by Gary Alexander

March 28, 2023

Inflation can kill an economy and bring down kings, queens, or presidents – as well as fuel the rise of Hitler in Germany a century ago. Thankfully, America was scarred at birth by inflation, in the Revolution.

If you compare the French and American Revolutions (bear with me), you can see the difference between sound money principles and inflationary gimmicks. The French Royalty overspent lavishly, far more than any other royalty of the day. Louis XVI had 4,000 household servants, including 30 to serve dinner, 128 musicians, 48 personal doctors, and 198 just to “care for his body.” The bills were outrageously high. The resulting deficits and inflation caused poverty for the masses – one major cause for the 1789 Revolution.

When the peasants couldn’t afford bread, Marie-Antoinette reportedly quipped, “Let them eat cake.” But when the revolutionary National Assembly took over France, they didn’t learn from the royal experience. They issued a new inflationary currency, called the Assignat. By late 1791, 1.5 billion assignats were in circulation, then 4.1 billion by 1793, and 19.7 billion by 1795, with a 99% decrease in purchasing power.

All this led to Napoleon taking over and then 20 years of costly wars all over Europe….and into Russia.

“Let Them Eat Cake” Images

America was a big beneficiary of French inflation, buying the Louisiana Purchase for just $15 million.

By contrast, the American Revolution against the British Crown pitted us against a nation with a strong currency against our weak “Continental,” a cardboard cutout currency that quickly lost its value, like the French Assignat. General Washington complained that a “wagonload of currency can’t buy a wagonload of provisions.” That’s why, after the Revolutionary War, our 1787 Constitution said that states could not mint any other currency but gold and silver coinage, and the Coinage Act of 1792 made gold and silver backing a national law, so the dollar was strong for over 120 years, until the birth of the Federal Reserve.

By 1958, France was on its Fifth Republic and relatively weak. We’re still on our first Republic and are still a Superpower. The lesson is: To keep a currency strong, don’t seek out 2% inflation. Strive for 0%.

Seven Flags Over the San Francisco Fed

Last week, I wrote about the Fed flooding the nation with trillions of dollars in 2020, then striving to get inflation UP to 2% in 2021, then when it overshot that mark by double, then triple, they said during all of 2021 that this high inflation was “transitory,” and then they waited a full year after inflation hit 4% before they raised rates, rapidly, and they waited even longer to end QE and to start any quantitative tightening.

We’re now three weeks past the “sell by” date on Silicon Valley Bank, so we’ve had time to craft an autopsy on what went wrong. There were at least seven red or yellow flags flying over SVB, all pointing to the lax supervisory focus of the San Francisco Federal Reserve, with its Board focusing on other issues.

  • At the end of 2022, 97% of SVB’s deposits were above the $250,000 (uninsured) limit. The national average is under 60%. Why didn’t the regulators notice this as a potential red flag?
  • A lion’s share of the bank’s depositors were in the technology sector, which was a particularly hard-hit S&P sector in 2022. Specifically, SVB claims to have backed nearly half of all U.S. venture-backed tech and health-care startups with a bias toward ESG, at one time bragging of working with 1,550 startups in “climate technology,” a clear red flag of over-concentration.
  • Deposits were pouring in at a record rate. From the start of 2020 to the first quarter of 2022, the bank’s deposits more than tripled to $198 billion. The stock price also soared – up 40% in January 2023 alone. Such rapid growth is unusual for a bank, a “yellow flag,” at least.
  • The bank deposited most of this money in long-term bonds seeking high yield instead of safer (short-term) securities, but long-term bonds will fall in price long before their redemption date.
  • The bank operated without a “chief risk officer” (CRO) for nine months, the critical nine months after the Fed began raising rates at the fastest pace in history – when they needed a risk officer.
  • SVB placed 57% of its assets in mortgage-backed securities vs. the national average for banks of 24%, at a time when mortgage rates were rising and their values fell, a highly risky position.
  • SVB CEO Greg Becker also served on the San Francisco Federal Reserve Board, a conflict of interest. Days before SVB collapsed, he sold $3.6 million of his SVB shares and fled to Hawaii.

Regulators had plenty of time to spot these excesses in one of the largest banks in their district, but some of these excesses harmonized with the SF Fed’s own biases for ESG dreamers and money-losing startups. In other words, some of these faults were perceived as virtues, at least in the Bay area’s moral landscape.

The Wall Street Journal said SVB was beloved for offering banking services to startups that often weren’t profitable and, in some cases, “didn’t have a product, and would otherwise have a hard time getting a line of credit or a loan from a larger bank.” Robin Hood investing: Borrow from the rich to loan to the poor.

One tech entrepreneur was more candid: “They’re basically subprime business loans. You’re talking about companies that have no credit profile, they’re burning cash … It was basically social credit.”

Depositors also need to be more careful: FDIC data show that since the end of the 2008-09 financial crisis (Q3’09), insured deposits of all financial intermediaries rose 64%, but uninsured deposits rose 275% from $2.8 trillion to $10.5 trillion. The portion of uninsured rose from 39% of total deposits to 59% (see chart).

Insured and Uninsured Deposits at All FDIC Institutions Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Today’s blindness to financial reality (especially in the San Francisco district) amounts to a slap in the face at depositors and bankers alike, akin to that other Marie’s “Let them eat cake.”  Let them eat years of high inflation, an inverted yield curve (poison to banks), losing money in long-term bonds as long-term rates rise, a plunging real estate market (hurting minorities the most), eventually causing a panic run on some troubled large and regional banks, fueling big rallies in bitcoins and gold as alternatives to banks.

In 2021, when Mary Daly told Barron’s, “We have the tools to bring down inflation,” you’re feeling those tools in action – high and rising interest rates and quantitative tightening – from $120 billion per month in new money to $95 billion per month less, a $215 billion per month ($2.58 trillion/year) swing in liquidity.

San Francisco Fed President Daly Quote Image

Today’s high inflation is due to Daly’s (and others’) push to force inflation UP to 2% in 2021 by quantitative easing and super-low rates for too long, combined with over-aggressive stimulus spending.

It’s all contained for now, thanks to promises of massive bailouts, but that translates into more money creation, which means more inflation down the road – and more of the Fed’s “tools to fight inflation.”

Let them eat “further policy tightening maintained for a longer period of time.” – Mary Daly, March 2023

Navellier & Associates Inc. does not own Silicon Valley Bank (SVB), in managed accounts. Gary Alexander does not personally own Silicon Valley Bank (SVB).

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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