The ravages of Inflation…
“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”
Democrat political strategist James Carville made that observation in reaction to a bond market revolt in 1994 against the profligate spending of the then-President Bill Clinton. Thankfully for the new president and for the country, Clinton acquiesced to the bond market and thereafter pursued reasonable budgets that helped spur tremendous prosperity into the last half of the 1990s.
Well, the current bond market revolt against Joe Biden makes that 1994 version look tame by comparison. Even worse, this present toxic stagflation combination — soaring inflation/interest rates plus a troubled growth trajectory – produces untold pain throughout the economy, including new risks for the banking sector.
Silicon Valley Bank failed last week and was seized by state regulators in California and placed into the control of federal regulators. SVB is the 16th largest bank in America and the largest bank collapse since the Great Recession of 2008-09.
Some of the predicaments of SVB are peculiar to that institution, especially its dangerous, concentrated dependence on the Tech space. Looking at the broad economy, Biden’s economic crisis grips consumers and sends major industrial metrics deeply into recession territory, such as Purchasing Managers Indices.
Tech Troubles for Silicon Valley Bank
But even as those barometers tank, the pain has been more acute in Tech. The sector thrived like never before during the lockdowns as Americans were forced into lives dominated by screens and online shopping. These unscientific and ineffective lockdowns were, not surprisingly, reinforced by the very same Tech oligopolies reaping the benefits of the repression. For example, Google, Facebook, and Twitter all censored and diminished content that was skeptical of these tyrannical lockdowns and mandates.
But now, with the economy decelerating and Biden’s inflation biting, Tech faces a very different landscape. Since the beginning of 2022, over 150,000 Tech workers have lost their jobs, and the pace of the layoffs currently accelerates. Not surprisingly, the stocks of Big Tech have similarly flailed, as shown here:
Amid this pain, SVB depended too much on one sector, clearly. As the carnage spread in Tech, so too did the withdrawals from SVB customers. These once-flush individuals and firms scrambled for cash and created material stress upon SVB. But, that stress could have been manageable, except for the additional pain of the bank’s bond portfolio.
By Steve Cortes