To The Moon

No one has an idea what would break if the Fed raised the interest rate too fast. Seeing stocks being sold down in the past one year was not a concern because shareholders who have greater financial resources are better equipped to handle such volatility. But when innocent depositors get hurt, that's not acceptable.

Despite the US government stepping in quick to make sure depositors of Silicon Valley Bank and Signature Bank are getting most of their money back, the fear of a banking crisis has not subsided.

Bank stocks are still getting hammered. This is because people are expecting more banks to fail and the thought of this issue are spooking investors.

To be clear, the depositors are getting their money back but not the shareholders or even the bondholders of the banks. Shareholders of Silicon Valley Bank would get zilch. In fact, its UK arm has been sold to HSBC for a mere 1 GBP. Any further sale will be heavily discounted, if they occur at all.

It's understandable that shareholders are selling their bank stocks as it's a survival instinct kicking in.

Besides the stock market, the price movements in other assets are telling us that 'money is scared'.

The Vanguard Total Bond Market ETF (BND), the largest bond ETF, has risen by 2% in a matter of days. This is atypical since bond prices are expected to decline with an anticipated increase in interest rates, given the inverse relationship.

When stock prices drop and bond prices rise, it often indicates that investors are seeking safety. This can lead to a sell-off in stocks as investors shift their funds to the perceived safety of bonds, which offer principal guarantees at maturity.

Investors are also diversifying their investments by turning to alternative stores of value in order to hedge against the US Dollar and the financial system.

This trend is reflected in the recent weakening of the US Dollar and the concurrent surge in assets such as gold, silver, and cryptocurrency, which have long been viewed as alternative forms of currency.

The current market conditions are clearly demonstrating this shift in investment strategy. The US Dollar Index has decreased by nearly 2% in the past five days, while the largest gold ETF, SPDR Gold Trust (GLD), has seen a 4% increase in value. Even silver, which is sometimes referred to as "poor man's gold," has experienced a 5% increase, as evidenced by the iShares Silver Trust (SLV).

Cryptocurrency has experienced even more dramatic growth, with Bitcoin experiencing a staggering 19% increase in value over the past five days.

Recent market movements indicate that interest rate risk may not be the primary factor driving asset prices at present. Instead, concerns about the stability of the financial system are influencing the investment decisions.

Although I anticipate that more banks may experience failures, I am confident that the financial system will remain intact. Given the government's awareness of the potential risks and the crucial role of the banking industry, I expect them to intervene proactively and effectively, as they have done with the first two troubled banks.

As a result, there may be some attractive opportunities to invest in bank stocks that are likely to weather this episode.

To identify the stronger banks, it's important to assess their capital ratios after adjusting for unrealized losses. The chart below provides an example:

Banks with a smaller decline in their capital ratio are generally considered more resilient. In this chart, JP Morgan (JPM), Citi (C), and M&T Bank (MTB) appear to be among the most resilient banks.