Correlation is not always causation
Silicon Valley and Credit Suisse only coincide with regard to their timing. Credit Suisse has been challenged for some time now.
- Silicon Valley Bank was caught by a highly correlated depositor base (which needed their uninsured – as of Friday- cash back) and found out Monday the Nanny State would make them good.
- The second shoe to fall for SVB was that around 75% of assets were classified as “held to maturity” with big duration. These securities are not marked to market until an item is sold, then, all assets in that category are marked to market. To give context, the held to maturity bucket for SVB was 50% higher than some of the money center banks we looked at. This would result in a big realized loss. A loss is a loss, and an unrealized loss is the ostrich of the group. Just because we don’t take the mark doesn’t mean it didn’t happen. This is much different than Separately Managed Accounts (SMAs) and mutual funds that mark to market daily.
The long and short is that, in our opinion, this is not a replay of the 2008 financial crisis. Market participants know what these securities are worth, the sellers (ostriches) just don’t want to recognize the losses.
What to do going forward? Get ready for more volatility!! Don’t do anything that is emotionally driven.
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