Investment markets have been very volatile over the last two days since the receivership of the California based Silicon Valley Bank.

As the name suggests this bank was involved with the technology industry which has been impacted by rising or as I like to think of it

‘normalising’ interest rates.

There are some very specific issues with this particular bank but there is also some important points to make about the financial system in general

as a result of the repricing of money to what is ‘normal’ levels.

Warren Buffet once said “that you only discover who is swimming naked when the tide goes out”.

Well, for a lot of unprofitable companies interest rates rising from 01% in May 2022 to 3.65% today (Australia) and in the US it was 0.25% (March 2022) and its 4.75% now, rising interest rates will leave them exposed.

Silicon Valley Bank was caught out by two main factors.

One was that many of the companies it lent to were unprofitable being in the early stages of development.

But also it invested its surplus funds in government bonds. As rates have risen sharply they have been forced to sell the government bonds at a loss to realise funds.

Bonds lose value when interest rates go up.

US regulators have guaranteed the deposits in Silicon Valley Bank which has soothed market concerns.

One piece of good news is that as a result of the uncertainty around Silicon Valley Bank going into receivership interest rates will probably not go as high as expected.

One of the main reasons to increase rates its to slow the economy – effectively reduce consumer confidence which reduces inflation.

Silicon Valley Bank has done a good job of that anyway.

We expect to see further volatility in share and bond markets in the next few days but the actions of US regulators has stopped a more significant event.

Should you have any queries on your own investments please let me know.

Regards,

John