Why A Macro View Is Useful In Investing!

The Silicon Valley Bank collapse is a lesson on what happens when you disregard macros

- Anand Tandon

Many market gurus have sounded knowledgeable by dissing macro investing. It is not uncommon to hear statements claiming that "bottom-up" stock buying is key to wealth creation and that if one were to worry about macro-views, one would never invest. The early weeks of March have brought home the perils of ignoring macros while investing with Silicon Valley Bank (SVB) suffering a run that needed government agencies to step in and backstop the bank to protect depositors. A few other banks and financial intermediaries also needed help. Let's attempt to take a simplified look at the cause of the collapse.

What happened at SVB?
On the liabilities side of SVB's balance sheet, one can see $122 billion of non-interest-bearing funds. These typically represent callable deposits and are short-term in nature. On the asset side, the bank has $29 billion of available-for-sale (AFS) securities and $88 billion of held-to-maturity (HTM) securities. As the nomenclature implies, AFS assets can be sold to meet short-term fund requirements and are marked-to-market. HTM assets are not marked-to-market and are held at cost - they also typically are longer duration. Selling a part of an HTM portfolio requires the entire holding to be marked-to-market. The bank was using short-term funds to invest/lend long-term - a classic case of asset-liability mismatch (ALM).

SVB operated in a niche segment - funding VCs and VC-backed companies. Its deposit base, too, was largely corporate funds from its clients, and only an estimated 7 per cent were truly retail deposits. Analysts estimate that around $152 billion of its deposits were higher than $250,000 (the limit beyond which deposits are not insured by the Federal Deposit Insurance Corporation (FDIC). The deposit base was extremely concentrated!