What You Should Know
On Friday, California regulators seized the assets of Silicon Valley Bank (SVB) as it was unable to meet its obligations. Concurrently, clients rushed to withdraw funds in what can only be described as a "run on the bank." This is very reminiscent of the 2008 financial crisis and will have significant negative effects on those who were unable to withdraw funds prior to its collapse. FDIC insurance will cover only $250,000 in each case and will likely take quite a while to do so. Meanwhile, thousands of companies - mostly tech and biotech startups - will not be able to meet payroll and individuals will suffer significant losses.
The SVB crisis is a direct result of the Federal Reserve's persistent policy of increasing interest rates to combat inflation. In past Strategy Updates, we have warned that although Fed policy is appropriate to bridle inflation, it will likely cause disruption along the way. With more Fed rate hikes ahead, it is possible that we may see more problems in the banking industry and the economy at large.
How to Protect Your Capital
As we have learned throughout history, the safest place for cash balances is not in banks, but rather in the US Treasury market. Cash held by banks is only guaranteed up to small amounts while the rest is at risk of bank failure. Cash held at a brokerage firm, such as Charles Schwab & Co., and invested in US Treasuries is not at risk since it is held in the client's name and backed by the US government - still considered to be a risk-free investment. Yields on Treasuries are similar to bank yields - but a whole lot safer.
How We Can Help
One never knows how contagious the SVB crisis will get for other banks, but there certainly will be rising pressures over the coming weeks and likely other institutional failures. If you are concerned about assets you are holding outside of Main Street Research, we have a solution. Simply let us know. We will open an account for you right away and help you transfer the cash as soon as possible and purchase short-term Treasuries at a very low cost to you. It's a simple, quick process and will ensure your assets are safe from potential harm that may lie ahead.
We hope this update and these thoughts are helpful. Please let us know if you have questions or if you would like us to open an account for you to get the process started.
Let's buckle up and stay safe during these interesting times!