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

We certainly live in interesting times.

As I have written about previously inflation and the medicinal therapy to control the symptoms being increasing interest rates are dominating investment markets in 2022.

It’s impacting all asset classes being shares, property, debt (bonds) and of course, cash itself.

The whole point of increasing interest rates is to reduce the supply of money and demand. Central banks around the world are increasing interest rates to reduce economic demand.

So basically they want to see increasing unemployment and falling consumer spending.

So far they haven’t seen enough of it either overseas or here and hence interest rates are still going up. On Monday in the US the unemployment rate came in at 3.5% which actually meant more people had a job.

Previously it was 3.7%.

But that’s not what the Federal Reserve in the United States wanted – they wanted more people unemployed.

More people unemployed means they don’t have to put up interest rates as much to control inflation.

The same story is being played out everywhere. So when you see newspaper headlines screaming ‘recession’ it’s really not that big a deal. In fact, a mild recession is what central banks are trying to achieve although they won’t say it.

Of course, no one wants a severe recession or depression.

But right now, good news is bad news.

It remains a volatile time for financial markets, and we are allocating across asset classes accordingly.

If you have any queries let me know.

Regards,

John

Good morning,

We certainly live in interesting times.

As I have written about previously inflation and the medicinal therapy to control the symptoms being increasing interest rates are dominating investment markets in 2022.

It’s impacting all asset classes being shares, property, debt (bonds) and of course cash itself.

The whole point of increasing interest rates is to reduce the supply of money and demand. Central banks around the world are increasing interest rates to reduce economic demand.

So basically they want to see increasing unemployment and falling consumer spending.

So far they haven’t seen enough of it either overseas or here and hence interest rates are still going up. On Monday in the US the unemployment rate came in at 3.5% which actually meant more people had a job.

Previously it was 3.7%.

But that’s not what the Federal Reserve in the United States wanted – they wanted more people unemployed.

More people unemployed means they don’t have to put up interest rates as much to control inflation.

The same story is being played out everywhere. So when you see newspaper headlines screaming ‘recession’ it’s really not that big a deal. In fact, a mild recession is what central banks are trying to achieve although they won’t say it.

Of course, no one wants a severe recession or depression.

But right now, good news is bad news.

It remains a volatile time for financial markets, and we are allocating across asset classes accordingly.

If you have any queries let me know.

Regards,

John

Good morning,

Investment markets continue to be very volatile.

The main cause is inflation.

Some economists talk about demand and supply-side inflation, but it comes to the same thing – prices going up, which reduces the purchasing power of money.

Once inflation becomes entrenched its very hard to dislodge –  rising prices in the supply chain leads to rising prices for end products and demands for higher wages.

Central banks around the world are tightening the money supply by increasing interest rates – basically making money more expensive.

Money has been ‘cheap’ for a long time, and Covid made this money even more ‘cheap’ with the Reserve Bank Cash Rate previously at 0.1%.

We are now seeing this being unwound and more quickly than many market commentators expected.

• In the United States inflation is now 8.3%, in March 2021 it was around 2%.
• In Australia its now 6.2%, it was also around 2% in March 2021.

Some commentators (although less now) believe this is transitory. We do not share this view and believe this is a fundamental shift.

The implications to date have been a significant rerating for growth stocks.

That is companies that are growing their profits into the future – technology stocks are principal among them.

The NASDAQ index (Amazon, Microsoft, Netflix etc)  is off 25% in the last year.

Government Bonds have also had a very difficult year as quickly rising interest rates cause the holders of bonds that are fixed a lower rate

than the current interest rate to lose value. This is why many diversified conservative funds have had unusually poor returns.

At Ethos, we were aware of this possibility and have generally had a low allocation to government bonds.

All in all, it’s a challenging period for all asset sectors, including residential property.

We are focused on protecting capital.

Please let me know if you would like more detail on your investments or have any questions.

Regards,

John