This Is The Black Swan
Banks are failing. And not just little niche crypto banks. Silicon Valley Bank is toast. This is a big deal and I wouldn't ignore it.
Normally on a Friday I’d be waiting until the market closes to give my portfolio update. The setup actually looked great at the end of last week. However, things have now taken a dramatically bad turn. HSEP has endured a 900 bps turnaround in the last 5 sessions and the broader market has been hit as well. Things are now so bad, that I’m publishing my end of the week update early and I’m opening it up to all subscribers because I think it’s important enough. And I want to give people a little bit of time to consider making decisions before the market closes today.
Here are the important news-related catalysts to consider:
Banks are collapsing. Not the top tier major banks (yet), but Silvergate Capital SI 0.00%↑ is closing its doors and Silicon Valley Bank SIVB 0.00%↑ has been taken over by FDIC. SVB is not a nothingburger. It was the 16th largest bank by total assets and it will now go down in history as the 2nd largest bank failure ever.
I can give a possibly over-simplified explanation of how this has happened: banks use customer deposits to buy assets like US treasuries or mortgage backed securities (this is normal). Many of these assets have since fallen in value to a fairly large degree. By itself, this isn’t a problem unless depositors want their money back. And that’s exactly what has happened. Bank customers have started asked for withdrawals and it has created a situation where the banks are forced to eat enormous losses on assets that they’ve purchased in order to meet depositor obligations.
The entire stock market has been getting thrashed in response to these bank failures but the financial sector specifically is getting taken out back and shot. It’s so bad that some of these names were actually halted from trading today:
I am not trying to spread fear. But broader bank contagion is not a zero-percent possibility. Somewhat unbelievably, there are already potential parallels to the financial crisis 15 years ago:
Jim Cramer called SVB a buy at $320 just a few weeks ago. It’s impossible not to be reminded of Cramer’s call on Bear Stearns which collapsed shortly after he called it a buy on March 11th, 2008 - the 15 year anniversary of which is tomorrow. Incredible.
Another Anniversary
My most recent article on Seeking Alpha goes into detail about how the Bitcoin network has grown in the ten years since the Cyprus bank bail-in. Which is another insane story of financial betrayal between bank depositors and the governments that oversee them. In that article, I ask why Bitcoin even exists in the first place:
Is it a store of value or a medium of exchange? I don't know if anybody really knows for sure what the network will be ten years from now. Throughout its history, I'd argue that bitcoin has been a really simple narrative trade when you strip away all the noise. The most straight forward way I think we can look at BTC is as a bet against the current system. Hedge against inflation? More debatable. But it is very much a hedge against banking custodians and central planning.
It’s really that simple for me. Is Bitcoin perfect? No. Is Zcash perfect? No. But I don’t need permission to use either of these things. And to be clear, I don’t need permission to use physical cash either. I’m not saying go buy BTC or ZEC - I think you all know where I stand on them at this point. What I am saying is if you have all of your assets with custodians, you’re not properly hedged. Cash is good. So is Gold or Silver.
What About Equities?
I won’t lie, I’ve been a net seller this week in the HSEP and in my personal account. While I won’t give specific names today (paid subs know where to access the sheet), I have taken off some of my riskiest names. The ones that haven’t been completely sold have been trimmed.
Even if the financial sector wasn’t dealing with what it’s dealing with at the moment, this is a brutally bad S&P chart now. In one absolutely horrendous session yesterday the S&P ripped through support at 3,985, the 50 day moving average and the 200 day moving average - like a hot knife through butter. Today’s isn’t much better and the broad market is now threatening to give back the multi-month trendline breakout from last month. If it closes below that line, I think this gets a lot worse and possibly fast:
I wouldn’t rule out another 150 points to the downside. And that’s base case. We could see 3,500 S&P. We could see 3,200 S&P. Again, I am not trying to cause panic. Things don’t go up in a straight line. Things don’t go down in a straight line. But the economic data is bad. Layoffs are probably just starting and housing prices have only begun to correct. That triggers a reverse wealth-effect and people stop spending.
I’ll probably share more thoughts on all of this in the coming days. But for now, take a little cash out if you don’t have any in your home. Put more trust in yourself than anyone else.
Nothing is guaranteed.
Disclaimer: I’m not an investment advisor. I live in my wife’s basement and I have no job. I share what I personally do and why I do it. I hold BTC and ZEC in self-custody.
Dominos begin to fall…