Tuesday, March 21, 2023

Is My Money In The Bank Safe?

The recent debacle on banks, their liquidity issues and bank-runs had prompted this question that was seldom asked before among my circles: is my money in the bank safe?

Short answer: it depends.


Before going on a panic spree upon my answer, we shall take a deeper look at why I gave my reply as such.


Enter SDIC


If you have heard of the Federal Deposit Insurance Corporation, or FDIC, on the news where it protected depositors of Silicon Valley Bank a while ago, we have an equivalent here in Singapore, called Singapore Deposit Insurance Corporation (SDIC). I had covered SDIC in my eBook on the chapter on cash1, but to provide a summary, the SDIC insures Singapore dollar (SGD) denominated deposits placed with a Deposit Insurance (DI) Scheme member in any of its branches in Singapore, up to SGD 75,000 (depending on type of account) per DI Scheme member. Foreign currency denominated accounts, structured deposits and investment products are not insured under SDIC.


You may check out who are the DI Scheme members, the calculation of the SGD 75,000 compensation, and the types of accounts insured in the SDIC website (provided under Reference below).


Diversifying Deposits?


If you had delved into the SDIC website on the compensation scheme, the first concern that may come into your mind would be: given the SGD 75,000 limit, should I diversify my deposits across different banks/finance companies?


As a proponent of diversification, I would say yes. Personally, I have accounts in two separate banks: one bank as my main salary crediting/bill paying account(s), and another just to store my emergency cash. However, we need to consider between balancing the risk(s) of having a financial institution defaulting, and the inconveniences of having one’s monies all around the place (long live FAST?), and other factors in-between.


In our local context, a bank/finance company collapsing is a very rare occurrence (the last one I heard of was Barings in the 1990s, and its collapse was due to a rogue futures trader), so that means the probability (and risk) of happening is very low. I would dare not say never, but the low risk of it happening does not warrant me to fret much over the issue, which in fact, there are other bigger things with higher risks to be concerned of (e.g., share prices of individual companies diving).


Stay calm, stay vested.




SDIC Website –  https://www.sdic.org.sg


1 – The Bedokian Portfolio (2nd Ed), p54-55


Sunday, March 19, 2023

When USD Is Up, The Price Of Gold Goes Down…

And vice versa.

This was one of my first financial advice dished out by my father while I was young. Somehow this sticks in my mind for a long time, like those childhood experiences, good and bad, where it remains with you forever.


When I started to know more of economics, finances and investing, it was obvious that this was a result of one of the most important attributes in an investment portfolio: correlation.


The current times are challenging due to rapid inflation followed by increasing interest rates, macroeconomic factors that had not been seen in at least a decade and a half. Major asset classes fell, yet there are some still holding, or even profiting, from the prevailing economic environment. Drilling down further, some regions/countries’ asset classes may have performed better than others; and going down even further, some sectors/industries of some places may be better than other sectors/industries of other places.


Such is the levels of diversification, another important aspect of portfolio management. It is not advisable to concentrate all into one asset class, region/country or sector/industry, for one big bang will bring massive pain to an investment portfolio (afterthoughts on SVB’s client base). Diversification is designed for two things: to prevent greater than normal losses in down times, and to let you sleep somewhat better at night.


Going back to the assumption in this blog post’s title, there is truth to it, to a certain extent.


Since gold is priced in USD, the argument for this assumption is that a weakened USD makes the price of gold cheaper, hence the latter’s higher demand, and the reverse, i.e., stronger USD, would make gold more costly, thus lowering its demand. However, there are other reasons, too, such as periods of inflation where gold is favoured due to its deemed hedging properties. Sometimes in moments of economic crises, USD and gold had shown some positive correlation. 


As with most relationships in the intricate world of economics, finance and investments, there is no single absolute link between the various asset classes, sub-asset classes, etc., let alone the one between USD and the price of gold. And these links may be positive or negative. In short, correlation does not imply causation, and all assumptions are made on certeris paribus (assume all things equal).


It is precisely this correlation, positive and negative, that brings variation in protecting an investment portfolio, and this variation is important in navigating the not-so-smooth path of investing and building the retirement pot.


Hence, this is why most in the investment circles would say that diversification is probably the only free lunch around.

Sunday, March 12, 2023

SVB And Silvergate: A Storm In A Teacup(?)

The last few days saw the markets (especially in the United States) rattled by the bank collapses of Silicon Valley Bank (SVB) and Silvergate Capital (Silvergate). 

Both SVB and Silvergate are bona fide banking entities, and their simultaneous downfall within the space of a short time caused the S&P500 index (which SVB was a constituent, emphasis mine) to go down above 3% over the last two days, not to mention the tumbling of major bank stocks such as Bank of America and Citibank. All the major business news networks were having a field day (or two, or three) reporting on this, and there were fears that this event may be 2008/2009, part deux.


Being a rationale investor, I needed to know what was going on and had searched the internet to find out what really happened. Below is a point-by-point issues of the event:


  • Both banks were experiencing liquidity issues to service customer withdrawals, and this led to bank-runs due to (or as a result of) the lack of depository funds.
  • The major clientele for SVB were venture capital firms, startups and technology companies, whilst Silvergate’s customers were mainly from the cryptosphere.
  • Rising interest rates and the subsequent rise of short-term bond yields caused longer term bonds, which SVB was holding, to fall out of favour and in price.
  • The fall of cryptos during the last 18 months or so hastened the fall of Silvergate, which had concentrated on this business space since around 2018.
  • The Federal Deposit Insurance Corp (FDIC) had stepped in as receiver for SVB, and it will be business as usual from 13 March 2023.


The Bedokian’s Take


The SVB-Silvergate scenario, in my opinion, could not hold a candle to the scale of the contagion of 2008/2009, that time which affected the big banks, insurance and financial firms. Rather, I would classify it as a localized issue within two banks themselves, since the lack of depository funds sparked the bank run which accelerated their collapse. Furthermore, their customer bases were specific, so the subsequent ripple effect would probably be a ripple, and not a tsunami as seen in 2008/2009. The FDIC stepping in for SVB is a good sign that things would be going back to at least normal.


In other words, I would describe this as a storm in a teacup.


As with what I had always mentioned, such times are good to look out for bargains, especially bank and financial-related counters with strong fundamentals, or perhaps you may find other fundamentally good non-bank counters that had taken a tumble in the past few days.


Stay calm and stay invested.




The Bedokian is not directly vested in any of the mentioned listed entities.