Is The Bottom Almost Here?

[Parsad]

9 hours ago, Valuebo said:

Markets been a bit jittery and participants are fighting the last crisis. Bank run on SVB maybe but should be easily contained. This isn't the last crisis. 

 

Mmmm...there's more here than we know.  How did this all start?  Who is holding what bag?  Contagion among leveraged institutions is not easy to contain, especially when the Feds have no idea what bag will drop next.  

 

Fed had no idea about AIG while they were helping Lehman...and they had no idea about Lehman when they were watching Bear Stearns go down...and at the beginning, no one knew that derivatives could be so destructive where Bear Stearns would fail.  So the Fed is slow to react (as we've seen with interest rates) in most cases.

 

In this case, we had multiple mini bubbles, rather than one gigantic one.  A couple of them have popped...we may have a couple to go!  Cheers!

[dealraker]

I'm just waiting for the guv debt default scare to wash through.  Yea, all these are mini's.  

 

100% in gold (in my dreams).

[Viking]

So what did we learn today? The 15th largest bank in the US just blew up. WOW! Largest take down of a financial institution since 2008. Is this a big deal? Yes. How big? Well we just don’t know… yet.
 

interest rates were close to zero 12 months ago. As of yesterday, rates were 5% and talk was they were going to 6%. Higher interest rates impact the economy 12-18 months later. The timing of SVB blowing up is not a fluke. 
 

When interest rates went from 5% to zero over the past 10 years, an absolute ton of money was made. Now that interest rates have gone from zero to 5%, an absolute ton of money has been lost. Except lots of these losses have not yet been realized. SVB blowing up is going shine the spotlight on other asset mis-matched / highly levered parts of the economy (with debt needing to be refinanced): commercial real estate looks like an obvious next shoe to fall. Who is exposed? Which REIT’s? Which banks? What about the unregulated shadow banks?
 

SVB blowing up is likely going to cause a ripple effect through financial markets… where are the cockroaches? Capitalism can be a vicious thing… the knives are coming out. And the Fed is getting what it wants… a tightening of financial conditions. An end of free money excesses. It just better hope things don’t get out of control.

—————-

US treasury yields are cratering… the 2 year is down something like 50 basis points in 2 days. Stocks? All hunky dory. 

Edited March 10, 2023 by Viking

[Intelligent_Investor]

To be fair, it seems like SVB made some absolutely idiotic decisions with risk management. Who in their right mind buys so much long treasuries at like 1.5% interest rates

[Viking]

12 minutes ago, Intelligent_Investor said:

To be fair, it seems like SVB made some absolutely idiotic decisions with risk management. Who in their right mind buys so much long treasuries at like 1.5% interest rates

True. But look at all the commercial real estate that was bought in recent years at cap rates that are 1/2 of what it costs to borrow today (with loans coming due in the next year or two). Today in Canada probably 25% of all mortgages are now negative amortizing (the monthly payment no longer covers the interest costs… so the difference is being added to the mortgage balance). There are so many examples like this of excesses that continue… until they can’t.

Edited March 10, 2023 by Viking

[Gregmal]

Weren’t banks the high rate beneficiaries? Too funny. The hedgies got the puppet to do exactly what they wanted. It’s dangerous chasing something that does exist. But hey, at least jay showed everyone his credibility lol 

[Spooky]

39 minutes ago, Intelligent_Investor said:

Who in their right mind buys so much long treasuries at like 1.5% interest rates

 

Especially when you are also super exposed / concentrated to another extremely interest rate sensitive sector, venture capital.

[Parsad]

1 hour ago, Intelligent_Investor said:

To be fair, it seems like SVB made some absolutely idiotic decisions with risk management. Who in their right mind buys so much long treasuries at like 1.5% interest rates

 

Like 14 other regional banks...five of which had their stock halted today.  Risk management rarely prepares for outlier events.  Cheers!

[Spekulatius]

14 hours ago, Valuebo said:

Markets been a bit jittery and participants are fighting the last crisis. Bank run on SVB maybe but should be easily contained. This isn't the last crisis. 

I do think that lending is going to get tighter because many banks will consider their liquidity buffers.

[Gregmal]

Does any bank ever really manage risk the way normal people with skin in the game do? The bigger banks all basically just look at the regulations and get as close to them as they can and then look for ways to get around limitations. Banking has become automated even though real people still do most of it. It’s just box checking without a care in the world for context, which generally works, but when there’s an outlier typically everyone has been making the same mistake or using the same workarounds. 

[gfp]

Just put in an order for a built-in sub-zero panel ready fridge for my in-laws.  12 months lead time to get one!  Doesn't sound like a recession to me.

[LC]

2 hours ago, Gregmal said:

Does any bank ever really manage risk the way normal people with skin in the game do? The bigger banks all basically just look at the regulations and get as close to them as they can and then look for ways to get around limitations. Banking has become automated even though real people still do most of it. It’s just box checking without a care in the world for context, which generally works, but when there’s an outlier typically everyone has been making the same mistake or using the same workarounds. 

 

I can't speak for other banks but the one I am most familiar with is pretty good for one reason: They are so freaking backwards and people heavy, that they can't HELP but review every decision with a huge committee and take the most pansy-ass approach.

 

And the regulators have pounded pounded pounded into their heads the need for "conservatism". So every decision is viewed through that lens. 

 

And the people making these decisions are total Karens (male and female version) with zero skin in the game except career longevity.

 

So they just say, "is this a conservative decision?" If not, they don't do it.

 

And I don't mean to be critical: it has it's benefits. Suboptimal allocation in good times but I would be surprised if major cockroaches emerge. Although I am not as close to the hard lending decisions as I used to be, I l kind of look forward to see how the big boys fare over the next 6 months. 

 

I think a lot of these fintech/SketchBanks will take some hits, but the over-regulated, people-heavy major banks will actually come out a bit stronger and be able to pick up some of the wreckage.

Edited March 10, 2023 by LC

[SHDL]

5 hours ago, Gregmal said:

Weren’t banks the high rate beneficiaries? 

 

Not if you're forced to sell your assets at the wrong time/price...

 

Anyhow re: SVB - we'll see how this mess gets resolved over the weekend and its ripple effects on the broader economy (if any) but based on what I've read so far about their importance in the SV startup world I'm surprised they weren't required to go though those annual Fed stress tests!

[Dalal.Holdings]

6 hours ago, Intelligent_Investor said:

To be fair, it seems like SVB made some absolutely idiotic decisions with risk management. Who in their right mind buys so much long treasuries at like 1.5% interest rates

 

SVB was betting on low rates for longer not just on its asset side, but also its liabilities side. It took deposits from the sector of the economy with the most to lose from rising rates. Double hit.

[Spekulatius]

10 minutes ago, Dalal.Holdings said:

 

SVB was betting on low rates for longer not just on its asset side, but also its liabilities side. It took deposits from the sector of the economy with the most to lose from rising rates. Double hit.

BAC and a lot of other banks did:

 

[Dalal.Holdings]

Just now, Spekulatius said:

BAC and a lot of other banks did:

 

 

Well at least BAC's deposits are not concentrated in startups/nascent tech (their liabilities are much better shape than SVB). I do worry about BAC's unrealized losses and yet WEB has sold every other bank except BAC. Maybe he's not concerned about it ?

 

Obviously with hindsight we can criticize, but I can't believe people moved into 20-30 year commitments just to get a bit more yield. I think inflation should have been anticipated in the wake of fiscal + monetary wave from covid.

[Dalal.Holdings]

 

I don't think Moynihan got Warren's memo

[Castanza]

Anyone else wondering how this will shake out for GOOGL and META in the ad department? Startups have been spending about half their cash on advertising between the two for some time. Many as high as 50% of cash. You had what 445B VC funding in 2022? Say 30% of that goes to ad spend so 133b and 50/50 split GOOGL and META....just napkin math without the nuance, but not immaterial when you consider GOOGL had 283b in ad rev 2022. 

[Dinar]

Just now, Castanza said:

Anyone else wondering how this will shake out for GOOGL and META in the ad department? Startups have been spending about half their cash on advertising between the two for some time. Many as high as 50% of cash. You had what 445B VC funding in 2022? Say 30% of that goes to ad spend so 133b and 50/50 split GOOGL and META....just napkin math without the nuance, but not immaterial when you consider GOOGL had 283b in ad rev 2022. 

Perhaps, is 445bn in VC funding only for tech, or for biotech as well?  

 

also look on the other side of the coin:

a) All of these companies carry a lot of deadwood, Meta fired 13% of employees last year, and will fire another 13% this year.  That's 20K employees, say at $400K per employee, that's $8bn in annual expenses just for Meta, holding comp per employee flat.  

b) Compensation is absurd, with 500K-1MM per year comp packages being a frequent occurrence, and many making even more - looking at you Salesforce.  Say GOOG/META/MSFT/CRM et all cut 200-300K jobs, companies like Docusing/Wayfair, et all fire another 50-300K workers and comp per employee can decline 30% as well.  So say comp per employee also get cut by 30% or $120K.  So that's another $7bn for Meta.  So Meta can cut $15bn of costs without much difficulty?

 

Google's employee count swelled since 2017, why?  What are those 50K+ people doing?  At say $500K per head, that's $25bn, add to that savings on the rest of the staff, and between the two you have $50bn of savings?

 

 

[Gregmal]

I’m kind of ok with the idea of guaranteeing deposits. These aren’t speculations and aren’t people taking risk; they’re putting their money somewhere that is federally regulated and should be safe.
 

$250k is a joke for an individual and for a business it’s nothing. People don’t store money under the mattress anymore, that’s how it’s evolved…if they are mismanaged, it’s either fraud, or a government fuck up. Here it’s kinda both. Who in the world didn’t have enough time to see this coming? It’s been orchestrated for 2 damn years. At the same time, if Powell is going to get power drunk and recklessly jack rates with no awareness of anything just cuz he s mad people still have jobs….is that really the fault of Sally running a tech startup or her employees hoping to get their paycheck next week? 
 

Even all the cash hoarders…how is your money safe if these things start becoming precedent? I had an investor years ago, one of the wealthiest dudes in Bermuda….was a conservative, old school guy. Had $42M in a Lehman money market fund in 2008…..there need to be lines where people can assume safety and not be held to some super duper high due diligence standard or “shoulda known better” scolding. Putting your money in a bank where you get 0% in return should qualify for that.

[Dalal.Holdings]

Well now it's on Zerohedge, Spek

 

 

 

[Parsad]

3 hours ago, Gregmal said:

I’m kind of ok with the idea of guaranteeing deposits. These aren’t speculations and aren’t people taking risk; they’re putting their money somewhere that is federally regulated and should be safe.
 

$250k is a joke for an individual and for a business it’s nothing. People don’t store money under the mattress anymore, that’s how it’s evolved…if they are mismanaged, it’s either fraud, or a government fuck up. Here it’s kinda both. Who in the world didn’t have enough time to see this coming? It’s been orchestrated for 2 damn years. At the same time, if Powell is going to get power drunk and recklessly jack rates with no awareness of anything just cuz he s mad people still have jobs….is that really the fault of Sally running a tech startup or her employees hoping to get their paycheck next week? 
 

Even all the cash hoarders…how is your money safe if these things start becoming precedent? I had an investor years ago, one of the wealthiest dudes in Bermuda….was a conservative, old school guy. Had $42M in a Lehman money market fund in 2008…..there need to be lines where people can assume safety and not be held to some super duper high due diligence standard or “shoulda known better” scolding. Putting your money in a bank where you get 0% in return should qualify for that.

 

+1!  A dependable, secure banking system is necessary for any long-term development of an economy.  What is the point of saving if you cannot be sure the fund's are safe when in low-risk/non-risk assets.  Cheers!

[Parsad]

2 hours ago, Dalal.Holdings said:

Well now it's on Zerohedge, Spek

 

 

 

 

The difference for the big four banks and larger institutions is that they've offset potential outlier events using derivatives.  Does anyone know how much of BAC's unrealized loss is offset by derivatives?  Cheers!

[Valuebo]

54 minutes ago, Parsad said:

 

The difference for the big four banks and larger institutions is that they've offset potential outlier events using derivatives.  Does anyone know how much of BAC's unrealized loss is offset by derivatives?  Cheers!

 

Bingo. All these people going on about HTM losses as if these guys go at it willy-nilly, okay... 

 

And I'm willing to bet this whole thing will have near zero impact on the biggest banks when all is said and done in a few weeks time. They have never been better regulated and capitalized, not to mention underowned and cheap cash cows with sticky deposits.

[changegonnacome]

5 hours ago, Castanza said:

Anyone else wondering how this will shake out for GOOGL and META in the ad department?

 

Yep I wonder all the time. I think an incestuousness exists in the Valley in big tech that is under appreciated............at the bottom of conveyor belt of VC funding, pass the parcel and mark to next round paper gains............is GOOG & META selling access to the clicks, installs and users required to make the 'blue sky' growth math work.........it is predicated, always on the greater fool theory, but once the greater fool doesnt show up.........well coughing up for clicks/installs starts to look more like a fools errand.

 

The quantum of this type of "CAC your way to VC heaven" spend is hard to figure out.....but it aint zero......