‘Inside of every problem, lies an opportunity.’
Earlier this month, markets and the world awoke in shock.
On Wednesday, 8 March, Silicon Valley Bank (SVB) announced it needed to raise more capital. Depositors got scared. There was a run on the bank. It could not meet demands. Within 48 hours, it had collapsed.
Source: Tech Crunch
The US Treasury stepped in. From Monday 13 March, depositors would be able to access all their money.
Decisive actions from the government were used to ensure there would not be a contagion to other banks. But the sudden collapse of a 40-year-old financial institution raises some questions. Some threats. And some new opportunities.
What about the situation here in New Zealand?
Here’s the big picture
Was the tech-firm-focused SVB a victim of rapid interest rate rises by the Fed?
Probably.
But is the Fed to blame?
The need to raise interest rates so swiftly actually stems from Covid-19 lockdowns. When the decision was made to lock down whole communities and businesses, central banks around the world responded. They flooded markets with cheap money.
Quantitative easing, money printing — call it what you will — it amounts to a manufactured increase in the money supply.
Governments further added fuel to the fire with ‘stimulus checks’, ‘wage subsidies’, and so forth.
An excess of money in the system eventually flows through to rampant inflation. That inflation needs to be cooled to restore economic confidence. The target is usually 0-3%.
We are not done with inflation yet.
Here in New Zealand (and Australia), it is still running at over 7%. While earnings reports and stats tend to suggest most wages are only increasing in the order of 3.5%. People are seeing a material demise in their living standards by around 4%.
This, alongside much higher lending rates, brings us to the midst of an economic slowdown. Some companies will see their values fall. Others will rise.
We’ll get to those in a moment.
But, first, are banks still safe?
Simon is the Chief Executive Officer and Publisher at Wealth Morning. He has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge-fund industry in Europe. Before this, he owned an award-winning professional-services business and online-learning company in Auckland for 20 years. He has completed the Certificate in Discretionary Investment Management from the Personal Finance Society (UK), has written a bestselling book, and manages global share portfolios.