Well, here we are again, another financial crisis. Should I say “What else is new?”
It comes around like clockwork, although the timing cannot be predicted far in advance. So like a wonky clock, I’d say, shifting time, but from time to time way off. Some companies, this time banks, get caught in a bind, people fret over the possibility of losing their money, and poof!, a new “crisis.”
The actual causes are specific to each time, and it all has been covered enough in the news. No repetition here. Plus others will be more knowledgeable of those situations than I (or you).
Lessons
So let’s look at it from different sides.
The first thing I note is that when things change, namely the recent increase in interest rates, other things will likely break. Not always easier to tell where and when, but sooner or later, most likely sooner, something will break. Some thing to keep in mind.
When we look banks during the Financial Crisis of 2008-2009, which was not caused by high interest rates, we see some similar problems as we saw with Silicon Valley Bank. Not always exactly the same problem, but similar enough. Poor investments with illogical financial constraints, too much debt, inability to get out from under the weight of debt, and so on it went. Banks again! Rumors and fears swamp thought, and then things cascade downward from there.
What are we to learn from all of this? If I am an individual keeping my deposited money to under the insured amount (currently $250,000), it means little to nothing if the bank fails: there will be a new bank on Monday. On the other hand, if I am financing a company, then the $250,000 limit is too low to meaningfully back me up.
Right now (and things always change), it seems that depositors in Silicon Valley Bank will have access to all their funds, even if over the insured limit. Is this a permanent change in FDIC rules: cover everyone, unlimitedly? In any case, there are things to learn.
Firstly, where one banks matters. Secondly, rumors and scary warnings do matter, as sad as it sounds. As we heard, warnings to move money out of the SVB in the two-odd days before collapse made a difference. The actions of a few turned to a flood. Should spreading rumors be made illegal? How political that would get in a quick hurry.
Thirdly, one should have backup and alternate plans. Nothing ever goes swimmingly according to plan without a hitch. For a business, have at least one backup bank. Or two. Lines of credit even if not immediately needed. Access to people who are monitoring financial institutions. And so on.
And that is also why, even in dividend investing, it is recommended to have more than one company’s stock. I spread out my investments. I do not have any company that is 10% or more of my portfolio value, and no company’s dividends is 10% of more of my dividend income. I might sacrifice a little in income by diversifying, but it is in times like these, I can sleep at night. Lastly, I do not have a large portion of my investments in any one industry. That also protects me from outsized losses should any one industry suffer.
What is your view. Let me know here.
The illustration of the ylang-ylang tree leaves and seeds is from “Cananga odorata” in Francisco Manuel Blanco’s Flora de Filipinas, 1880-83. Courtesy Real Jardín Botánico, CSIC, Madrid, Spain.
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