Banks Lose Billions in Value After Tech Lender Stumbles Investors dumped shares of SVB Financial Group and a wide swath of U.S. banks after the lender said it lost nearly $2 billion selling assets following a larger-than-expected decline in deposits. The four biggest U.S. banks lost $52 billion in market value.
Shares of SVB, the parent of Silicon Valley Bank, fell more than 60% after it disclosed the loss and sought to raise $2.25 billion in fresh capital by selling new shares.
Banks big and small posted steep declines. PacWest Bancorp fell 25%, and First Republic Bank lost 17%. Charles Schwab Corp. fell 13%, while U.S. Bancorp lost 7%. America’s biggest bank, JPMorgan Chase & Co., fell 5.4%.
Thursday’s rout is another consequence of the Federal Reserve’s aggressive campaign to control inflation. Rising interest rates have caused the value of existing bonds with lower payouts to fall in value. Banks own a lot of those bonds, including Treasurys, and are now sitting on giant unrealized losses.
Large declines in value aren’t necessarily a problem for banks unless they are forced to sell the assets to cover deposit withdrawals. Most banks aren’t doing so, even though their customers are starting to move their deposits into higher-yielding alternatives. Yet a few banks have run into trouble this week, sparking fears that other banks could be forced to take losses to raise cash. (…)
Some venture-capital investors have advised startups to pull their money out of SVB, citing liquidity concerns, according to people familiar with the matter.
Garry Tan, president of the startup incubator Y Combinator, posted this internal message to founders in the program: “We have no specific knowledge of what’s happening at SVB. But anytime you hear problems of solvency in any bank, and it can be deemed credible, you should take it seriously and prioritize the interests of your startup by not exposing yourself to more than $250K of exposure there. As always, your startup dies when you run out of money for whatever reason.” (…)
The Federal Deposit Insurance Corp. in February reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion as of Dec. 31, up from $8 billion a year earlier before the Fed’s rate push began.
In part, U.S. banks are suffering the aftereffects of a Covid-era deposit boom that left them awash in cash that they needed to put to work. Domestic deposits at federally insured banks rose 38% from the end of 2019 to the end of 2021, FDIC data show. Over the same period, total loans rose 7%, leaving many institutions with large amounts of cash to deploy in securities as interest rates were near record lows. (…)
Bank of America and its megabank peers can afford to part with a lot of deposits before they are forced to crystallize those losses.
Most of SVB’s liabilities—89% at the end of 2022—are deposits. Bank of America draws its funding from a much wider set of sources that includes more long-term borrowing; 69% of its liabilities are deposits. (…)
SVB, based in Santa Clara, Calif., caters to tech, venture-capital and private-equity firms and grew rapidly along with those industries. Total deposits rose 86% in 2021 to $189 billion and peaked at $198 billion a quarter later.
They fell 13% during the final three quarters of 2022 and continued dropping in January and February “in part because of its concentration in investor-funded technology company deposits and the slowdown in public and private investments over the past year,” Standard & Poor’s credit analysts wrote in a note downgrading SVB to one notch above junk. They said they expect SVB’s deposits might decline further. (…)
In a news release Wednesday, SVB said it had sold substantially all of its available-for-sale securities. The company said it decided to sell the holdings and raise fresh capital “because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses.”
SVB’s year-end balance sheet also showed $91.3 billion of securities that it classified as “held to maturity.” That label allows SVB to exclude paper losses on those holdings from both its earnings and equity.
In a footnote to its latest financial statements, SVB said the fair-market value of those held-to-maturity securities was $76.2 billion, or $15.1 billion below their balance-sheet value. The fair-value gap at year-end was almost as large as SVB’s $16.3 billion of total equity. (…)
- Silvergate’s Story Is About Fundamentals, Not Just Crypto The lender’s problems stemmed partly from age-old banking risks such as concentration and matching assets and liabilities
- US Banking System Can Weather SVB Contagion Risk, El-Erian Says
Another example of how analysts and investors, even institutional investors!!, often fail to see risk, even try to avoid seeing it…
While reports of its problems had surfaced in recent weeks, things were calm enough that just two days ago, [SVB CEO] Becker was on stage at a Morgan Stanley conference answering questions about the startup scene, market valuations, M&A, IPOs, remote work, crypto, ChatGPT—everything except how the bank was doing. Becker was even asked about how he relaxed! (The Information)
Dunno what he said about relaxing, he surely knew what was going on, unless his CFO saved him the anxiety… BTW, Daniel Beck, the CFO, should not be relaxing about his job.
US Jobless Claims Jump to 211,000, Led by New York, California
Applications for US unemployment benefits last week rose to the highest since December, driven by spikes in California and New York and suggesting some softening in what’s still a tight labor market.
Initial unemployment claims increased by 21,000 to 211,000 in the week ended March 4, Labor Department data showed Thursday. Continuing claims, which include people who have received unemployment benefits for a week or more, rose by the most since November 2021. (…)
The four-week moving average in initial claims, which smooths out some of the volatility, edged up to 197,000, the highest since January. (…)
California and New York accounted for three quarters of the increase. Severe weather across the Midwest and California may have been a factor.
The figures may also have been boosted by New York City school workers like bus drivers and cleaning staff who have negotiated into their contracts the ability to file for unemployment benefits when there’s a school break, according to Stephen Stanley, chief US economist at Santander US Capital Markets LLC. (…)
Additionally, technology, media and financial companies have announced tens of thousands of job cuts in recent months. Layoffs that were announced in January may not materialize until now, when the worker is actually coming off the payroll, according to Bloomberg Economics.
Separate data Thursday from Challenger, Gray & Christmas Inc. showed 77,770 job-cut announcements in February, more than five times the number in the same month last year. It also marked the highest level for any February since 2009, according to the group.
In case you slipped past my sarcastic emoji (there is no “you gotta be kidding” emoji), Stephen Stanley, chief US economist at Santander US Capital Markets explains:
This week’s tally was inflated by the New York City school holiday. This may strike some as outlandish, but NYC school workers have negotiated into their contracts the ability to file for unemployment benefits every time there is a school break. The number of new filers in NY state more than doubled, adding 16,000 to the national total.
The seasonal factors have a tough time dealing with it, because the timing of the breaks vary from year to year. Absent this special factor, the count would likely have been below 200K yet again. Broadly, initial jobless claims have remained remarkably low despite the flurry of layoff announcements in recent months, underscoring that the labor market retains considerable momentum. (via John Authers)
BTW, Job cuts… no longer “only tech”… (@MikaelSarwe)
Inflation Persistence: Dissecting the News in January PCE Data
This post presents updated estimates of inflation persistence, following the release of personal consumption expenditure (PCE) price data for January 2023. (…) The MCT (Multivariate Core Trend) is a dynamic factor model estimated on monthly data for the seventeen major sectors of the PCE price index. It decomposes each sector’s inflation as the sum of a common trend, a sector-specific trend, a common transitory shock, and a sector-specific transitory shock. The trend in PCE inflation is constructed as the sum of the common and the sector-specific trends weighted by the expenditure shares.
The current release of the MCT implies a significant upward revision in estimated inflation persistence. The MCT stands at 4.9 percent for the month of January following an increase in December, as shown in the solid blue line in the chart below. Importantly, the MCT curve has moved up relative to the estimates reported in our February 7 post. What happened?
The Bureau of Economic Analysis (BEA) release of PCE data for January 2023 included substantial revisions to the price data for the last three months of 2022 (due primarily to revised seasonal adjustment of the Consumer Price Index (CPI) components that underlie much of the PCE price index). Overall, the revisions amounted to an average increase of 0.74 percentage point (ppt) in the monthly annualized core PCE inflation for these three months and were broad-based across sectors.
These data revisions and new data for January have led to a reassessment of the estimated inflation persistence as measured by the MCT. While the dynamics of the trend remain roughly the same as estimated prior to the current release—the trend peaks in May/June of 2022 and then declines throughout the third quarter—the MCT level is now higher.
What is more, the decline from the mid-year peak is not as pronounced, and rather than plateauing at roughly 3¾ percent, as we reported in February, the trend picked up again in the last two months. What explains this overall increase?
(…) In addition to the upward revision of fourth-quarter data, PCE prices accelerated in January, with both headline and core measures up 0.6 percent in the month, moving up further our model’s assessment of inflation persistence. From the chart, the blue line of current MCT lies above the gold line since mid-2022, indicating that January’s inflation reading led to firmer estimated inflation persistence beyond what can be attributed to fourth-quarter data revisions alone. (…)
Moreover, the recent increase in inflation persistence is driven primarily by the common trend component, with the sector-specific trend even down a bit in January (…).
To sum up, the PCE price data released for January have shown a broad-based resilience in inflation persistence.
Russia oil production grows, returns to near pre-war levels
The EIA reports that Russian oil production rose to 11.13 mbpd in February, the highest since April 2022 and a whopping 1.1 mbpd higher than the EIA’s forecast from two months ago.
In fact, as visible on the graph above, the EIA has been ‘forecast surfing’ since last July. That is, the EIA anticipated that embargoes and price caps would precipitate production declines, particularly related to the more difficult market in refined products. Month after month, the EIA forecast that, although production declines had not yet kicked in, they would soon begin.
Thus, the EIA has published a series of forecasts showing a cascade of anticipated production declines, with the Russians thwarting expectations month after month. The visual impression, as one can see on the graph above, is of a kind of ‘forecast surfing’, as though the actual data were surfing on an ocean wave.
Why has the EIA proven so wrong to date? And why has our forecast from last July — the Black Market line on the graph — proven so much more accurate? (…)
The EIA’s models are built on market forecasts, emphasizing elements like customer requirements and tanker availability. There is nothing wrong with this, as oil is normally traded under market conditions (with some exceptions regarding OPEC).
By contrast, our forecast from last July is a black market forecast, that is, it operates under a different set of assumptions. Chief among these is that prohibitions — whether on quantities like the EU embargo or on prices like the oil price cap — tend to lead to evasion accompanied by vast corruption and unbounded hypocrisy. Thus, we assumed that the Russians would find a way around the sanctions, and the numbers to date suggest this in fact has happened.
The shape of our forecast comes from historical data on black markets, most notably from the US Prohibition era, when alcohol consumption was illegal in the United States. (…)
This is no surprise, given that the various oil sanctions do not apply to much of the globe, including India, China and the Middle East. Overall, however, we see the same pattern: initial success of the sanctions followed by a supply recovery to a level modestly lower than the pre-prohibition state. We made our Russian oil forecast using this approach, and to date it has held up better than the EIA’s numbers. This, again, is not due to superior forecasting technique, but rather the use of an entirely different forecasting paradigm.
Forecasting is, of course, a precarious endeavor. The Russians have announced oil production cuts equalling 650,000 bpd, and these should begin to manifest in the March data. If the EIA is not entirely right, it may not be entirely wrong either. Still, the Russians are likely to find ways around embargoes and price caps. The more time passes, the more successful they will be. That is what a black market model suggests. (…)
A Revolution Is Coming for China’s Families By 2050 living parents and in-laws will outnumber children for middle-aged Chinese men and women.
China’s working-age manpower is in steep decline. The country is rapidly graying, and the largely dependent 65-plus population is soaring. In January Beijing announced that the country’s total population shrank in 2022—a decade earlier than Western demographers had been forecasting as recently as 2019. (…)
The Chinese family is about to undergo a radical and historically unprecedented transition. Extended kinship networks will atrophy nationwide, and the widespread experience of close blood relatives will disappear altogether for many. This is a delayed but inescapable consequence of China’s birth trends from the era of the notorious one-child policy (1980-2015). The withering of the Chinese family will make for new and unfamiliar problems, both for China’s people and its state. Policy makers in China and abroad have scarcely begun to think about the ramifications. (…)
But China is now on the cusp of a severe and unavoidable “kin crash,” driven by prolonged subreplacement fertility. The implosion of consanguineous family networks, by our reckoning, means that China’s rising generations will likely have fewer living relatives than ever before in Chinese history.
A “kin famine” will thus unfold unforgivingly over the next 30 years—starting now. As it intensifies, the Chinese family—the most important institution protecting Chinese people against adversity in bad times and helping them seize opportunity in good times—will increasingly falter in both these crucial functions.
By a grim twist of fate, China’s withering of the family is set to collide with a tsunami of new social need from the country’s huge elderly population, whose ranks will more than double between 2020 and 2050. Our simulations depict a fateful inversion within the nuclear family. By 2050 living parents and in-laws will outnumber children for middle-aged Chinese men and women. Thus exigency may overturn basic familial arrangements that have long been taken for granted. The focus of the family in China will necessarily turn from the rearing of the young to the care of the old. (…)
Owing to the surfeit of baby boys under the one-child policy and declining cohort sizes, growing numbers of men in decades ahead will enter old age without spouses or children—the traditional sources of support for the elderly. By our projections, by 2050, 18% of China’s men in their 60s will have no living descendants, twice the fraction today. Absent a massive expansion of Chinese social-welfare provisions over the next few decades, who will look after these unfortunates? (…
China’s coming family revolution could easily conduce to a rise in personal risk aversion. Risk aversion may in turn dampen mobility, including migration. Migration is a risky act that requires knowledge of opportunities and trusted people who can help obtain them. (…) Less migration means less urbanization, which means less growth—and possibly still more pessimism and risk aversion. (…)
If the waning of the family requires China to build a huge social welfare state over the coming generation, as we surmise it will, Beijing would have that much less wherewithal for influencing events abroad through economic diplomacy and defense policy.
Further, our simulations suggest that by 2050 at least half of China’s overall pool of male military-age manpower will be made up of only children. Any encounter by China’s security forces involving significant loss of life will presage lineage extinction for many Chinese families.
Autocracies are typically tolerant of casualties—but maybe not in the only-child China of today and the decades ahead.
Failure to contemplate the implications of the coming changes in Chinese family structure could prove a costly blind spot for the Communist Party. Blind spots expose governments to the risk of strategic surprise. The consequences of social, economic and political risks tend to be greatest when states aren’t prepared for them.
The full report here.
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