The Jobs Report in the Shadow of SVB's Collapse | The Daily Peel | 3/13/23

Mar 13, 2023 | Peel #417

Market Snapshot

Happy Monday, apes.

Good morning to everyone except the management team of Silicon Valley Bank. You guys stink, and my stocks hate you.

Anyway, we’re all aware that the collapse of SVB is basically the only story that matters to Mr. Market right now. JPow just got a lot more nervous for next week’s FOMC meeting, and every founder and VC on Earth is having heart palpitations. Can’t wait to talk about it all below.

But life goes on. Amid the chaos of Friday, equity markets managed to hold up decently well. We got a spike to nearly 25 in the VIX, while the major U.S. indices all sank around 1-2% in tandem. Treasury yields absolutely plummeted as investors piled into safety before the weekend, with the 2-year going from +5% to sub-4.6% in less than 48 hours. Wild.

Let’s get into it.

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Banana Bits

• SVB was saved by the bell as regulators set up a full backstop to the bank’s deposits this weekend
• Another bank bites the dust while First Republic tries to pinky promise clients that the bank does, in fact, have bank
• California Rep Mark Tokano knows how to get votes as he pushes forward his bill to reduce the workweek to 4 days to “increase the happiness of humankind”
• Packy McCormick went full psycho mode on this 12,000-word book about Internet Computer, and we’re loving it

Macro Monkey Says

Much Ado About Nothing

Does anyone even care about this? Scroll down to find the SVB coverage for today (with plenty more to come). But hey, if you’re still here, let’s talk jobs for a hot minute.

At the beginning of last week, everyone was unbelievably hyped for Friday’s jobs report. This hype only grew when JPow basically slapped Mr. Market in the face and said, “the next rate hike will depend almost exclusively on this jobs report” during his testimony.

And then the 16th-largest bank in the United States collapsed, decimating the financial sector, startup ecosystem, and markets as a whole for the day (at least).

Definitely isn’t wild to assume that this collapse might change JPow’s game plan, but we gotta take a look at what he told us would be the most important part of the week.

In February, the United States economy added 311,000 jobs. Big swing and a miss for economists who expected the nation to add 205,000 for the period, off by about 50% this time around. So, despite the staunch slowdown from January’s revised net job gains of 504k, this last month was still a sharp surprise.

Meanwhile, the unemployment rate actually grew from 3.4% to 3.6%. That’s exactly what JPow wants to see, although the uptick remains at a near half-century low.

All in all, Friday’s report was close to exactly what we wanted to see. Job growth is strong, maybe even still too strong, yet the rising unemployment rate shows that the labor force is growing, meaning that the supply of labor is on the rise.

Now that’s what we want to see. For Powell and the FOMC, they ideally would’ve hoped for lower growth numbers, but the drastic fall from January’s explosive reading should be good enough for the boy.

Considering SVB has—to use the technical term—f*cked all our sh*t up, the market’s reaction is a lot tougher to read. Still, the implied probabilities for the next rate move have shifted back to a majority expectation for a 25 bps hike after swinging 70% odds to a 50 bps jump earlier this week.

Now is where I’d talk about how the market might react to the report and upcoming FOMC meeting, but actually, zero human beings on Earth care now that SVB has shot itself in the face. The point is there was no data in the report to support a shift back to 50 bps hikes, not that anyone cares.

What's Ripe

Volatility Index ($VIX) ↑ 13.98% ↑

• I mean, yeah, this was an obvious one. As SVB goes down, volatility does the exact opposite, as if the two were on a seesaw. The collapse of SVB has given us one thing to be certain about: uncertainty.
• That’s really what the VIX and volatility in general measure—uncertainty. But, the VIX actually measures options-implied expected volatility over the next 30 days. As some major event, like, I don’t know, the collapse of a financial and technology institution, occurs, traders place new trades on indexes and other kinds of options to hedge new and existing bets. This risk-rebalancing caused the spike we saw Friday.
• Despite all this, the S&P is only down around 3.3% since closing Wednesday. That’ll change today, and we sure don’t know which direction, but we do know it’ll be a fun ride (as long as you don’t work at SVB, of course).

JP Morgan Chase ($JPM) ↑ 2.54% ↑

• Now, to turn our attention to a real bank with (seemingly) competent risk management, JP Morgan had a solid say on Friday.
• The largest bank in the United States is sitting pretty as a pile of rubble swells beneath it. Speculations were running amuck this weekend that Dimon & Co. might take over SVB, but it’s clear that’s not the case now. Investors likely saw the collapse of SVB and subsequent tanking of the regional banking sector and decided to rotate to JPM, a real company with a “fortress balance sheet.”
• That fortress is looking even more fortress-y now as inevitable fears abound with the far-too-fresh memory of 2008 in mind. Regulators appear to have the situation under control (for now), so fingers crossed!

What's Rotten

Signature Bank ($SBNY) ↓ 22.87% ↓

• Signature Bank saw how much fun SVB was having with all the attention it’s getting and decided to follow in its footsteps. Late Sunday evening, regulators announced they’d be closing this bank down too.
• Signature was facing the onset of a run of its own on Friday, and fingers crossed we don’t go full 2008-again, closing the bank down to stem a spreading crisis.
• Fortunately, regulators have announced that all depositors at Signature (and SVB) will be made fully whole and have access to those deposits today through an emergency facility spun up by the Fed and treasury. And no, none of your tax dollars are being used (allegedly).

Docusign ($DOCU) ↓ 22.85% ↓

• Contrary to popular belief, there actually is more going on in the world than the collapse of SVB. Although, Docusign sure wishes there wasn’t.
• Shares in the electronic signature/document management company crashed following the firm’s latest earnings report, with margins facing heavy pressure as the firm’s absolute and utter monopoly shrinks now that people are going back into the office.
• Last quarter wasn’t even that bad. EPS and sales both topped guesstimates, but contracting net margins and Prozac-inducing guidance for the year put shares on blast. By close, the company had eviscerated over 1/5th of its market cap. Still, at least they’re not SVB.

Data Peel

US economy added 311,000 jobs in February. Unemployment rate rose to 3.6%

Source

Thought Banana

Banking On A Crisis

Yeah, that seems about right for SVB Financial.

Everything markets-related over at least the past year has been about two things: inflation and interest rates. JPow came out earlier in the week and literally laid it out for us in the most plain English possible saying that the next rate decision will depend heavily on this past Friday’s jobs report. And no one is talking about it.

If you’ve been conscious at all over the last 100 hours or so, you know exactly why. Right now, we are witnessing the second-largest bank failure in United States history. Everyone is talking about it. No like literally look at what my mom texted me:

She teaches 4th grade, by the way.

Now, if you go on FinTwit, there are approximately 5 billion different explanations of what happened at SVB that led to the collapse. Rather than a 42-tweet thread, let’s sum up the important parts in 6 bullets:

• Deposits exploded, more than tripling in under a decade and doubling from March 2020 - March 2021 alone
• Banks view deposits as a cheap source of financing, so they had to do something with them to make $
• SVB invested those deposits in treasuries and MBSs, with a major over-allocation to long-term, fixed-rate notes
• Rates rising forced customers to withdraw cash at unprecedented levels, particularly because SVB’s clients work in the f*cked-up tech / VC industry
• To meet deposits, they had to sell those treasuries and MBSs at a $1.8bn loss to meet demand from customers to reclaim their deposits
• That loss triggered investors and customers to think there was a serious liquidity problem, causing a classic run on the bank to the tune of >20% of all deposits

That’s pretty much it. Now, we could get a lot more specific with it, but for today let’s focus on the implications.

Throughout U.S. history, bank failures have been all too common, so common they even made a movie about one after the Great Depression. In the past hundred years, however, regulations on what banks can and cannot do with their deposit base, among other things, have absolutely exploded. Laws and frameworks like Basel III, Dodd-Frank, capital ratio requirements, etc. *ideally* are designed to prevent these things. But, as of now, it looks like there are basically two things that went wrong:

• SVB overallocated its deposit base (which requires immediate liquidity) in long-dated, fixed-rate (+10-year, 1.56% on avg) MBSs and treasuries and did not mark some of those asset values to market (bc they didn’t have to)
• JPow’s rate hikes not only f*cked the value of those assets but also froze dealmaking in VC, causing companies and individual clients to pull funds from their bank accounts at levels that SVB had not modeled for

Now, you’re gonna see a lot more people calling for additional regulation in the banking sector. All those Socrates-wannabes on Twitter that were epidemiology, crypto, and macro experts over the last few years are now getting their weekend PhDs in banking regulation, so be on the lookout.

As of Sunday afternoon (5:01 pm), the only major developments have been Treasury Secretary Janet Yellen’s confirmation (allegedly) that they’re not gonna run any bailouts (allegedly).

There’s a lot that is happening and could happen, but damn, this is gonna suck for employees and employees at companies whose payroll is run out of SVB. RIP to all of them, but we’re gonna be talking about this one for a while. We’ll keep you updated; for now, enjoy the irony-filled list below that confirms we live in a simulation:

• Chief Administration Officer Joseph Gentile was formerly the CFO of Lehman
• SVB had no Chief Risk Officer from April 2022 - January 2023 (as the VC market imploded)
• CEO Greg Becker sold $3.6mn in shares two weeks ago, his first sale in over a year but one that did come as part of a pre-arranged sale
• Writers on Seeking Alpha predicted the collapse a few months ago while regulators apparently worked on their coloring books

The big question: Well, what the hell happens now? How damaging will the collapse of SVB be to the startup ecosystem? How will regulations change? Anyone going to jail? Anyone getting their money back??

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Happy Investing,

Patrick & The Daily Peel Team

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