Like you, I have been consuming the daily feeds documenting the restacking of global capitalism. Normally, I’d engage in a bunch of rabbit hole-diving to highlight the hidden stories under the hood of what’s shaping up to be one of the largest banking crises in history.
In this case, however, in all honestly, it’s not interesting enough to wade that deep. Let me get a few things out of the way quickly.
You probably have almost no direct financial exposure to what’s going on. I happened to be on an exquisitely timed vacation last week, but our VettaFi Voices covered this in our weekly round-up on Friday. The most exposed ETF out there in the U.S. is the Vanguard FTSE Developed Markets ETF (VEA), and it had less than half a percent of Credit Suisse exposure before all this began.
You probably have limited counterparty exposure to Credit Suisse in particular and to any at-risk bank. This is because Credit Suisse has been telegraphing that it is not to be trusted as a counterparty for ETF and ETN investors for years. It was only two years ago that I went out on a limb (for me!) and suggested that Credit Suisse’s management of its ETN delistings bordered on unethical on live TV. Worse, it’s been showing that it can’t be trusted to manage its ETN book cleanly for over a decade. Remember TVIX, anyone?
While it’s possible that you might own one of the handfuls of still-trading Credit Suisse ETNs covering gold (the Credit Suisse X-Links Gold Shares Covered Call ETN (GLDI)), silver (the Credit Suisse X-Links Silver Shares Covered Call ETN (SLVO)), MLPs (the Credit Suisse S&P MLP Index ETN (MLPO)), or oil (the Credit Suisse X-Links Crude Oil Shares Covered Call ETN (USOI)), those notes are senior (unsecured, but still senior) debt, which, according to what we know right now, will be fine in the pending UBS takeover. After all, even equity holders — the last in line — look like they’re getting a door prize.
What Does This Mean for Your Client Portfolios?
Get your cash right. Honestly, I’d be shocked if many financial advisors weren’t already all over this issue, as I’ve been discussing it with you for the last year as rates have been rising. Don’t leave $1 million in your client’s cash at a local bank. At a minimum, use sweep options available at every regional and commercial bank. But the smart advisors I know are using funds like the JPMorgan Ultra-Short Term Income ETF (JPST) or any of dozens of banking competitors to park cash. There are even specialized, advisor-centric services like Meow.co, which are designed just to solve these kinds of problems for you.
Don’t invest (your or your clients’ wealth) in parts of the cap table you don’t understand. At the moment, it looks like only the “Additional Tier 1” bondholders of Credit Suisse are getting blanked. Don’t know what AT1 is? Good, it’s probably not where you should have been chasing yield. Contingent convertibles and other edge-case capital vehicles exist to grease the skids between large capital holders — not the average wealth client. (That said, my read is that some shenanigans are going on in how bond covenants are being interpreted, but that’s really just popcorn material.)
And What About the Markets Themselves?
Of course, a banking crisis puts a pause in the tightening by central banks, but we have no real way of knowing what was really in the cards beforehand. Smart folks like Jim Bianco now think the central tendency is no move, with a market reactive hike (or cut!). Put another way: How the market reacts will very clearly drive this current banking policy decision.
The time-honored tradition of “deregulate, blow up, consolidate” will continue in banking. The ability of regional and specialty banks to take risks will be strongly curtailed, either by regulation or market forces. This puts yet more power in the hands of fewer large financial institutions, with all of the concomitant problems that entails: more regulatory capture, more “too big to fail,” moral hazard risks, and so on. There’s really no path that doesn’t create more consolidation.
Crypto will have a field day — as it should. I’m far from a bitcoin maximalist, and it’s worth noting (repeatedly) that while nobody thinks the current bank kerfuffle is peachy keen, we also don’t have senior citizens lined up at ATMs on the news every five minutes. The “losers” here, from an investment perspective, are just really those undiversified equity holders who had CS or SIVB in a portfolio and those who participated specifically in Credit Suisse’s AT1 bond offerings.
As a sector, financials have been dogs for a decade. On a 10-year basis, financials were already trailing the S&P 500 continuously since the GFC, almost regardless of where you mark the start date. I personally find this unsurprising; large financial institutions are increasingly a kind of risk-taking public utility where returns are constrained by the willingness of the system — democratic capitalism — to allow for real failure. We have almost no appetite for that, so why should you expect better than market returns? See also: crypto.
So What, Big Deal
I don’t mean to make light of bad news. Markets being down hurts real people. Companies getting sold at fire-sale prices and edge-case bondholders getting wiped out will cause real suffering for real human beings, and I try to always remember that.
But part of the job of being a financial advisor — or a pundit — is to push back against the hyperbole cycles that often dominate our inboxes and news feeds. Sure, some stuff has broken, and a few more things will likely break. And in two months, we will have largely moved on, risk will have been repriced, and hopefully, your portfolio and your clients will have done better than most, simply by quietly paying attention and not making any sudden moves.
A boring financial crisis is better than the alternative.
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