It's official. Silicon Valley Bank has a collapse. The question now is how deep is that contagion going to spread? And what does this mean for the Federal Reserve Let's talk first about what just happened. Then we'll get into it this morning.

I Broke down the financials of Silicon Valley Bank right after I Broke down the financials of Silvergate yesterday where we showed that the underlying fundamentals of banks aren't as good as they seem. And that's what's raising a lot of eyebrows right now. Because wait a minute if banks are being tested based on their balance sheets. But what's actually on bank balance sheets are just toxic assets.

What happens? Well, you potentially get bank failure and that's what happened today. This is the biggest bank of failure since the Great Recession This is the second largest bank failure ever. And silver or Silicon Valley Bank rather could not even find somebody to bail them out. Not the government, not another bank.

Nobody wanted to touch them and this could be the beginning of a financial crisis. So let's listen to some of the things that happened first. This is a bank that told us they had about 209 billion dollars in assets, but we don't actually know the true market value of those assets. today.

if those assets are worth 20 less, the bank is upside down because they have about 175.4 billion in deposit liabilities. Remember when you hear that a bank has 175 billion dollars in deposits, it doesn't mean they have that cash sitting around. They have deposit liabilities. which means they owe that money to people who want to go to the bank and get cash.

But if the bank has invested that into commercial mortgage-backed Securities residential mortgage-backed Securities or even just Bonds in general, but what happens in a rising interest rate environment? Unfortunately, the value of your assets plummets. and as I tweeted about this morning, this is why you want to follow me on Twitter at realmeet Kevin My suspicion was that any kind of lines of credit or lending available to uh, this particular bank would be Frozen and it looks like, at least according to a piece, by Zero Hedge 65 billion dollars of the assets that uh Silicon Valley Bank thought they had were in the form of a credit line. Well, my anticipation was that that credit line would very quickly be frozen in the event of stress. and that's likely what happened and likely what led to the failure of the bank.

So of course, more details were coming out. The question now is what does this mean for the broader Market Well, first of all, it's worth noting that Silvergate did business with 44 of startups coming out of Silicon Valley That's a lot. That's almost half of all startups in Silicon Valley One of the big Winners was actually Sunrun who was funded by uh Silicon Valley Uh bank. Now keep in mind this is not to be confused with Silvergate.

Silvergate was the crypto Community Bank much smaller that ended up failing and liquidating just the day prior and so it's making you wonder: are these the beginning of the Domino chips starting to fall? Now what's interesting is uh, we we saw this morning a lot of uh startup CEOs be interviewed by Bloomberg live and they were saying they were leaving up to 250 000 at the bank, withdrawing the rest so that way they could continue to pay their bills and payroll and whatever else you're welcome to head out and open up guys. Uh, the the problem with that is and I was advocating for take everything out because the problem with that is what happens if you leave 250k in goes into FDIC receivership. you're potentially waiting months if not longer to be able to access that Capital Now the FDIC thinks they can provide smooth access to Capital Much sooner we'll see what is the FDIC done? well. The FDIC has just created right after California shut the doors to the bank today to prevent the bank run that was happening.

It was so bad that at one point you had police apparently called to certain Bank branches because people were aggressively looking to withdraw their funds. Uh, literal Bank Run here. But anyway, the FDIC created that was per Bloomberg as well. the FDIC apparently created a new entity called a Deposit Insurance National Bank of Santa Clara.

They argue that they should be able to have normal banking operations open again on Monday for people who have deposits of under 250 000 dollars, customers with accounts in excess of 250 000 should immediately contact the FDIC the number is 1-866-799-0959 because you're going to receive an uninsured uh receivership certificate that says that you have a claim that when this bank's assets start getting liquidated, you have a claim to potential dividends in the future. So that way you could get some of potentially your uninsured deposits back. But the big signal here is a lot of other people are now worried what's going to happen to Banks like First Republic Pac West their stocks are falling. There's some smaller Banks like a capital and Revolt that are seeing massive inflows, but these are also smaller banking startups.

Personally, I would be only moving my money into tier one Banks like a JP Morgan Right now, it's still a bank, You still have to trust the banking system potentially to some degree, or you just go all crypto I'd probably go for for a tier one bank for now, but we don't know how big this contagion is going to go and that that is the big question now. and that's where I think we get to the FED First of all, why does this happen again? Higher rates, higher rates lead, uh, existing bond yields to be worth less. average bond yield at Silver or a Silicon Valley Bank was 1.9 on on their assets. That essentially means when the risk-free rate is four percent the value of their existing bonds plummet.

So that's understandable when we get higher for longer from the fed. You squeeze more of these Banks to the brink because they're fighting for deposits. The banks want your deposits. But think about this: If you're a small Regional Bank and you've got somebody who's got, let's say, a 20 million dollar bank account There you want, you're going to demand a rate a yield On that.

Well, the more of a yield you demand, the more pressure you put on the bank to essentially provide the money they're receiving from. Let's say, the Federal Reserve and Repo markets to you. And if you don't, you threaten to withdraw your money and go to somebody else who will give you a yield. Robin Hood's giving five percent you've got and they're offering.

You know what? up to I Think it's a million dollars in FDIC Insurance What they're doing is they're taking your money and putting it into 4 or different smaller Banks Which then you wonder, hey, could one-fourth of assets potentially at Robinhood be a failure if one of the four Robin Hood Banks goes bankrupt? We don't know. Be careful with everything. But the point is, as there's a fight for yield, more pressure goes on to banking margins. Margins tighten.

It's very simple as there's competition margins tighten. That's why you generally want to invest in stocks that have a moat. think Apple for example, has a big moat. Very large margins They can see margins collapse and still be profitable.

A bank, especially a smaller one? Not necessarily so. Where do we get to? Contagion Well, contagion comes from How good are the Fed's stress tests? The most important thing to know is that only the largest eight Banks like JPM Bank of America City Wells Fargo Goldman Sachs Only the largest eight Financial St Institutions in America get the strongest stress tests. All banks get stress tested, but the largest eight get the largest and heaviest, most scrutinized stress tests. And uh, that? that's why I think you want to be associated with a tier one bank right now? Uh, like one of those that I just mentioned.

But hire for longer is the big question. This is where we want to wrap this. So what does this mean for the FED In my opinion, this is the moment where the FED should really heavily consider. Let's pause: we don't have runaway inflation from the Jobs report.

We don't know what the CPI report's going to show, but if we show, we don't have a wage price spiral via the Jobs report today, which we did watch my Jobs report video this morning and we can prove that we don't have runaway inflation. Yes, it'll be sticky. Yes, it'll be higher for longer, but that's fine. We could be higher for from for where we are right now.

We could always reactivate hikes, But let the effects of where rates are now now trickle through the market. That's what the Market's already pricing in the Market's now suggesting. Terminal rate of 5.3 down from 5.65 just two days ago. Big drop over here in expectations for where the Fed's going to go markets now trying to start pricing it.

Um, higher likelihood of 25 versus 50. personally, I think 50 is way off the table. We're looking at likely 25, but more of a skew towards zero than 25 in my opinion. But the question is, how toxic are all of the other bank assets? If JP Morgan is accurate and they say they only have uh, 47 billion dollars of unrealized losses? Fine, maybe that's doable.

Maybe that can pass Fed stress tests, but what if their numbers are also wrong? That is where we could really see a larger scale Financial contagion. So this is where we really want to be somewhere we really want to be paying attention to not only what the FED is doing, what banks are doing, because if we see more Banks raise Capital That could be a red flag if we see the FED potentially start adjusting rates. Maybe as Tristan you were mentioning this morning Tristan's holding the camera here mentioning this morning. hey, the FED might adjust repo rates if we see an adjustment of repo rates.

Maybe that's a sign. The banking system needs a lot more liquidity than we previously thought. Now at least we have money in the repo facilities to provide that liquidity. But the question is what is the Fed going to do next? My belief is wait for CPI and then the next Fed meeting is going to be a fascinatingly interesting meeting.

But what we want to take away right now is Silicon Valley Bank has failed. Silvergate has liquidated. Uh, this is hopefully an isolated incident and not systemic, but I am worried that there's going to be a lot more of this and it's a concern. So if you want to learn more about my perspectives on building your wealth, take advantage of the Saint Patty's Day coupon.

link down below and we'll see in the next one. Thanks! Bye.