SVB: The Canary in the Coal Mine

You're mentioning like crack starting to appear. Um, and I know you wrote a piece about Silicon Valley Bank's downfall being the canary in the coal mine. Can we just explore that a bit further?

Um, so the canary in the coal mine is meant to reflect two things. Uh, first, that the, um, it's not just the Silicon Valley Bank; it is a pervasive thing about holding a lot of debt that has gone down in value, um, and being leveraged long. So it's a pervasive thing, and also meant to convey that there's a sequence of events that are like dominoes falling.

So, for example, those who are hurt financially and have a lot of that debt don't want to buy more of that debt. Yet the government is going to have to sell the debt. In other words, when they run a deficit, that means they have to sell bonds. And there are, um, all of those who have bought bonds, including foreigners, um, who are increasingly worried about, um, even, uh, the value of the debt.

Um, but also, uh, sanctions. Sanctions means that you know, you freeze the debt. Um, so certain holders of the debt say, “I've got a lot of US dollar denominated debt, and I already have maybe too much. And then do I want to buy more?”

And so you have, um, an imbalance there in terms of selling and buying, which is a risky situation. In addition, there's this sequence of events that takes place, such as, um, those who were making loans—uh, banks who now are suffering from this condition—don’t want to make as many loans.

And so if you look at, let’s say, like Regional Banks, those Regional Banks make a lot of loans for, uh, residential real estate. Excuse me, commercial real estate. Although there’s a problem with residential too. But so if you look at, um, real estate, commercial real estate, um, there's, um, it's vulnerable.

And they haven’t gotten the consequences that are yet to come in the form of running out of adequate cash flow and not having the money and then having to sell assets, and so on.