April 5, 2023

These are truly mixed-up times!  War, drought, the debt limit conflict… Sometimes we are so worried about the new fear that we fail to see the old fear resolved. In 2022, we saw 100% of California in D1-D4 drought levels.  Today that’s dropped to 35% and moderate to major spring flooding is predicted.  Lake Shasta, the state’s largest reservoir, was only 1/3 full just six months ago.  Today it’s at 60% and climbing!  Alas, all this good news doesn’t sell newspapers, so it’s seldom a front-page topic.  Positive news is often crowded out by the new seemingly unsurmountable issue of the day because that’s what sells ad time.  Don’t get me wrong, we are facing some serious issues, but when do we get to pause and celebrate our successes? Oh well, on to the next crisis.

The Fed is walking a tightrope.  The recent bank closures and takeovers have led to market volatility, questions about regional bank stability, and uncertainty among investors.  All of this as our number one enemy: inflation continues to exceed acceptable levels.  Just like my uninvited cousin Floyd, once he comes to visit it’s almost impossible to get rid of him!  The Federal Reserve is working hard to remain tough on inflation while endeavoring to manage a soft landing.  Good luck to them!  History teaches us that inflation can be a very difficult economic disease and increasing the Fed Fuds rates can be the medicine to cure it.  The trick is not to overmedicate the patient and tip the economy into a deep and long recession. 

A BIG unwanted consequence of our war on inflation has been the strain that rising rates have placed on a some of our regional banks. The two banks that failed the second week of March (Silicon Valley Bank and Signature Bank) were notable examples of banks with overexposure to long dated assets and concentrated business models.  However, we view the systemic risk to the overall banking industry as low.  Most banks are well capitalized and have more diversified balance sheets.

In the case of California regional bank Silicon Valley Bank (SVB), there were some systemic issues affecting the whole banking system that contributed to their dissolution.  However, the core issues were non-systemic and specific to SVB.

One key systemic issue is that higher interest rates have caused an estimated $620 billion in unrealized losses in bank portfolios. *  Additionally, it seems to me that the public had relaxed their attitude towards their banking relationships.  There had not been a high-profile banking crisis in many years and people let their guards down.  They stopped worrying about insured vs. non-insured deposits.  In 2008 FDIC increased insured levels from $100,000 to the current level of $250,000 and has not adjusted for inflation or increased deposits in 15 years. 

All banks had to deal with those issues, but SVB had additional issues unique to a handful of regional banks. A large portion of their depositors were from concentrated industries.  In SVB’s case those industries were startup technology companies, private equity firms, and venture capital companies, who also had dramatic deposit growth.  SVB’s deposits nearly doubled from 2019 levels and a large amount of those funds were invested in long-dated US Treasuries and mortgage-backed securities.  Securities that declined in value as interest rates went up.  SVB had 76.4% of their total deposits uninsured.  Additionally, the company went most of the year without a Chief Risk Officer to keep investments in check.

Thankfully the regulators reacted swiftly.  A joint statement was released on March 12 by the Federal Deposit Insurance Corporation (FDIC), the U.S. Treasury, and the Federal Reserve announcing measures to protect depositors at banks that failed the previous week, and to provide support to the banking system.  These steps seem to have calmed fears of the issues spinning out of control.

Our Take:
In our advisory portfolios we remain defensive yet active.  Last month we reduced cash equivalents and moved to take advantage of higher rates on treasuries and investment grade bonds.  Overall, we are still underweighting exposure to stocks and are currently holding more cash equivalents.

In brokerage accounts we’ve assisted several client in moving uninsured deposits from their banks into US Treasuries, brokerage Certificates of Deposit, and high quality Corporate Bonds. 

Now I would like to introduce the newest member of the Denver Group, Client Associate, Sunil Parekh. He will outline how your cash deposits are insured in both bank and brokerage accounts. 

Thank you for the handoff, Chris!

Cash deposits held in bank accounts are eligible for FDIC insurance.  The FDIC insurance program can get confusing.  The general understanding is that the standard coverage amount is $250,000.00 per financial institution.  However, many clients are not aware of the additional coverage they are afforded based on their accounts’ ownership categories (Individual, Joint, Trust, etc.).  There is a wonderful tool that you can use to calculate your insurance coverage per financial institution, called the EDIE calculator, which will have you input all your accounts at a single bank, how they are titled, and their balances.  The calculation will generate a report that will tell you what funds are insured, and what funds may not be insured.  You can access that calculator here:  FDIC: Electronic Deposit Insurance Estimator (EDIE)

For more information on the FDIC, go to their website at www.fdic.gov

At Wells Fargo Advisors, unless you have opted out, any uninvested cash deposits held in your brokerage accounts are automatically placed in our expanded bank deposit cash sweep program.  Your funds are split between several interest-bearing deposit accounts at both affiliated and unaffiliated banks with Wells Fargo Advisors.  This allows us to provide up to $1,250,000.00 in FDIC insurance coverage for individual accounts ($2,500,000.00 for joint accounts with two or more owners). 

For more information on our Cash Sweep Program, visit  https://www.wellsfargo.com/investing/cash-sweep/

Finally, I will cover SIPC insurance, which can protect your cash and investments in your Wells Fargo Advisors brokerage account.  SIPC provides coverage up to $500,000.00 for missing securities and cash, which includes up to $250,000.00 for cash.  SIPC does not, however, cover changes in the value of your investments.  Please bear in mind that SIPC coverage is different from and is not a replacement for FDIC insurance.   Wells Fargo Advisors also maintains additional coverage of up to a firm aggregate limit of $1 billion for missing securities and cash, including up to $1.9 million for cash through Lloyds.
For more information on SIPC, please visit https://www.sipc.org/for-investors/what-sipc-protects

In closing we’d like the thank each and every one of you for your partnership and allowing our team to work with you as we strive to achieve your long-term goals.  As stated in the first line of this letter, “These are truly mixed-up times,” but that’s nothing new.  We have lived through times like these before and we are confident that positive news of this issue’s resolution will soon be crowed out by a new one.  The keys to success are no different today than they have ever been.  Have a plan, stick to it, and have a long-term perspective.

All the best,

The Denver Group of Wells Fargo Advisors
Chris O’Neil
Senior Financial Advisor
Managing Director - Investments
Senior PIM Portfolio Manager

Sunil Parekh
Registered Client Associate

Joe Jaensen
Senior Financial Advisor
Managing Director - Investments
Senior PIM Portfolio Manager

Breana King, MBA, CFP®
Senior Financial Advisor
First Vice President - Investment Officer

Brittney Gunning, CFP®
Financial Advisor
Associate Vice President - Investment Officer

Samantha Gill
Registered Client Associate