“Holy crap! Is my money safe!?” That’s what my best friend Sean asked me after Silicon Valley Bank (SVB) became the 2nd biggest bank failure in U.S. history.
It’s a sentiment that millions of Americans currently share. After the trauma of the Great Recession, when about 160 banks collapsed, any hint of banking trouble can give us flashbacks to those dark days. I assured Sean his deposits in PNC Bank were indeed safe.
But unfortunately, there is likely a lot more banking terror coming for America and potentially a lot more portfolio pain.
At Intelligent Income Daily, we pride ourselves on protecting regular investors like you from the chaos that the economy and markets can unleash. We strive to help you stay sane, safe, and even profit during the craziest market conditions.
Today I’ll explain why an even larger scale bank failure may be imminent and how you can protect and build your wealth from the carnage.
Banking Carnage Unfolding
The bank I’m talking about is First Republic Bank of California (FRC), which my colleague Brad Thomas visited this week as soon as we heard about the news.
(Brad Thomas at First Republic Bank in NYC)
FRC is bigger than Silicon Valley Bank and, from its recent reports, may be doomed to fail on May 20. If this goes down as expected, the hit to the economy could be so severe, stocks could plunge about 30%.
Let me explain…
Following an epic bank run last week, FRC borrowed about $100 billion from the U.S government to stay afloat.
It filed a disclosure report so brutal, it is the likely cause of the S&P’s downgrade of FRC for the 2nd time in a week. FRC went from A- to B+ in one week, indicating bankruptcy risk soared from 2.5% to 25%.
In that filing, FRC disclosed that it has until May 15 to repay the $100 billion it borrowed, with interest, or the government will begin liquidation proceedings on May 20.
The trouble for FRC is that it lost a lot of deposits last week. How much? About 50% of its pre-crisis deposits have now left.
Analysts estimate that for FRC to survive, it needs at least $100 billion in deposits. Right now, it has $120 billion. But $30 billion of that is a 120-day emergency deposit infusion from 11 other banks.
While management says daily account withdrawals have slowed considerably, it would take just $21 billion more in outflows for FRC to become bankrupt by May 20.
And just to give you an idea, the average account at FRC is $1 million. If around one hundred accounts or less pull out within the next two to three months, there is no hope for FRC. That is a pretty fine line to walk as a major bank.
The good news is that FRC will likely be acquired in a Credit Suisse-type emergency takeover.
Depositors are safe… but shareholders and bondholders will likely be wiped out.
According to a recent study from Stanford, the regional banking crisis is likely to worsen, as 186 regional banks are at risk of failing like SVB or Signature Bank (SBNY) did.
Even if only a handful of these banks fail, and the FDIC makes all depositors whole, regional bank lending will dry up quickly.
This means banks that are not yet in danger are going to be focused on ensuring their survival. But everyday Americans can still pay the price…
The Makings of a Recession
In order to survive this crisis, banks will be less likely to lend to smaller companies and businesses, and instead focus on the larger corporations that give them a higher return.
For better or worse, small businesses employ nearly half of the U.S. employees according to the U.S. Small Business Administration Office of Advocacy (SBA).
If small businesses start struggling to get loans, it will affect all their bottom line and the income of their employees.
And guess what drives 70% of the economy? Consumer spending.
And most of that money comes from income. If the income of nearly 50% of U.S. employees are affected, the driving force of the economy will be impacted.
And according to the bond market, a recession could be just four months away.
And here’s what that potentially means for the stock market…
Historically stocks bottom in a bear market at about 14 times earnings. And the average earnings decline in a recession since WWII is 13%.
This means that a highly average recessionary bear market low would be 2,770 on the S&P 500. That’s about 30% lower than stocks are now. And it would represent a peak decline of 43% below the record high of 4819 set on January 2, 2022.
So if stocks bottom, and history were to repeat, the S&P might fall about 30% from here.
When my best friend heard this, he almost lost his lunch.
But fortunately, there is something you can buy today that can protect you from the likely market carnage ahead.
The Asset to Protect and Build Your Wealth
When you take a look at past economic crises, one asset withstands the pressure…
30-Year Treasury Bond Returns During Market Crisis
(Sources: Charlie Bilello, Ycharts)
30-Year U.S. treasury bonds are the best long-term asset you can own in a recession. Since 2000, they’ve averaged 44% gains during bear markets.
That’s why I recommend buying some of iShares 20+ Year Treasury Bond ETF (TLT) today, the lowest cost way to gain exposure to long-duration U.S. treasurys. During the banking crisis so far, TLT is already up 6% as of writing this.
As this situation continues to worsen, mark my words, TLT will go up.
The Fed’s decision yesterday to continue raising interest rates in the midst of a banking crisis is only going to exacerbate the current problem.
Which is why right now, I am recommending these assets that have withstood the test of time.
We spend a lot of time searching for the best – and most resilient – income opportunities in the market. That’s our bread and butter at Wide Moat Research.
And we’ve put together a whole portfolio of plays just like this in our Intelligent Income Investor service. Many of them are actionable right now. And some might decrease in price over the coming weeks – giving us the chance to pick up shares of these recession-resilient plays at an even bigger discount.
To get all the details on this portfolio, click here.
We are about to see a lot more carnage over the coming months. Now is the time to prepare.
Safe Investing,
Adam Galas
Analyst, Intelligent Income Daily