Email us at to talk to a financial advisor today!

Email us at

Jeromeggedon and Calamity Janet

“Guess what guys, it’s time to embrace the horror! Look, we’ve got front-row tickets to the end of the earth!” This month’s collapse of Silicon Valley Bank (SVB) had many of their well-heeled venture capitalist depositors and customers metaphorically reliving this scene from the 1998 movie, Armageddon. SVB’s downfall had people questioning if we are headed for another epic crisis in the banking system like that experienced in the 2008 Global Financial Crisis punctuated by the failure of Lehman Brothers. On March 8th, SVB announced a $1.8 billion loss on its investments in long-term treasuries prompted by depositors withdrawing funds. Withdrawals soon snowballed as general partners at venture-capital firms began pulling their money out of Silicon Valley Bank and urged their portfolio companies to do the same. Hours later, Moody’s downgraded SVB Financial triggering its stock price to crash sending shockwaves reverberating throughout the banking system. $52 billion in the market value of JP Morgan Chase, Bank of America, Wells Fargo, and Citigroup was lost as panic spread about the safety of banking deposits, particularly deposits over Federal Deposit Insurance Corporation (FDIC) insurance limits of $250,000. Two days after the initial announcement, the FDIC took control of SVB after depositors attempted to withdraw $42 billion. On March 12th, the New York Department of Financial Services regulators announced the 3rd largest bank failure, Signature Bank.  Signature Bank was one of the few banks accepting crypto deposits; some believe this made them an easy regulatory target. SVB’s failure prompted Signature Bank customers to move their depository funds to larger systemically important banks, like JP Morgan Chase and Citigroup, as concern rose surrounding its portfolio which was very similar to SVB’s.  Systemically important is the code for “too big to fail banks” that the Federal government will likely step in and save in a full-blown crisis.

Panic and concerns surrounding the U.S. banking system sent shockwaves from large banks down to your local community bank known for giving out lollipops for new deposits or transactions. $165 billion in losses of market value were experienced among the 10 biggest bank stocks and $108 billion in losses were incurred among small bank stocks according to the Federal Reserve. Concerns began to arise that we were in for another collapse of the banking system as the closure of SVB marked the 2nd largest bank collapse ever and the largest since the 2008 Global Financial Crisis.  Many experts wondered aloud whether SVB was analogous to a Lehman moment within the technology sector centered around Silicon Valley and San Francisco.

Image Source: Fox Business

The Downfall of Silicon Valley Bank

So where did SVB go wrong? As the name suggests, Silicon Valley Bank was a preferred bank for many tech start-ups and venture capital firms. The bank saw substantial growth during the pandemic as the technology sector was booming and venture capital money was raining down on VC startups, minting hundreds of Unicorns – VC startups valued at $1 billion or more. SVB invested the flood of deposit funds into treasury bonds, mortgage-backed bonds, and other long-dated assets which provided SVB with a larger interest spread over the interest SVB paid to its depositors in the low-interest rate environment during the pandemic. The Federal Reserve monetary and interest rate policy decisions and long-term guidance encouraged this behavior as Fed Chairman Powell labeled incipient inflation “transitory” in 2021.  But as inflation continued to rise into 2022, the Federal Reserve was ultimately forced to hike interest rates very aggressively.  The yield curve eventually inverted as long-term interest on 10-year treasuries fell below those offered on 2-year treasuries.  Consequently, the long-duration securities that SVB purchased to back its deposits fell substantially in value, something on the order of 25%. In accordance with accounting rules and the regulatory framework for banks, SVB had counted on the fact that they would hold their investments until maturity and did not recognize the mark to market impact of higher interest rates in its financial statements.  These held-to-maturity securities were carried at cost on their balance sheet until they could no longer be “held.”  Sophisticated depositors caught wind of this shadow accounting issue with SVB’s announcement of a $2 billion equity capital raise.  Deposits were rapidly withdrawn causing a forced sale of these long-term securities and creating large realized losses.

SVB had also been facing a general slowdown in the venture capital funding cycle and deposit taking. Venture capital investments are far less attractive when the cost of capital rises with interest rates.  It’s far easier to finance these ventures that do not cash flow for several years, maybe a decade or more, at zero interest rates, but it’s a completely different ballgame with the Federal Funds Rate at 5.0%. Funding across the venture capital space slowed meaningfully and deposits to the preferred depository institution began to shrink massively.  Moreover, these cashflow-burning startup enterprises continued to rapidly withdraw money for payroll and operational expenses. The Federal Reserve’s wild misjudgment on inflation and subsequent unprecedented rapid hiking campaign fomented the destructive conditions for a life-or-death decision between the safety of deposits and SVB’s insolvency, or Jeromeggeden.   The Federal Reserve had effectively financially engineered this textbook run on Silicon Valley Bank by its policies. Many sophisticated investors had long ago concluded that the Fed would keep hiking interest rates until they broke something. Technology-sector concentrated SVB proved to be the weak link and the first domino to fall.

The big question is how many other banks will be caught swimming naked on interest rate risk management now that the banking deposit tide is going out. This banking cycle is a foreseeable consequence of Fed monetary policies. Remember under quantitative easing (QE), the Federal Reserve printed dollar reserves and used those reserves to take U.S. treasuries and other government-backed securities out of private hands. These excess reserves generated by QE are now trapped in the U.S. banking system. Depositors are being rational economic actors and withdrawing bank deposits and buying money market funds that hold U.S. treasuries.  With money market funds yielding 4.3% today, this deposit withdrawal cycle may be largely irreversible.  The Fed should be accelerating its wind-down of its U.S. treasury holdings to soak up the wave of private demand for treasuries.

The Federal Reserve’s Response

The fears around the financial stability of the banking system had investors and consumers alike calling for a slowing of Federal interest rate hikes. Investors and banks alike had already been questioning Chairman Jerome Powell on the timing (too late to start the hiking cycle) and pace (too fast hiking because playing catchup) of their policy decisions. Judgment day came on March 22nd when the Fed announced another 0.25% rate increase making it clear their priority was combating inflation despite growing fears about the stability of the banking system. The rate hike prompted banks to lose further equity value both domestically and in Europe, causing unease that the Fed’s decision could cause additional damage to the already wounded banking system. Mr. Powell said that “depositors should assume that their deposits are safe” as the government plans to impose further regulations on an already heavily regulated industry. This “watch and see what happens” approach was small comfort and hasn’t given bank depositors in non-systematically important banks that warm and fuzzy feeling about the safety of their deposits. Deposit withdrawals at regional and small community banks continued apace.

Will the Large Banks Keep Getting Larger?

The resulting crisis has depositors and banks alike looking to the FDIC and U.S. Treasury Secretary, Janet Yellen for guidance. Yellen commented at a Capitol Hill hearing that the FDIC will cover the uninsured deposits (excess of $250,000) of both SVB and Signature bank, yet there is great uncertainty if this policy decision would apply to other bank depositors in the future. Yellen publicly said shortly after the SVB collapse that the FDIC could cover depositors whose funds exceed the $250,000 limit.  However, when questioned if all banks would receive this treatment at the Congressional hearings, Yellen’s response appeared to suggest that small and midsized banks would be left out. The calamity caused by Yellen’s comments was highly disruptive for many smaller banks as it prompted businesses and individuals to contact their local community banks about transferring their depository funds to larger banks that Yellen said would be protected.  This was a surprisingly dismal show of confidence from the U.S. Treasury Secretary who once proclaimed in 2017 as Fed Chairman “I don’t see a financial crisis occurring in our lifetimes.”

From March 8th to March 15th, $110 billion flowed out of small banks into larger banks. Small banks account for just 34% of deposits in the U.S. banking system; however, they account for a substantial portion of commercial real estate loans sitting at 74% of total loan activity. Like the iconic Bailey Building and Loan from It’s a Wonderful Life,  these small community banks lend out deposit funds to Main Street America borrowers for local commercial real estate projects or businesses. If deposits to small banking institutions continue to contract, then this would reduce capital available for commercial real estate lending. Small banks often work with borrowers whose needs are more specialized or whose funding needs are too small in size for the larger banks in America to consider. For example, according to the American Banking Association, a majority of agricultural lending is done by small and mid-sized banks that have deep roots in their rural communities. Farm loans require specialized analysis and training that not many large banks possess. If depositors pull their money from these small institutions, this could affect the availability of capital for agricultural lending, small business lending, and lending to underserved/underbanked communities.

While concerns surrounding the U.S. banking system have merit, the situation Silicon Valley Bank found itself in was somewhat unique. Nationwide, 45% of all deposits in the United States banks are uninsured; however, at SVB almost 94% of their deposits were uninsured. To stem this evolving bank liquidity crisis, the Fed created a new program to administer additional funding called the “Bank Term Funding Program,” (BTFP). Through this program, banks would be loaned funds if they pledge U.S. Treasury securities, mortgage backed securities, and other collateral. The result would be potentially transferring the risk of bank losses from the bank to the federal government. Through BTFP, the Federal Reserve apparently will provide liquidity to the borrowing bank may give loans based on the par value/cost of the securities rather than its depreciated market value.  In other words, they moved the shadow accounting for unrealized losses to the Fed’s balance sheet.

Safety of the US Banking System

Despite ongoing concerns surrounding the stability of the U.S. Banking system and another potential banking crisis similar to 2008, most economists believe that the U.S. Banking system is sound. On a broad scale, U.S. Banks are solvent overall and are not at a high risk of systematic failure or collapse. While rapid interest rate hikes have caused more severe fluctuations in capital flows in higher interest rate sensitive sectors of the economy, like technology and banks concentrated on that sector, we would expect that most large banks have well-risk-managed investment and lending portfolios and show more of diverse depositor base among sectors. Silicon Valley Bank appears to be a unique case of a large bank that did not properly manage the interest rate or duration risk of its investment holdings and Federal regulators were found asleep on the job again. Small community or regional banks may struggle to diversify their portfolio from a geographic standpoint however their focus gives them the ability to lend to a wide array of small businesses such as farms, retail, commercial property, and others. The investment portfolio of these smaller banks is closely watched by bank regulators as they serve such a large percentage of the total loan volume.

Policy actions and statements from the Fed’s Jeromeggedon and Treasury’s Calamity Janet have many Wall Street economists forecasting the U.S. will be in a full-blown recession by the second half of 2023, potentially forcing the Fed to pivot and begin lowering interest rates. Servant Financial client portfolios continue to stay overweight cash and fixed-income securities relative to strategic risk targets. The Federal Open Market Committee’s (FOMC) decision to raise the Fed funds rate by 25 basis points last week shows that the Fed is prioritizing its “stable prices” mandate over financial stability. We believe this policy decision will ultimately lead to increased financial instability while heightening inflation risk.  As such, we are maintaining underweights to equity and credit risk and healthy portfolio allocations to precious metals and other real assets.

Based on the FOMC’s subsequent actions, we plan on adjusting risk allocations once financial instability and recession risks have been fully repriced.  We expect the Fed will be forced to abandon its inflation fight and lower interest rates materially in the coming quarters. For now, we are advising clients to remain the rational actors that all economists expect us to be. For our portion, that means getting paid to wait by holding excess cash in money market funds with better yields from short-term investment-grade bonds. For example, the Fidelity Government Cash Reserve money market fund (FDRXX) yields 4.3% as compared to just 0.7% more in yield (5.0%) for a high-quality bond fund with a 6-year duration.  This short-term positioning greatly reduces the risk of taking a wait-and-see approach to the rapidly evolving macro, policy, and market backdrop.

Keep it simple with money market funds for your liquid savings as well or keep it local if you can.   Consider maintaining savings accounts or bank certificates of deposit (CDs) of 6 to 12 months at multiple local banks in support of your community. CDs, like checking or savings deposits, are only FDIC-insured up to $250,000 but are now offering rates from 4% to 5%. Ultimately, it is important to do business with people you trust and places you know will be there when you need them. Have conversations with your local banker to find out how protected your money is. Shop around, this is a saver’s dream after nearly a decade of near-zero interest rates.

Disclaimer: This is not investment advice and should not be used in the context of forming an investment portfolio. See your investment advisor or talk with Servant Financial today about how these factors affect your portfolio.



Russia and Ukraine… One Year Later

By The Numbers

One year ago, the lives of millions of Ukrainians were uprooted, and many more lives around the world were indirectly impacted by the Russian invasion of Ukraine.  The human toll alone has been considerable.  As it stands today, 8,000 civilians, between 175,000 and 200,000 Russian soldiers, and between 40,000 and 60,000 Ukrainian military members have lost their lives in this crisis. More than 8 million Ukrainians have fled their country.  This is equivalent to the population of the Chicago Metropolitan Area being forced to flee their homes. The largest group of refugees are women and children.  A further 6,000 Ukrainian children have been taken to refugee camps and facilities in Russia, subject to Russian re-education.

The United States government has provided $68 billion in total economic support with $29.8 billion of that being direct military aid and the rest being humanitarian assistance and economic support. The White House is requesting an additional $37.7 billion in aid in the coming year. The U.S. has given more military aid than any other country; however, the European Union (EU) leads in financial support at $30.3 billion provided to Ukraine within the last year. On the Russian side, communist-led Venezuela, Sudan, Cuba, and Nicaragua have all pledged their allegiance to Russia. While the U.S. has not confirmed China giving direct military aid to Russia, Chinese authorities do not deny their willingness to support their communist ally.


Source: CSIS

In addition to the horrific human toll, the war has also caused a wide swath of economic damage, sending shock waves to financial markets, agricultural markets, energy markets, and world economies. The outcome of the war is still largely unknown as concerns continue to be raised about Russia’s potential use of tactical nuclear capabilities and the uncertain form of Chinese support for Russia. Russia recently suspended its participation in the last remaining nuclear arms deal with the U.S., the 2021 extension of the START treaty (Strategic Arms Reduction Talks).  Russia can now begin expanding its nuclear weapons inventories.  One year ago, some speculated that Russia would swiftly overtake Ukrainian armed forces, but Volodymyr Zelenskyy and his army have proven their mettle in fighting off close to 320,000 Russian soldiers. While the results of this brutal fight are still hanging in the balance, we will now look back at how this conflict has disrupted global markets.

Agricultural Impact

Agriculture generally flies under the radar for many investors and consumers as a sufficient food supply is generally taken as a given, particularly in the developed West.  However, the invasion shed light on the tenuous nature of global food and commodity supply as the stomping of Russian boots on Ukrainian soil was felt from the sunflower fields in Ukraine to the amber waves of grain in the United States. Agricultural commodities such as wheat, sunflowers, corn, and soybeans all depend on the trifecta of fertilizers for plant growth: Nitrogen, Phosphate, and Potash. While the United States is not significantly dependent on Russia for imports of these vital crop nutrients, Brazil and other agricultural-producing countries import a significant portion of their fertilizer needs from Russia and its allies in China and Belarus. The fertilizer pressure globally has sent fertilizer prices skyrocketing with energy, seed, and financing costs for farmers also following suit. Input prices increased 20-30% for U.S. farmers in just one year as Brazil and others scowered the global market for alternative sources of supply. Global fertilizer prices remain firm and/or continuing on an upward trend.

Source: Farmdoc Daily

On the flip side of rising fertilizer prices, agricultural commodity prices have generally offset these rising input costs with corn, soybeans, and wheat prices all hitting 8-year highs in the past year. A relatively favorable growing season for much of the corn belt meant strong net farm incomes across the United States. Prices for agricultural commodities however have begun to fall off recently as the world has begun to adjust grain and input risk premiums to discount expected war outcomes with the war at a seemingly painful stalemate.

Globally, Ukraine supplies the world with 30% of the world’s sunflower and its byproducts (oil and meal). It is also a significant producer of corn, wheat, barley, and rapeseed. The conflict has brought about many uncertainties about whether the fields in Ukraine will be turned into battlefields or if they can produce a crop, will there be open ports for them to take their harvest to for export to global markets. Speculation about the war’s impacts on agriculture production are ongoing; however, if the COVID pandemic and Russia-Ukrainian war have taught us anything, it’s that regardless of what is happening in the world and whether there is war or peace, people still need to eat.

Energy and Financial Markets

Investors have been riding a wave of economic turmoil throughout the last year as the Russian ruble tumbled early on against the US Dollar and then climbed the mountain upward as capital controls and petrodollars came in. The ruble began to sell off once again when US and EU energy sanctions threatened a stranglehold on Russia’s critically important energy and gas business. Crude oil has been volatile as a result of the war with the oil price peaking at $128 last March after the Russian invasion began. Importantly, Russia is Europe’s largest oil exporter and although sanctions have been placed on Russia from the West, Russia has been able to re-direct most of its oil sales to China, India, and Southeast Asia. Natural Gas has been subject to similar turmoil as Europe was one of the main customers of Russian natural gas through the Nord stream gas pipeline system. Europe imports 83% of its natural gas and the war has brought about additional sanctions on Russian gas imports impacting the price European consumers pay for heat and energy. Europe has been forced to find new import partners such as the U.S., Qatar, Nigeria, Norway, and Algeria to keep people’s homes heated and the lights on.


A stock market repricing for a looming recession or economic slowdown and the Federal Reserve’s ongoing fight against inflation have eaten up investors’ returns over the last year.  However, there are sectors of financial markets that have profited from the Russian-Ukrainian conflict. Aerospace and defense stocks are up 11% in past year according to a subindex of the S&P 500. Commodities and raw materials have also remained strong as both sellers of agricultural products and energy commodities benefitted from higher prices and the uncertainties about a region that produces 14% of the world’s energy (Russia) and is a leader in sunflower oil, corn, and wheat production (Ukraine). Price pressures and volatility will remain in global commodity markets until the conflict is resolved. Amundi, Europe’s largest asset manager, says the probability of a long, drawn out war is up to 30%.

Source: WSJ

Global investors have been adjusting their strategic asset allocations for these geopolitical uncertainties and attempting to benefit from strong commodities and defense stocks. The uncertainty surrounding how the U.S. will respond if Russia deploys tactic nukes has some speculating around domestic defense stocks.  Some also believe military spending may be in a secular uptrend as U.S. munitions and defense equipment inventories have been depleted and the White House begins saber rattling against the Chinese.  The military industrial complex will likely adopt Rahm Emanuel’s approach by “never letting a serious crisis go to waste” to push their military spending agendas.  For those looking to go long a secular defense spending spree the iShares U.S. Aerospace and Defense ETF (ITA) has a low expense ratio of 0.39% with concentrated exposure in defense companies such as Raytheon (21.4%), Lockheed Martin Corp (16.14%), and Boeing Co (7.42%) among others. ITA is not cheap; however, as it trades at 24 times projected 2023 net earnings with a dividend yield of 1.4%.   For more a narrow, internationally focused play, BAE systems (BAESY), has experienced strong growth over the past year as Europe’s leading defense contractor.  BAESY trades at a more modest 18 times trailing earnings and yields 3.0%.  Generally, the stock has benefitted from higher military spending which doesn’t seem like it will be tapering off anytime soon.

How the Russia-Ukrainian war will end is still highly uncertain; however, it is clear that sadly global markets will be actively repricing its extended effects long after the last solider leaves the battlefield.