One-Month Memory
If I were stubbornly optimistic, I would also have the desire to easily forget.
Highlights
The first bank failure is never the last.
Have yet to see the fallout from the collapse of Silicon Valley Bank and other financial institutions appear in released macro data.
Stay focused and protect capital from large drawdowns.
Let’s Get After it!
Thought it would be fun to revisit a previous piece that I had written because there are some parallels to recent events. The former publication that I am sharing below has served me as a guide to navigate these troubled waters over the last couple of months and I anticipate that it will continue to hold true throughout time. Additionally, just funny to look back and think about the sharp sentiment shifts during the market’s “One-Month Memory”. Although these macro data reports will be lagging, over the next several weeks the April data will begin to be released and this will be the first glimpse to see the fallout from the Silicon Valley Bank collapse along with tighter credit conditions. This will be discussed below, but here is a reminder to caution against selling the lows (especially if short).
Might be a shocker to some, but was not too long ago in the middle of March, that the market was melting following the Silicon Valley Bank insolvency and marked the kick-off for the current banking crisis that we are experiencing in the US. I know right, huge revelation right there. Based on my experience in markets and living in this wonderful world, memory proves to be short-term amongst the masses due to the overwhelming volume of media, news, headlines, screen time, noise, and high-frequency market data that inundates them every day.
Following a classic case of “One-Month Memory”, I saw various headlines stating, “Banking Crisis Contained”, “Bank Bailouts Save the System”, “Liquidity Injections Come to the Rescue”, others claimed, “Clearance Event”, or “Financial System Strong and Stable”. During the month of April, the underlying issues that are plaguing the banking sector were hastily forgotten and the market was well on its way to another “month-end markup” (no surprise because this virtually happens every month at this point). What is a “month-end markup”? In one sentence, this is where asset managers push the prices of the assets on their books (portfolio) higher into the end of the month to demonstrate a favorable performance to investors on paper. Read about it in a previous “Friday Reading” with the link here.
By the end of April, any type of financial and market risk was an afterthought. Below is a quote from Daniel Kahneman’s book, “Thinking, Fast and Slow”, which is applicable to the aforementioned behavior and willingness to blatantly ignore risks. This has been persistent at every turn over the last 14 months. Highly recommend reading this book (promise I am not getting paid to say that).
“The evidence suggests that optimism is widespread, stubborn, and costly.”
― Daniel Kahneman, Thinking, Fast and Slow
Since the original publication below was written on March 12th of this year (2023), there have been a few notable bank failures. Signature Bank was next. This bank had approximately $110 Billion in assets and was the 29th largest bank in the US as of December 31st, 2022. Most recently, First Republic Bank was seized by the FDIC earlier this week on Monday (5/1/23) and then sold to J.P. Morgan. The failure of First Republic Bank is the largest since the great financial crisis in 2008 and overtakes Silicon Valley Bank which occurred in March as referenced above. This is not the place where I will speak about the growing number of deposits under the control of J.P. Morgan due to the financial fallout, so will save that for a later date. First Republic had a total of approximately $213 Billion in assets and was the 14th largest bank versus Silicon Valley Bank ($209 Billion in assets) the 16th largest bank in the US.
Recently, as one bank falls it’s onto the next weakest link with Pacific West Bank and Western Alliance Bancorporation now in the crosshairs. The Pacific West stock got cut in half yesterday, while Western Alliance was down -38%. Not making any “calls” on what comes next for these because I really do not know. However, the behavior of the stocks is not very reassuring that “everything is ok”, so we will see what happens from here. Honorable mention to Credit Suisse which went under as well since the initial publication.
If it was not already apparent, the first bank failure is never the last. Since March, there have been a few names that have decided to play follow the leader. Presently, the Russell 2000 (a lot of companies) is trading at cycle lows and still represents a major divergence from the overall market indexes such as the S&P 500. Many of the companies within that index continue to make new lows. The words below were my thoughts that I published (before I started this Substack) from the weekend following the Silicon Valley collapse and should serve as a reminder while we travel forward through time to reach the light at the end of the tunnel (whenever that may be).
*IMPORTANT* BE PREPARED: WEEK 3/13/23
First and most importantly, the world is not going to end. There will probably be tons of negativity over the next several months. Eventually, everything will be ok.
Nothing is wrong with just sitting in cash and waiting for the volatility to subside. This market will not be easy. Do not feel pressured to “trade” or “short” the market. Do not feel like every move has to be played. Waiting in cash is perfectly fine and is a proper way to preserve capital. The key over the last year has been capital preservation and avoiding large drawdowns. That has not changed today.
If things take a turn for the worst, then markets, pundits, media, news, YouTube, and Twitter is going to get very crazy/ egregious. There will be misinformation. Be careful when listening to certain “theories” or public statements that are made.
This is my first time actively risk managing a potential financial crisis and will likely be the first for many in this community. We are all in this together. It is not going to be easy.
Do not act like you know what will happen. Do not think that you are smarter than the market. I have no idea what is going to happen. Anyone who says or acts like they know what will happen with full certainty is probably full of s**t.
Bear Sterns was the 5th largest investment bank at the time of its collapse on March 16th, 2008. Ultimately, the market took approximately one year to bottom after the bear collapse, in March 2009. SIVB (Silicon Valley Bank) was the 16th largest bank at the time of the collapse.
There will be narratives. “Government bailouts”, “Letting it fail”, “Rate cuts”, “Bank buyouts”, and “Liquidity injections or stimulus” which we are already seeing this past weekend. All this will do is perpetuate more volatility in both directions. By the way, the markets still went down a lot more after Bear Sterns was bought out and the government began bailing out banks in 2008. These narratives and market talks will perpetuate more volatility.
“STABLE” COINS ARE NOT US DOLLARS. They should not be viewed as USD equivalents. I do not know how many more times I need to say this but having hard-earned capital in “stablecoins” is an unnecessary risk. Maybe nothing happens with them at all. I have been monitoring the USDC situation, and am seeing the price moving back towards parity. When writing this, the price is currently $0.97 for a full US dollar, up from $0.88 for a full dollar. This does not matter and there will not always be second chances. Risk management says to not bank on this ever-reaching parity again. If it does, great and I will be happy to see the owners spared. I am deeply saddened that this loss of peg is even happening. It is truly terrible for anyone that is investing under the assumption that this is a real USD equivalent. For something that is supposed to be a USD equivalent to lose 12% of its value in hours is a HUGE RED FLAG. This is not a way to store wealth. That type of loss for a “currency” in hours is not normal. Be aware.
Do not get sucked into head fakes. These will exist on both the long and short side. If volatility increases above 30, this will perpetuate very extreme price movements in either direction. Do not get caught shorting the lows because “the world is ending” or “every bank is going to fail”, and do not get caught buying the “hope” or “government backstop so everything will be fine”. Crucial to be mindful and always have daily price ranges front and center of thought. Do not try to be a hero.
We will get through this. There will be a light at the end of the tunnel and one that is filled with opportunity. Things will not be easy to navigate, but taking the time to conduct diligent research and paying attention will offer enormous rewards on the other side.
I hope the community finds this message helpful. Feel free to share this message with whoever because times will be challenging if current circumstances continue to play out over the next several months. I usually do not write notes like this on Sundays and while on vacation, but given the seriousness of the current circumstances, I wanted to publish something for the community to think about. This is not financial advice, just my own thoughts heading into next week. *Written 6:07 pm on Sunday, March 12, 2023*
Conclusion
Important to study history and that broad category also includes the study of one’s self. This may reveal hidden secrets and lessons to be learned along the way. A greater understanding of the past is not an oracles guide to understanding the future but leaves us with the ability to learn from previous human actions. The first bank failure is never the last, and the section above was shared as a reminder of a prudent mentality that may seem distant for many, but in reality, it is a time not so long ago.
In the section above, “Be Prepared Week 3/13/23”, the note serves as a reminder of the significance of protecting hard-earned capital against drawdowns, while maintaining a level head and resisting the enticing extremities of positive/ negative sentiment shifts. Financial stabilization is a process and observing the daily prices of the market will be relatable to a roller coaster with frequent ups and downs. Contrary to the popular Wall Street passive management strategy dogma, timing does matter. Specifically when it comes to protecting capital and compounding wealth. Resist the “One-Month Memory”.
Should not be long before some of the fallout from Silicon Valley failure begins to appear in the April data that will start to be reported over the next several weeks. This data will be lagging but can provide potential clues to broader economic impacts from tighter credit conditions. This starts with the labor markets, and the April non-farm payroll report will be released this morning at 8:30 am. Do not just gaze and fixate upon reports that illustrate yesterday’s news, think about painting a picture for the landscape of tomorrow.
Happy Friday,
Aaron David Garfinkel
Resources
Really love your thoughts.
Great insights.