The Pulverizing Power Of Panic

Yesterday a bank failed. Silicon Valley Bank, one of the most prominent lenders to the tech industry and the 16th largest bank in the country, was shut down by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Company took over operations as the bank’s receiver. The collapse of SVB is the second largest bank failure in U.S. history.

Bank failures are never pretty. They often recall Ernest Hemingway’s famous observation that there are two ways to go bankrupt: “gradually, and then suddenly.” Banks operate on a foundation of trust in their stability and integrity, and when that foundation is undercut, failure can occur with breathtaking speed. That appears to be what happened with SVB.

As an interesting CNBC article recounts, SVB’s downfall took less than two days. On Wednesday, the bank advised investors that it needed to raise $2.5 billion. At that point, the bank was apparently still reasonably well capitalized; at the end of December, it reported $209 billion in assets and $175 billion in deposits. But underlying issues with the American economy had caused some start-up depositors to withdraw their assets to stay afloat, the bank found itself short of funds and was forced to sell the bonds it had available for sale at a loss, and when it announced it needed to raise additional funds the blood was in the water. The bank’s stock price plummeted, the tech investment community spread the word that deposits should be removed from the bank, and customers withdrew an astonishing $42 billion in less than 48 hours, leaving the bank with a negative cash balance of $958 million. With the bank insolvent and unable to find a buyer, regulators stepped in.

The CNBC article quotes one fintech investor as saying that the failure of SVB was “a hysteria-induced bank run” caused by venture capital firms. That’s often what happens–and the sad thing is that the people who panic, withdraw their funds, and precipitate bank failures usually end up safe, whereas the people who leave their money in the bank and trust that all is well often end up sorry. In the case of SVB, the people who kept their deposits in the bank will now have to deal with the FDIC, which insures deposits up to $250,000 per depositor. If you’re someone who had more than $250,000 on deposit at SVB, you might well find yourself out of luck.

For all of our thin veneer of civilization and sophistication, people are still prone to panic–especially panic about money. Let’s all hope that the failure of SVB, coming on the heels of cryptocurrency collapses and other recent negative financial developments, doesn’t provoke a stampede.

Risky Business

2022 hasn’t exactly been a banner year for cryptocurrency. In the spring, the crypto markets experienced a spectacular crash, and last week a leading crypto exchange platform, FTX, slid abruptly into bankruptcy amid questions about its operations, liquidity, and use of funds. The SEC and Department of Justice are reportedly investigating whether the company’s sudden collapse involved criminal activity or violations of the federal securities laws.

The demise of FTX was so quick and catastrophic that the company’s founder and CEO, Sam Bankman-Fried, is reported to have lost 94 percent of his net worth in a single day. The rise and sudden fall of FTX may well rank right up there with Enron in the riches-to-rags business bust category. But there’s an even more ironic twist to the FTX failure: only a few months ago, during the 2022 Super Bowl, FTX ran a commercial where a skeptical Larry David, with a record of rejecting inventions like the wheel and the light bulb, also rejects the idea of investing with FTX, which is presented as “a safe and easy way to get into crypto.”

As is always the case when a high-flying entity suddenly crashes and burns, there are ripple effects from FTX’s spectacular failure. For example, the Ontario Teachers Pension Plan, the third-largest pension plan in Canada, disclosed last week that it had invested $95 million in FTX entities. (Fortunately for Ontario teachers, the investment apparently represents only a tiny fraction of the money invested by the Plan.) Other entities also had investments in FTX. One of them, a venture capital firm called Sequoia Capital, announced that it will mark down its $214 million investment in FTX to zero. Sequoia told its investors: “We are in the business of taking risk,” and “[s]ome investments will surprise to the upside, and some will surprise to the downside.”

Sequoia’s observation is, of course, true–if the investor understands, as Sequoia did, that cryptocurrency is a risky investment. The problem is that crypto advocates keep trying to present it as something else, as FTX tried to do with that in retrospect hilarious Larry David commercial. If the everyday investor is paying attention, the FTX collapse will make it harder to sell cryptocurrency as the next best thing to the light bulb. And we might want to check to make sure that our pension plans or mutual funds have learned that lesson, too.

At The Far End Of The Comparative Pain Scale

If you’ve ever had any kind of painful injury, a doctor probably asked you to assess the extent of your pain using a smiley face scale like the one shown above. Often, quantifying pain is difficult, and you may have mulled over whether your condition came in at a four or a five on the scale.

Sometimes, though, the pain scale assessment is easy. For example, right now pretty much everyone involved in the investment world is at 10–suffering through the worst possible pain with the reddest, most anguished non-smiley face. In fact, if there were an 11 on the pain scale, like the speakers on This Is Spinal Tap, the current market conditions would qualify.

Words don’t adequately describe just how awful the investment markets are right now. Across the board, every form of investment is getting creamed. The S&P 500 has fallen more than 20 percent since January, moving into “bear market” territory, and bond prices have “tanked.” Cryptocurrencies have gotten crushed. Even good old cash in the bank isn’t safe, as inflation rates continue to climb–and the New York Times reports that the May inflation results suggest that the inflation rate may be “accelerating.”

If it is any consolation, everyone is getting pulverized. The Bloomberg Billionaires Index shows that the world’s 500 richest people have lost $1.4 trillion this year. It may make you feel better to know that Mark Zuckerberg, Elon Musk, and Jeff Bezos have all reportedly lost more than $60 billion this year. Of course, even those staggering losses leave them plenty of money to fall back on–which isn’t the case for most of the people who are investors.

If you are a retiree or someone who is getting close to retirement who sees the value of the portfolio and savings that you are counting on to fund your retirement years falling every day, you wonder what to do. There doesn’t appear to be any safe harbor in any of the standard, or even not-so-standard, investment options. With no viable options, most of us will just try to ride out this intensely painful period, avoid making decisions that lock in the impact of the current downturn, try not to constantly check the market indices, and hope that the needle on the pain scale starts to move in a more favorable direction.

The Great Crypto Crash

I frankly don’t get the whole cryptocurrency concept. I don’t understand how it works, or how it can have value. It seems like the most volatile, unpredictable possible investment. And the fact that it is the preferred form of ransomware payment required by computer hackers doesn’t exactly give it a veneer of legitimacy, security, or credibility, either.

In short, I’ve never invested in a cryptocurrency, and I can’t believe that will ever change. After this past week, I’m glad I’ve taken that conservative stance. To be sure, the stock market has been taking a beating recently–the S&P 500 is now down 18 percent since the end of December, and the Dow is down 13 percent over that same time period–but that is chump change compared to what has just happened in the crypto world. MarketWatch described last week as a “bloodbath” for cryptocurrency, with multiple different crypto currencies losing huge chunks of their market value. One crypto trading firm said last week represents “the largest wealth destruction event in the short history of the crypto markets.”

The abrupt valuation changes for some of the crypto firms is truly shocking. MarketWatch reports that one cryptocurrency, LUNA, was trading at about $80 in early May, only to fall “nearly to zero.” Another cryptocurrency that had been pegged at one to one with the U.S. dollar fell to as low as six cents. In all, it is estimated that the crypto market lost $400 billion in value over just seven days. Those are sudden and catastrophic losses on the same scale as the stock market crash in 1929. Imagine being one of the people who bought a cryptocurrency at $80, only to see their investment vanish within a week!

The crypto market has had some tough times before, but has rebounded. Will it bounce back this time–or will people begin to wonder whether getting into crypto is just too risky? One of the reasons the American stock market keeps its value, even during difficult economic times like the present, is that millions of American workers have a portion of their paychecks invested in the market through their employers’ 401k plans. That constant infusion of money is a nice little support mechanism that the crypto market just doesn’t have. When the big players decide that it’s time to get out of crypto–as they apparently did this past week–there is no safety net to absorb the shock.

Bitcon

There’s been a lot of buzz about bitcoin, and other “cryptocurrencies,” lately.  The people who bought bitcoin early apparently have made outlandish amounts of money, and now the word is out — and a number of people have been trading in hopes that they, too, might strike it rich in the trading markets.

Calling the trading price of bitcoin volatile is like saying Donald Trump is a tad outspoken.  The price seems to yo-yo back and forth for no evident, real-world rhyme or reason — of course, any real-world event other than people investing in bitcoin or selling bitcoin.  Today, for example, the price of bitcoin fell more than 10 percent.  The linked article has this helpful information:  “Additional market data shows that other cryptocurrencies, including nearly all of the top-20 coins by total capitalization, are down amid the day’s trade. Among the worst performers are IOTA, which is down more than 18% in the past 24 hours, and monero, which has fallen nearly 15% in the same period, according to CoinMarketCap.”  No one seems to have any explanation for why all of the cryptocurrencies took a beating today.

And that’s one reason why I won’t be investing in bitcoin.  For all I know, it might be the next big thing and a crucial part of the coming digital economy.  But, if people can’t provide any reason whatsoever for its price movement, then it sure seems more like outright gambling and less like a true investment.  That, and the fact that I can’t understand precisely what bitcoin is, no matter how many times I read explanations of it, makes bitcoin seem more like a bitcon — a hyperspeculative bubble that has been foisted upon people who hope to make money and who are too embarrassed to admit that they don’t understand what cryptocurrency really is.  And, of course, the late investors in these matters always seem to be the ones who are left holding the bag when the “smart money” exits.

People who are considering getting into bitcoin might do well to remember the tale of the Emperor’s new clothes.