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What in the world

Published on 15/03/2023

In the space of 2 or 3 days, most of the developed world went from having never heard of Silicon Valley Bank (SVB) to worrying about its ability to bring down the banking system (again).

Full disclosure, we at Upside have an account with SVB (UK branch), a decision to add them was made several years ago by our COO/CFO who had worked with them previously. They brought credibility to a startup in investors eyes, they helped with funding rounds, they might even allow lending to 'stock rich, liquidity poor' founders at the right stage. Their sales pitch was right over the plate for us. They didnt have much in the way of competition, Barclays, Natwest, HSBC (errr) bent themselves into pretzels to make life complicated for new businesses to setup accounts. "Every form in triplicate, 7 vials of blood and notarised copies of your mothers favourite dog".....I joke....sort of.

So it is little wonder the SVB had been doing so well, a real banking service to an unbanked area of the world. Startup tech businesses. Great model!

The problem as it became known was traditional. Its a mistake that's been made before and will (no doubt) be made again. There was nothing overtly evil in their operations, at worst it was greedy, but (at the time of writing) their is no allegement of wrongdoing, outside of extremely poor/negligent risk management. A classic bank run in the era of the digital is ---FAST----

So what does this change, or mean (if anything) - well below are some of our thoughts;

  1. Bank runs happen - they are a by product of the banking system. They will happen again.
  2. The argument that this wasnt a bail out - is incorrect, it was (in the US). Tax money is being used to pay for the losses incurred by the depositors. Sure that tax money comes from the banks, but if it wasnt being spent on SVB, then it could be used elsewhere. It is a bailout, just not of stockholders.
  3. All deposits are now guarenteed, in an unlimited fashion. This appears to be the case, but is also - is not true. The FDIC does not have the funds to cover much more than 1% of the current M2M losses on duration, so if this were to be tested in anger, deposit holders WILL be wiped out.
  4. The Fed will now cut rates. We do not think this is correct, but we do think it will slow and/or stop their tightening cycle. QT is paused with the new lending facility. The Fed might pause but retain the option to rehike once the "dust settles", we think this is unlikely. The speed of hikes is putting the system under pressure. Property funds are gating, banks are getting into trouble.....to keep hiking is, in our view, extremely dangerous/reckless. Does that mean we dont get another 25bps....no, we may well, but that will be it. We are in the end zone. Rates will be cut this year as the economy falls off a cliff.
  5. Crypto is back. Possibly, the existential argument for crypto is always strengthened by monetary and tradfi failures, but the regulatory headwinds have not abated, so the picture remains complex and volatile.
  6. Gold is likely to make a continued run to $3000 as money supply comes back online.

With SVB everything changed, yet somehow nothing changed.

Good luck.

Upside Technologies Limited
33 Broadwick Street

Company number: 11228711
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