Richard Bernstein Advisors: Some Thoughts on the Banks | ETF Trends

Breaking down the Silicon Valley Bank breakdown:

What’s happening to Silicon Valley Bank is exactly what we warned about in a report from over a year ago, The Biggest Risk to Portfolios Today ( While the original report was written in the context of investor portfolios having concentrated Technology/duration exposure within their stock holdings and in their alternative investments, which added to the already heavy exposure to traditional fixed income duration, it is essentially the same issue that caused Silicon Valley Bank to fail.

Regarding liabilities, a large portion of their deposits were concentrated in Technology/venture capital/start-up clients who were forced to pull those deposits to cover operating costs as liquidity dried up and their growth slowed. On the asset side, the bank needed to sell investments to fund those withdrawals, but they had invested a significant portion of those deposits — unlike traditional banks who lend more of their cash out — in bonds, many of which were medium/longer maturity fixed-rate bonds. With the large rise in interest rates, those bonds became worth a lot less and selling them caused the bank to realize enormous losses which created a funding shortfall.

In essence, the bank’s balance sheet was a concentrated bet on Technology/venture capital/duration (just as many investors’ portfolios were last year), hitting it simultaneously from both sides of the balance sheet. This is exactly what happens when liquidity dries up.

Here’s the bottom line:

  1. This is not a hair-on-fire event for the overall economy. It is for some banks, for the Technology sector, and for venture capital speculators, but the overall economy likely won’t be ruined.
  2. The whole point of Fed tightening is to slow the business of the banking sector. That’s how tighter monetary policy gets into the economy. People oddly forget the Fed is the Central BANK!
  3. Zero interest rates and 27% M2 money supply growth caused some VERY speculative behavior. Unfortunately, speculators rarely believe they are speculating and think there’s a “new world order” of some sort. This cycle is now proving that misconception once again.
  4. This isn’t likely to be the end of venture capital/Technology/startup problems. Although there have been problems popping up, this is only the first to gain national attention.
  5. RBA’s positioning is very defensive relative to the speculative aspects of the market and the economy. Our portfolios are generally quite shielded from these issues, having sold out of Regional Banks and Global Financials last year, we are underweight banks in general.

Dan Suzuki, CFA
Deputy Chief Investment Officer

*RBA does not directly hold any Silicon Valley Bank securities but might have inconsequential positions held indirectly through the underlying portfolios of the registered investment companies in certain product offerings.

Nothing contained herein constitutes tax, legal, insurance or investment advice, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument. Such an offer or solicitation may only be made by delivery to a prospective investor of formal offering materials, including subscription or account documents or forms, which include detailed discussions of the terms of the respective product, vehicle, service or instrument, including the principal risk factors that might impact such a purchase or investment, and which should be reviewed carefully by any such investor before making the decision to invest. RBA information may include statements concerning financial market trends and/or individual stocks, and are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such. The investment strategy and broad themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information contained in the material has been obtained from sources believed to be reliable, but not guaranteed. You should note that the materials are provided “as is” without any express or implied warranties.  Past performance is not a guarantee of future results. All investments involve a degree of risk, including the risk of loss. No part of RBA’s materials may be reproduced in any form, or referred to in any other publication, without express written permission from RBA. Links to appearances and articles by Richard  Bernstein, whether in the press, on television or otherwise, are provided for informational purposes only and  in no way should be considered a recommendation of any particular investment product, vehicle, service or  instrument or the rendering of investment advice, which must always be evaluated by a prospective investor  in consultation with his or her own financial adviser and in light of his or her own circumstances, including the  investor’s investment horizon, appetite for risk, and ability to withstand a potential loss of some or all of an  investment’s value. Investing is subject to market risks. Investors acknowledge and accept the potential loss of some or all of an investment’s value. Views represented are subject to change at the sole discretion of Richard Bernstein Advisors LLC. Richard Bernstein Advisors LLC does not undertake to advise you of any changes in the views expressed herein.