As I write this opinion column a US regional bank, First Republic, is rumored to be in the midst of being taken over by the US Treasury or Federal Reserve. The Bank’s stock, once trading at $219, closed at just over $8 today (April 4th) or a 95% loss.
Investors are running for the exits as the Bank showed that they lost over $100 million in deposits since the Silicon Valley Bank blew up last month, which would also put all similar US regional banks that are not fully deposit-insured in jeopardy. Unfortunately, if they are suffering, other similar regional banks are also experiencing a flight of customers and their money to bigger banks. Regardless of immensely powerful intervention from the Federal Reserve and the US Treasury, regional banks are breaking, badly.
The reality is that bank loans to middle America will become constrained as money moves out of regional banks and that will have devastating effects on economic growth. As of now, most analyses of leading economic indicators I see that are published by independent economists are clearly demonstrating a brutal recession is coming – although if you speak to bank-owned economists, they will point to their economic forecasts showing just above zero growth. Well, that seems strange, the disconnect between banks and independent economists, doesn’t it?
Let’s just call a spade a spade. The last thing banks ever want to project is doom and gloom because it fundamentally goes against their business model – so you will never hear them panic, never hear them say the market is going to blow up, never hear them tell you to pull your cash out of your portfolio. The best of the best of them, Jamie Dimon, is, however, on record admitting the coming recession could be an economic hurricane – but he also smartly suggests that his bank, JP Morgan, is well suited to handle the crisis for his customers.
You may be thinking to yourself that many economists say the sky is falling, but your banker is telling you to remain calm and do nothing or make small adjustments to your portfolio. So, what do you do? First, knowing what to do should start with how you would be impacted by significant losses if that were to be the case. If you cannot afford the losses, then it is GICs for you. Go with short term GICs and stick with one of the six Canadian Systemically Important Banks. If you are a more seasoned investor and don’t need the money soon, like within 10 years, I would set some capital aside, in cash, maybe 30%, and allocate it back into equities as the market cascades down over the rest of this year – if it indeed does. Note, you should be keeping 70% in high quality stocks of companies that pay dividends and have strong balance sheets. You should not own bonds with a term longer than 2-3 years unless you intend to hold them to maturity.
If you’re even more sophisticated, then you are likely employing strategies too complex for most of the readers of this column, and all the best to you playing the stock market like a casino – remember that the dealer always wins, and the market will always surprise you and eventually damage you when you least expect it.
At the end of the day, get advice. But remember, advice comes with strings and bankers are in business – even when banks are breaking bad.
Romel Dhalla is President of Dhalla Advisory Corporation and provides clients with strategic corporate finance solutions. He was a portfolio manager for 17 years with two major Canadian banks.