Bank Run?

The stock market had a rough couple of days due to a couple of bank failures and a few other financials that got hit hard in what looks like sympathy. Silvergate (SI) is a player in the crypto world in a way that appears to be far more involved than just about any other bank out there. It was involved with FTX and Alameda Research. That's really a live by the sword die by the sword situation unique to SI or any other banks that might be similarly enmeshed in crypto. SI tells us nothing about the banking system.

Silicon Valley Bank (SIVB) is a different situation but still does not appear to be a canary in a coal mine. Bob Elliott did a deeper dive and SIVB is not over leveraged per the following stats; 15% tier 1 assets (15 years ago bigger banks were at a fraction of that), 40% LTV and 100% deposit liquidity coverage. I've done some reading and as best as I can tell, the bank had a mismatch between its assets and it's liabilities. It was down on longer dated paper like treasuries and asset backed without having enough shorter term assets to meet short term cash needs. If all of that as reported is accurate then yeah, I guess someone did a bad job but the bank wasn't reckless in its lending or risk taking. The bank does a lot of venture capital business and it seems like the VC community sort of panicked and fomented the outcome. 

From the top down SIVB frequently had returns that were much bigger than the broader financial sector in both directions, much bigger. When I talk about expectations for a stock, that sort of performance, meaning much bigger price swings, tells you something about volatility and also risk. Obviously, I had no idea the bank would go under but it has clearly been a long term source of volatility. I think it is important to consider how much or how little volatility a holding might add to the portfolio. That something is volatile is not on its face bad but is something to understand. It is also important to remember that just because something has had a certain volatility profile in the past doesn't mean it will stay the same in the future. 

One interesting thing that happened on Friday was that managed futures got hit pretty hard. I follow maybe a half dozen funds in the space, with two in my ownership universe and only one of them had an ok day. My first thought is that somehow they got caught wrong footed with the extreme treasury volatility but I am working on trying to find out. 

I see some crazy ideas out there about how much to allocate to managed futures. This is the exact same behavior as 15 years ago when pundits were talking about 15-20% in REITs, MLPs and gold. That's too much, too much! 

For my money, managed futures offers better diversification/protection than REITs or MLPs by a mile. I think managed futures are more reliable than gold but the case there is not airtight like it is compared to REITs and MLPs. That does not make the strategy infallible. 

About a month ago we looked at the Return Stacked Bonds & Managed Futures ETF (RSBT) which offers 100% exposure to both bonds and managed futures. That fund was down 3.74% even though the iShares Aggregate Bond ETF (AGG), which is RSBT's bond exposure was up 1.17%. 

Return stacking is a fascinating concept and there are ways to have it influence portfolio construction but be careful with this. I see a lot of people liking 150%-200% exposure, leveraging up to blend things together that should have a low correlation to offer a smoother ride. Today is obviously just a microcosm of what could go wrong. more like a nanocosm but at the end of the day, taking leverage too far very often ends in tears.

While I was writing this post, I got an email letting me know that fixed income volatility was a big part of the story accounting for the rough day most of the managed futures group had. 

I have no interest or intention of using any of the stocks or funds mentioned personally or in client accounts.