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Market Update - March 2023

The events in the banking sector in the last few weeks have highlighted a few key trends, and their consequences.

The Evolution of Bank Runs

Bank runs of the past faced a lot more friction because most people were required to physically go to the bank and wait in line to withdraw their money. In today’s digital world, a funds transfer is a few clicks away. This exponential increase in speed is exacerbated by panic spreading via social media. Our fractional reserve banking system was established and built in a slower, simpler time. As the speed of information will only increase going forward, the industry has no choice but to adapt in order to survive, and it will.

Why is a lot of money leaving banks?

Interest rates. Interest rates are the gravity of an economy. You cannot see them, but everyone and everything feels them. Due to the Federal Reserve’s low interest rate policy since 2008, banks have had access to prudent investments that yield just 2-3%. After their operating expenses, they cannot pay depositors much more than .5% interest. Recently, bank depositors have had a higher yielding alternative, enter money market funds. Money market funds are mutual funds that invest in very short term (1-3 month) government treasuries. Slowly, but steadily, money has been leaving traditional bank deposit accounts, and moving towards money market funds. This is forcing the banks to sell their lower yielding securities at a loss in order to meet withdrawal demand.

Is this 2008 again?

The short answer is we do not know. 2008 was caused by banks knowingly selling mortgages to people that could not afford them. Banks then sold these bad loans as quality investments, and they made their way throughout the economy. When the housing bubble burst, and people walked away from their mortgages, these quality investments revealed themselves as anything but quality. As Warren Buffet is famously quoted, you see who is swimming naked when the tide goes out.

From that angle, this is not another 2008. The current events within the banking sector were caused by a rapid rise in interest rates, which devalued assets the banks have as collateral for deposits. As with any stress test, the outliers crack first and that is what we saw with Silicon Valley Bank and the others. The Fed stepped in and provided an initial solution to the problem. We could very well look back six months from now and the current events could be almost forgotten. The good news is that if the Fed engineers a more long-term solution, and interest rates normalize, these depressed assets will return to their full value in time.

It is more important than ever to remain calm, and stay focused on the long term nature of investing. More to come on this topic in the next email. As always, if you have any questions, do not hesitate to give us a call.

Citrus Wealth Management

O: 909.312.4412 // F: 909.312.4441

1461 Ford Street, Suite 103, Redlands, CA 92373

An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The foregoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.

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