WHAT IT MEANS FOR US

Did we hold any Silicon Valley Bank or Signature Bank stock?

We do not own any individual stocks or bonds.  However, because we invest in index funds, our indirect holdings of Silicon Valley Bank were less than $7,000 or 0.02% of Fund Assets. Our overall indirect ownership of regional banks is $82,000 or 1.87% of total assets. We have not had, nor do we expect to have any significant losses in our portfolio from either SVB or Signature Bank. We do not have any deposits in either bank.

WHAT HAPPENED
Last week the Federal Government took over Silicon Valley Bank, and on Sunday they took over Signature Bank in New York City. The impetus behind both takeovers was that each bank was experiencing – or was expecting – depositor withdrawals of such magnitude that neither bank had sufficient liquidity to meet the demand.

On Monday morning it was announced that the FDIC would cover all deposits at both banks and that other government agencies would provide temporary liquidity to any other commercial bank under pressure from depositors withdrawing their money.

In the case of Silicon Valley Bank, the run on the bank started with the announcement that the bank sold $20 billion of U.S. Government Bonds at a significant loss. The bank was trying to recapitalize itself, but their actions scared depositors and started the run.  Signature Bank appeared to be in a much better position. Their business had expanded very rapidly over the last several years, as they became a major player in the cryptocurrency world. As you probably know, crypto has gone through its own upheaval, and it appeared that Signature customers might have been in trouble. This fear concerned Signature depositors, and as a result, withdrawals accelerated.  The same worry was impacting several other smaller banks.

To protect the entire banking system and to prevent a run on all banks large and small, the Federal Government decided to provide liquidity to depositors at Silicon Valley and Signature and to make important credit facilities available to all banks. It appears that these actions stopped the massive withdrawals that had been feared.

HOW DOES IT AFFECT THE EASTON EPISCOPAL FUND?

– Liquidity

Our liquidity position is excellent. Currently we have more than $3.9 million (12% of our assets in U.S Treasury Money Market Funds, which are currently paying more than 4% annually). Our normal monthly draw by shareholders is around $60,000. At that rate we have more than five years of liquidity protection – not counting received interest or dividends, which currently amount to more than $38,000 per month. The remainder of our portfolio is invested in marketable securities and can be fully liquidated in no more than three days.

Overall, how has the Fund performed this year?

Last Thursday and Friday were difficult days for the stock market.  By diversifying our stock portfolio over many companies both domestic and international, and by holding a large percentage of our fixed income portfolio in high quality U.S. Government and high-grade corporate bonds, we have been able to eke out a small YTD gain through last Friday reporting a positive return of 0.55%.

What do we expect going forward?

Predicating the stock market over short periods of time is always treacherous. Today it is even more difficult as new major financial and economic events have occurred that will influence the path of future Fed and Regulatory pronouncements. To us, it appears that the Fed is in a very difficult position. By pausing an announced rate increase in March, those who are most fearful of high inflation will violently argue that the Fed is following the wrong course, while those thinking that rates have risen too rapidly will herald a reasonable action by the Fed.  My own opinion is that the Fed will proceed with a 25 basis point, (.25%) increase since inflation is still not in check, and that the problems that faced SVB and Signature were special situations and appear to have been contained.

Regardless of whether or not the Fed raises rates at the March meeting, we should be prepared for additional rate increases later this year. Many forecasters are now predicting that the high rate should be close to 6%.

In this environment we should expect both the stock and bond markets to be volatile, but as we get closer to 2024 and the next presidential election cycle, the economy should be on a firmer footing and monetary policy more conducive to growth, which would improve the outlook for stocks.

Chris

Chris Maxwell, Vice Chair

Easton Episcopal Fund

March 14, 2023