from 2017-2022. That growth and the higher resulting multiples were justified during a zero rate environment. Not any more.

 

Well no kidding, the reason for hiking rates is to chill the economy. Even co like Google/Alphabet which has practically no debt risk, is a participant in the economy. The point is, “big tech” almost doesn’t rely on debt financing at all. There are different implications trying to link them to a bank failure, vs. just stating their stock multiples need to come down (and many already have).

 

I heard it explained like this yesterday(not saying I agree, just one view), you can’t yell fire in a crowded building unless the building is on fire.

But I do see what you are saying.

 

There are rules for what shareholders can publicly say - and this is done to address stock manipulation, but unless he were linked to “short positions” or he becomes involved in entities trying to take over the bank, not sure what can be done. If he just pulled out deposits as a customer and then said “everybody out” there might not be any rules at all. Although there should obviously be investigations into the bank and who they were talking to.

 

I didn’t mention financing. You also can’t take Google and make it representative of the entire Nasdaq 100. Lot of companies within that index that rely on financing to grow at the rates they need to and justify their multiples.

 

I don't think higher debt costs affect big tech much operationally, but in valuing their stock, future earnings become less attractive in a higher rate environment.

A billion dollars in net income 10 years from now is worth ~820 million today using a 2% rate, but only ~550 million at 6%.

It's moreso the rate investors "charge" on their equity investment, rather than the rate the company has to pay out to debt holders. But it's still a cost of capital either way. When that cost goes up, the price of the investment has to go down to compensate, all other things being equal.

 

Wouldn't be the first time. Bear Stearns. Washington Mutual come to mind.

 

This was an isolated occurrence not because of bad banking practices but being in a niche market where there is little diversification. They were awash with so much money in the beginning, they bought US Treasuries and bonds in bulk. With inflation and higher rates, those bonds are worth negative money. So for every $1 they used a few years ago, it's worth about .75. The concern is they are the 20th largest bank in the US and they aren't the only ones to buy up US Treasuries when times were good. Most banks diversified enough that they could offset these crappy US Treasuries with positive-growth stocks and assets.

Keep in mind the FDIC is barely functional. Their bottom line is only showing roughly $134B in liquidity so they can handle SVB's collapse but not much else. Any other bank that collapses will force the Fed to inject cash into the FDIC. But keep in mind, even a 1% banking collapse is more than enough to crash the banking system. The problem is nearly $10T in depositor accounts are covered under FDIC protection. There's about $8.5T in deposits that are not protected (accounts > $250K) so they are out of luck if they had large accounts in SVB. So imagine if enough contagion got into the system to affect more banks. It wouldn't take but a few more SVBs to send into a banking catastrophe. Then add a looming debt ceiling crisis in which Moodys has already come and said no matter if we raise it or don't, the US dollar may get downgraded because the Dollar is approaching a debt load the US won't be able to manage. We already pay more in debt interest than the rest of the world combined.

 

Here's a great read about the debt we have and how it's related to SVB's downfall:

The $31.4 trillion debt dilemma

So as debt increases and we haggle over raising the ceiling, the Treasuries are affected by the climbing debt in the form of high interest rates. I've said this a hundred times before, that interest on debt is what we need to keep an eye on. So many, I'm trying to not call people names, have said debt is what we owe ourselves, and they are right, but we borrow that money and that money requires interest payments. There's mandatory spending and then there's discretionary spending, but interest on debt is paid before all else. Yet, and again I hate to always be that canary in the coal mine here, but interest was ok when rates were low or non-existent, but as rates climb, so too does debt interest. And I've said this also, the only way to combat inflation is raising rates higher than the inflation rate and we aren't even close to that. It's projected by 2035 that debt interest will be more than Medicare and national defense combined. And this is money spent every year until the human race ends. Debt will never be paid off, too late now. This country would never tolerate 20 years of severe austerity measures; they can barely handle a year or 2 of cutbacks on social programs.

SVB's downfall was putting too many of their assets into junk US Treasuries. They didn't diversify and paid for it. They aren't the only bank to place many of their assets into US Treasuries. So as inflation hit and rates climbed, those who had bonds lost money, lots of money. When SVB had to raise capital, selling their bonds showed a negative PE on the books and they couldn't raise enough capital to cover over $200B in depositor accounts. I'm very sure the Big 3 are being scrutinized this weekend to make sure they are looking great and haven't been cooking their books because if any of them collapse, there's nothing the Fed will be able to do to bail them out and the FDIC said in a December meeting that any collapse will be paid with bail-ins. So why didn't they bail-in SVB? It's in the focus and if bail-ins were used on this one bank, that would have sent the world into an overnight depression. There would be so many runs on banks, that the entire system would collapse. But if there's another bank, a smaller bank that collapses, watch what the Fed and FDIC does. I bet they will resort to bail-ins.

 

Yes, there are tech companies on the public market that don’t make money and don’t generate cash. Something like an Uber immediately comes to mind. I’m sure there are others. But that isn’t the norm like it was in the 90’s .com bubble, and even Uber is a real company with real revenues. The idea of tech contagion from SVG just isn’t there, not in public markets. It will impact startups most of us have never heard of (some of which might not have been much more than ideas that were seeking initial angel investor and VC funding). Small upstarts that will go under because they suddenly can’t make payroll and barely have revenue, let alone profits or positive free cash flows. Now I’m not dismissing it, it could be dozens (if not hundreds) of businesses and thousands of people that either get wiped out or lose their jobs. Maybe a few of those could have gone public 5 years from now. But that also isn’t all that relevant to people who don’t invest in VC, which is the vast majority of people, not even indirectly through pensions or mutual funds (wouldn’t be surprising to learn next week if CALPERS took a hit, would be surprising if it were material impacts).

Seems there are two separate arguments. A) that there is contagion risk here, to which I say “not likely” B) that high interest rates depress stock valuation, to which I say “no shit sherlock”. I could pick out a bunch of tech companies I personally think are definitely still overvalued even after they’ve pulled back, that doesn’t mean I’d be right. Some would take the opposite position and argue it’s already priced in.

 

And Jim Cramer just encouraged people to buy the stock(within the last 30 days). I believe Jim Cramer sells his buy advice.

 

Which is why many stocks have seen multiple compression due to higher rates(increase cost of capital).

 

I don’t think anyone could have predicted this until the day it happened.
From what I’ve read the management messed up and didn’t have the typical funding needed for support which is not an uncommon thing.

 

Actually rates going up so quickly led to this.

Banks do it all the time swap treasuries based on rates the steeply inverted yield curve exacerbated this practice.

 

Over the last two days 1-3 year treasury rates declined 30-50 basis points. Longer term rates dropped but not as much.

Over the same time period, commercial payments era rates increased by a similar amount.

Looks like a substantial move to the relative safety of treasuries and corporate borrowing rates have increased. It will be interesting to see what happens next week …… and how this impacts the next FOMC meeting and any rate increases thereby.

 

Yep, and that’s a good bet with the rates being paid for secure return.
Many think I can get 5% locked in why risk losing 30% if the market takes a crap and they ove to treasuries.
Hell i just put 15k in a 6 month CD at 5.1%

 

Uninsured depositors are out of luck, but they will get an advance dividend within a week. What people don't know about FDIC is that having an account in multiple banks doesn't mean you will automatically get that $250k. You have to read the fine print. The reason is almost every bank is owned by the Big 3, so even if I were to win the lottery and split my accounts up into 1,000 separate accounts across 1,000 US banks, chances are that I don't have 1,000 insured accounts because most of these banks are tied to the Big 3 and only 1 account is covered. What do billionaires do with their money? They don't put it in the banks for one. Usually they put their money in global banks, strong banks, into real estate, into high-value assets, such as yachts, precious metals, paintings, etc. When I see someone win that MegaBall jack pot, I actually feel sorry for them because they have no idea what they just took on. It's not like they can take that $400M lump sum and go walk into Wells Fargo and deposit it there; at least I hope not. They have to hire a financial planner who has a fiduciary responsibility and probably a team of other advisors to manage that money across multiple accounts and portfolios.

For example, everyone knows who Roku is right? Well they held half their money in SVB and all of it was uninsured outside of the 1st $250K. The rest of their nearly $500M is all uninsured and will go poof. Roblox only lost 5% of their assets but that 5% was in SVB. Another company based out of Toronto had 90% of their assets in SVB and will lose every bit of it.