Market expert Larry McDonald has issued a stark warning that the crisis at Silicon Valley Bank could trigger a chain reaction that forces the US Federal Reserve to cut rates by 100 basis points by December, in a bid to stop the contagion from spreading throughout the financial system. The situation at Silicon Valley Bank began when the bank announced a $1.8 billion loss from the sale of its $21 billion bond portfolio, which had been hit by the Fed’s rate hikes. After failing to raise more capital, the bank is now reportedly looking to sell itself. The bank run caused by the rate hikes has had devastating consequences, with Silicon Valley Bank’s share price plummeting 68% over just two days.
According to McDonald, the Fed is causing this bank run, as its rate hikes have made short-term Treasuries more attractive and drained deposits from banks such as Silicon Valley. This, in turn, is leading to plunges in the shares of regional lenders like First Republic, Signature Bank, and PacWest, as well as Wall Street banking giants. McDonald warned that regional banks like Silicon Valley Bank are particularly vulnerable to the Fed’s aggressive tightening, as they are not as well equipped to manage interest rate risks as larger banks.
The timing of the Silicon Valley Bank crisis is particularly worrying, as the Fed is expected to continue raising rates later this month. In fact, earlier this week, Fed Chairman Jerome Powell opened the door to more significant increases as economic data points to sticky inflation. However, if contagion spreads, the Fed would be forced to “bring out the other firehose and cut rates, probably within six to nine months,” according to McDonald. This would mark a sharp reversal from the central bank’s current course of aggressive tightening to rein in inflation, and could have significant implications for the wider financial system.
Investors are understandably concerned about the potential fallout from the Silicon Valley Bank crisis, with several venture capital firms advising their portfolio companies to pull money from the bank. However, it is important to remain calm and rational in times of uncertainty. While the situation is certainly worrying, it is important to remember that investors have tools at their disposal to mitigate their financial risk and protect their wealth.
One such tool that investors may want to consider in times of economic uncertainty is gold. Historically, gold has been considered a safe-haven asset in times of crisis, and its value often increases as other investments falter. As such, it may be wise for investors to consider diversifying their portfolios by investing in gold. While gold prices can be volatile in the short term, they have tended to appreciate over the long term, making them a potentially valuable addition to any portfolio.
With the situation at Silicon Valley Bank causing widespread concern, it is important for investors to remain vigilant and keep a close eye on developments in the financial markets. While it is impossible to predict exactly what will happen next, by diversifying their portfolios and investing in safe-haven assets such as gold, investors can help to mitigate the risk of losses and protect their wealth in the face of uncertainty. Ultimately, by staying calm, rational, and informed, investors can make smart decisions that will help them weather any storm that the financial markets may throw their way.