To The Moon

One of the biggest stories this week is the liquidity risk issue at SVB, and here's a summary of the current situation for investors to consider.

SVB is a commercial bank that provides financial services to technology and life sciences start-ups, venture capital firms, private equity firms, and other emerging companies. Due to rumors of the bank being unable to pay its debts, SVB experienced a classic bank run where depositors simultaneously demanded withdrawals. The bankruptcy of SVB not only illustrates the tech industry's overexpansion under past loose conditions, but also draws investors' attention to the overall market's liquidity risks. Here are some companies with severe cash flow problems that investors should be aware of.

USDC Depeg

Due to the bankruptcy news, Circle, a stablecoin company in the crypto market, immediately experienced a price deviation with its USDC, and investors withdrew large amounts of funds for fear of being unable to withdraw their money if the bank collapsed. Circle then issued a statement saying that investors' assets were backed by a combination of 100% cash and US Treasuries, with most of the reserves held in the form of liquid US Treasury bonds, and that it could still redeem them at a 1-to-1 ratio using the US dollar as a regulated payment token. Currently, 77% ($32.4B) of USDC is backed by US Treasury bonds, and 23% ($9.7B) is backed by cash held by various institutions, including SVB.

However, during the bank run, the price once deviated to around 0.83, a drop of over 17%. Circle has taken action to reduce bank risk and deposited $5.4 billion with Mellon Bank in New York. On March 13, FDIC issued a statement guaranteeing full protection of SVB user funds, and the market panic gradually subsided, with prices stabilizing. USDC can still be used on the chain 24/7/365, but issuance and redemption are subject to the limitations of the US banking system's working hours.

What Investors Can Expect From the FDIC's Emergency Loan Support

In response to the recent liquidity crisis in the banking sector, the FDIC has announced emergency loan support worth $25 billion from the Treasury Department to help major banks in the US. This funding will be used for turnover, allowing banks to use national bonds, MBS, and Treasury Department for 100% face value turnover. This means that even if a government bond with a face value of $100 is currently experiencing losses, the Treasury Department will still provide the full value of the bond. The interest rate for this loan is the overnight index swap rate plus 10 basis points, or roughly 4.5%. The Federal Reserve has also reiterated that the US banking system remains strong.

Despite this intervention, investors should still anticipate event risks before the release of critical economic data in the US. Important events, such as February's inflation data, the UK budget report, and the ECB interest rate meeting, could add to risk factors, especially since the market expects Europe to continue raising interest rates.

Will Interest Rates Peak in May?

The FDIC's intervention indicates that the US economy has already been struggling with the excessive expansion and rapid interest rate hikes. During the crisis, however, the government continues to provide funding to the market through printing and borrowing money. This liquidity crisis is likely not exclusive to one bank, and other banks, such as FRC and SignatureBank, are also facing pressure from withdrawals. The overall market outlook is not as optimistic as before, so I would rather miss out on market rebounds than bear the risk of bank liquidity problems. At least for the next few weeks, I will be cautious. I believe that the Federal Reserve cannot raise interest rates too aggressively, even if economic data remains strong. In the event of an economic recession or market crash, solving inflation problems at the expense of the Biden administration is not ideal. Currently, the Implied Rate on the CME is around 4.7%, and it will likely peak in May.

@MaverickTiger @VideoLounge @CaptainTiger @MillionaireTiger @Daily_Discussion @TigerStars