Tuesday, March 14, 2023

Banks, Bonds, and Bears: Time to Press the Panic Button?


The failure last week of Silicon Valley Bank (SVB), the second largest bank failure in U.S. history, left me with an eerie feeling of déjà vu.  It has troubling parallels to the chain of events that launched us into the Great Recession nearly sixteen years ago.  This is particularly unsettling since the government supposedly passed tighter regulations to ensure we had no repeat of that period of our recent history.

So what happened? 

SVB had significantly grown its deposits over the last year or so.  Ordinarily a bank can brag about that.  But SVB served a clientele that included many start-up tech companies that sometimes need to have ready access to their deposits for their everyday expenses, especially when their business income starts to drop.  And in case you haven’t noticed, the tech sector has been laying people off, even while other sectors of the economy continue to add to payrolls.  So with income dropping, the tech companies needed more of their deposited money back.

But like most any other bank, SVB had invested in bonds in order to make some profit from their depositors’ cash.  When the depositors came calling for their money, SVB had to start selling those bonds—at a loss—in order to cover the withdrawals.  The bank tried to raise money by other means, but when news of that leaked, it spooked other depositors into asking for their money back, even if they didn’t need it right away.  SVB couldn’t meet the demand, and this led to its failure.

I’ve said for years (since the Great Recession) that financial regulations are great for preventing the LAST recession.  That is, we examine what happened to cause the most recent downturn and then craft regulations to prevent it from happening again.  Unfortunately, the knuckleball that knocks the economy down typically comes out of left field, from something unanticipated.  But this was nothing but an old-fashion run on the bank, a 1930’s-type problem.  And yes, regulations are meant to prevent that, and there is the Federal Deposit Insurance Corporation (FDIC) to guarantee deposits.  But there are already murmurings about bank regulators failing at their job when it came to overseeing SVB’s operation.  There were said to be some red flags in SVB’s quarterly reporting leading up to last week’s events.  I’m sure there will be lots of finger-pointing in the weeks ahead.  And as for the FDIC insurance, that covers only $250,000 for each account.  These tech companies had millions of dollars on deposit.

I relate that story here to illustrate a couple of points relating to personal finance.

Banks are not the only entities invested in bonds.  Many, or perhaps even most investors in the stock market have some exposure to bonds.  A bond, simply put, is an IOU issued by a company or by a government.  You buy a bond for, say, $1000, with the understanding that you will be paid a certain percentage in interest while the “loan” is outstanding.  At the end of the term, you get the $1000 back.

The risks of a bond are mostly twofold: the company or government might “go under” and they either can’t pay you the interest they promised and/or they can’t even pay the loan back.  Or more commonly, the risk is that you tie up your money in a bond that is earning very low interest while newly issued bonds are promising much higher interest payments.  If you kept the bond until it matured (six months, one year, one decade, or even 30 years later, depending on the bond’s term) you would still get all your money back; you will have just not made as much in interest payments compared to what else was available.  But what if you needed the money earlier, before the bond matured?  In that case you would have to sell it on the secondary market, and who will want to purchase your older, low-interest bond when they can purchase a new one that pays out much more in interest?  If you are in a pinch and need the money quickly, you will have to sell the bond for less than it cost you, just to entice a buyer into taking it off your hands.  You would, of course, be losing money.  That is what happened to SVB.  Interest rates are going up currently; SVB was stuck with some lower-rate bonds and had to unload them at a loss to raise the cash to pay depositors.  They could not sustain the losses.

As an investor, you can buy individual bonds.  To mitigate the risk of default, invest in U.S. Treasury securities or in very stable, highly rated companies.  But you are still subject to the interest rate risk.  As the rule of thumb states, “When interest rates go up, bond prices go down.”

But you can also invest in bond funds, similar to stock funds.  These mutual funds hold the bonds of dozens or even hundreds of different governments and corporations.  This guards against the failure of any one company having too large an impact on the investor.  But bond funds are also subject to interest rate risk.  And the longer out the average maturity date is for that fund’s bonds, the more susceptible it is to interest rate risk and the resulting drop in the bonds’ value. 

Bonds have long been touted as a balance against the risk of owning stocks.  Interest due to lenders (holders of bonds) must be paid before dividends can be paid to stockholders, for example.  And bond prices are less volatile than stock prices and can provide a steady income stream.  Or so we are told.  Last year was a bloodbath for BOTH stock and bond funds.  This surprised some people, but it shouldn’t.  The same happened during the Great Recession. 

So now we face a potentially severe bear market.  Is the long-anticipated recession in our near future?  What should you do to protect yourself against it?  I have some thoughts on that….

First, check your bank account balances to ensure you are fully covered within the FDIC coverage limits.  If you have any questions, call your bank.  Yes, the President has said the FDIC will cover all SVB’s depositors for their full balances.  I’m sure that is to soothe the nerves of the public.  Don’t expect that it could do the same for every potential bank failure if the dominoes start to fall.  And unfortunately, this kind of extraordinary bailout (though the administration is loath to call it that) could encourage further risky behavior by some banks.

Second, don’t become desperate.  Panic begets panic.  If the money you need to pay bills is in the bank and fully insured, that should put you more at ease.  And if your investments in stocks and bonds are way down, again, don’t panic.  Realize it may get worse before it gets better because I expect a bear market to develop/continue.  Ideally, if you are retired or otherwise in a situation where you need to withdraw money from a 401(k) or IRA, you hopefully stowed at least some of it in a cash equivalent account, like a money market fund.  That way you don’t have to sell stocks or bonds after they’ve lost value in order to raise the needed cash.  You can afford to wait until they recover their value.

I’ve been saying for three years now that a recession is coming.  (I’ve GOT to be right one of these days!).  So I’ve kept a significant share of my retirement savings in a government money market fund.  The idea was that I would have that to draw from when stocks were down, PLUS I’d have some cash available to buy some of those greatly devalued stocks and bonds with the expectation they would go way up again.  That money market fund was basically making only pennies in interest for me but is suddenly making over 4% because interest rates are going up.  But now may be the time to pull money OUT of the account and buy some of the cheap stocks and bonds that will become available.  It’s counterintuitive, but that’s how the great investors succeed: they go against the crowd; they do the unexpected; they don’t panic.  It’s not a bad model to follow.

Everyone’s situation is different.  Consult a financial advisor for ideas for securing your own future.  If you are fortunate enough to be invested in a company-sponsored 401(k) plan, you likely have free access to an advisor.  It’s going to be a volatile market for a while, but that could portend some great opportunities for those positioned to take advantage of them.

Until next time,


“The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun.” Ecclesiastes 1:9

Thursday, March 9, 2023

An Idiopathic Persistent Singultus in the Economic System


What do holding your breath and swallowing seven times, taking a spoonful of sugar, and saying “pineapple” have in common?

According to the Farmers Almanac they are all supposed cures for hiccups. 

I’ll withhold judgement as to their effectiveness at curing mild cases of those rapid spasms of the diaphragm.  But what about those stubborn cases that seem to elude solution even by the medical profession?  Hiccups can be a lingering condition after brain surgery, for example.  And there have been people who suffered for decades of continuous hiccupping.

Known technically as idiopathic persistent singultus, hiccups seems to be one of those orphan medical conditions that has captured little attention from professionals.  But The Atlantic magazine recently highlighted this situation and told the delightful story of Ali Seifi, a neurointensivist at the University of Texas in San Antonio.   Challenged by a patient who questioned why human hearts can be transplanted successfully but there’s no solution for hiccups, Seifi set out to do some research.

I won’t belabor you with the details, but Dr. Seifi developed a simple device called the HiccAway and sold the first one in 2020 for $13.42.  A fairly modest price for a modern medical device, no?  He even appeared last year on Shark Tank and enticed Mark Cuban to invest a quarter million dollars into his venture.  To date, HiccAway has grossed over $1 million.

But lost in this medical/business success story is Dr. Luc Morris, a surgeon at the Memorial Sloan Kettering Cancer Center who specializes in tumors of the head and neck.  Almost twenty years ago, as a medical student, he described a cure for idiopathic persistent singultus he named supra-supramaximal inspiration”, or SSMI.  He even conducted a small-scale clinical trial and had a 100% success rate among those who were able to complete the SSMI method.

But aside from being published in a couple of obscure medical journals, Dr. Morris’s discovery didn’t receive much, if any, publicity; and the good doctor never explored further or conducted more extensive trials of SSMI.  Asked by a reporter why he didn’t do more with his discovery, he answered, “Well, you know, we got busy.  But also, how would we do a clinical trial?  Who would pay for it?  There’s no drug we can sell.  Nobody will invest the money and hire all the people and do all the regulatory paperwork, because there’s no money to be made.” (emphasis added)

So the availability of an effective cure for hiccups turned on whether the discoverer could make money from it?  Capitalism has its detractors, and I get that.  But this economic system rewards innovators monetarily, and like it or not we humans generally are motivated by greed and the desire for more money and what it can purchase.  It’s the “fallen” human condition.  Capitalism takes that and uses it to spur creativity and innovation, hopefully for the good of all.  If someone were to discover a cure for, say, Parkinson’s disease, the person likely would—and should—be handsomely rewarded.  I have no problem with that.  Maybe hiccups just doesn’t rate very highly as an affliction in the public’s mind.  Yet one doctor did monetize his cure for hiccups while another did not or could not.

Does money make that much difference in the world?  Does society miss out on some very good things because no one could make money from them?  What if YOU were in a situation where you could benefit the world in a very tangible way but it would actually cost you a modest amount of capital, and you knew you’d never be fully reimbursed for your effort and expense?   I’ll leave you to ponder that question.  Just know that money in and of itself is not bad; it is how we relate to it and let it impact our lives and relationships that tells the story for each person.

[Okay, you want the cure, right?  Here’s the SSMI method; it’s free, requires no accessories, and can be performed anywhere.  First, exhale completely, then inhale a deep breath.  Wait ten seconds, then—without exhaling—inhale a little more.  Wait another five seconds, then top up the breath again.  Finally, exhale.  Farewell idiopathic persistent singultus.  Wait a minute…didn’t I start this post by stating that holding your breath is an old folk remedy for curing hiccups?]

Until next time,


“For the love of money is a root of all kinds of evil.” I Timothy 6:10 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide.