The Fear of a Banking Crisis: Why Investors are Turning to Alternative Stores of Value
The US Federal Reserve has the power to raise or lower interest rates. But what would happen if the Fed raised the interest rate too fast? No one knows for sure, but we do know that seeing stocks being sold down in the past year was not a concern because shareholders who have greater financial resources are better equipped to handle such volatility. However, when innocent depositors get hurt, that's not acceptable.
Recently, the US government stepped in quickly to make sure depositors of Silicon Valley Bank and Signature Bank got most of their money back. But the fear of a banking crisis has not subsided, and bank stocks are still getting hammered. This is because people are expecting more banks to fail, and the thought of this issue is spooking investors.
To be clear, depositors are getting their money back, but not the shareholders or even the bondholders of the banks. Shareholders of Silicon Valley Bank would get nothing. Any further sale will be heavily discounted, if they occur at all. It's understandable that shareholders are selling their bank stocks as it's a survival instinct kicking in.
Besides the stock market, the price movements in other assets are telling us that "money is scared." Investors are seeking safety by diversifying their investments and turning to alternative stores of value in order to hedge against the US dollar and the financial system.
This trend is reflected in the recent weakening of the US dollar and the concurrent surge in assets such as gold, silver, and cryptocurrency, which have long been viewed as alternative forms of currency.
The current market conditions are clearly demonstrating this shift in investment strategy. The largest bond ETF, Vanguard Total Bond Market ETF [BND], has risen by 2% in a matter of days, which is atypical since bond prices are expected to decline with an anticipated increase in interest rates, given the inverse relationship.
When stock prices drop and bond prices rise, it often indicates that investors are seeking safety. This can lead to a sell-off in stocks as investors shift their funds to the perceived safety of bonds, which offer principal guarantees at maturity.
The US Dollar Index has decreased by nearly 2% in the past five days, while the largest gold ETF, SPDR Gold Trust [GLD], has seen a 4% increase in value. Even silver, which is sometimes referred to as "poor man's gold," has experienced a 5% increase, as evidenced by the iShares Silver Trust [SLV]. Cryptocurrency has experienced even more dramatic growth, with Bitcoin experiencing a staggering 19% increase in value over the past five days.
Recent market movements indicate that interest rate risk may not be the primary factor driving asset prices at present. Instead, concerns about the stability of the financial system are influencing investment decisions.
Although there may be some attractive opportunities to invest in bank stocks that are likely to weather this episode, it's important to assess their capital ratios after adjusting for unrealized losses to identify the stronger banks. Banks with a smaller decline in their capital ratio are generally considered more resilient. In this chart, JP Morgan, Citi, and M&T Bank appear to be among the most resilient banks.
In summary, the fear of a banking crisis has led to investors seeking safety by turning to alternative stores of value, such as gold, silver, and cryptocurrency. The current market conditions are demonstrating a shift in investment strategy, with concerns about the stability of the financial system influencing investment decisions.
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The Fear of a Banking Crisis: Why Investors are Turning to Alternative Stores of Value
The US Federal Reserve has the power to raise or lower interest rates. But what would happen if the Fed raised the interest rate too fast? No one knows for sure, but we do know that seeing stocks being sold down in the past year was not a concern because shareholders who have greater financial resources are better equipped to handle such volatility. However, when innocent depositors get hurt, that's not acceptable.
Recently, the US government stepped in quickly to make sure depositors of Silicon Valley Bank and Signature Bank got most of their money back. But the fear of a banking crisis has not subsided, and bank stocks are still getting hammered. This is because people are expecting more banks to fail, and the thought of this issue is spooking investors.
To be clear, depositors are getting their money back, but not the shareholders or even the bondholders of the banks. Shareholders of Silicon Valley Bank would get nothing. Any further sale will be heavily discounted, if they occur at all. It's understandable that shareholders are selling their bank stocks as it's a survival instinct kicking in.
Besides the stock market, the price movements in other assets are telling us that "money is scared." Investors are seeking safety by diversifying their investments and turning to alternative stores of value in order to hedge against the US dollar and the financial system.
This trend is reflected in the recent weakening of the US dollar and the concurrent surge in assets such as gold, silver, and cryptocurrency, which have long been viewed as alternative forms of currency.
The current market conditions are clearly demonstrating this shift in investment strategy. The largest bond ETF, Vanguard Total Bond Market ETF [BND], has risen by 2% in a matter of days, which is atypical since bond prices are expected to decline with an anticipated increase in interest rates, given the inverse relationship.
When stock prices drop and bond prices rise, it often indicates that investors are seeking safety. This can lead to a sell-off in stocks as investors shift their funds to the perceived safety of bonds, which offer principal guarantees at maturity.
The US Dollar Index has decreased by nearly 2% in the past five days, while the largest gold ETF, SPDR Gold Trust [GLD], has seen a 4% increase in value. Even silver, which is sometimes referred to as "poor man's gold," has experienced a 5% increase, as evidenced by the iShares Silver Trust [SLV]. Cryptocurrency has experienced even more dramatic growth, with Bitcoin experiencing a staggering 19% increase in value over the past five days.
Recent market movements indicate that interest rate risk may not be the primary factor driving asset prices at present. Instead, concerns about the stability of the financial system are influencing investment decisions.
Although there may be some attractive opportunities to invest in bank stocks that are likely to weather this episode, it's important to assess their capital ratios after adjusting for unrealized losses to identify the stronger banks. Banks with a smaller decline in their capital ratio are generally considered more resilient. In this chart, JP Morgan, Citi, and M&T Bank appear to be among the most resilient banks.
In summary, the fear of a banking crisis has led to investors seeking safety by turning to alternative stores of value, such as gold, silver, and cryptocurrency. The current market conditions are demonstrating a shift in investment strategy, with concerns about the stability of the financial system influencing investment decisions.