2023 Q1 Mid-Quarter Commentary
By Nick Fisher, Portfolio Manager
Over the last week we have had two banks in the United States fail. One of those banks, Silicon Valley Bank was the 16th largest bank by assets and deposits with over $200+B and $170+B respectively. While I don’t want to minimize the importance of this as there are a significant number of depositors and businesses exposed, I don’t believe this is going to lead to a widespread systemic banking crises. This will be resolved in short order, but we do have reason to be worried.
This is a symptom of a much broader issue which we have been discussing for some time. More than a decade of low interest rates (and zero interest rates) has hyper financialized markets and there has been a significant, unrestrained, and widespread misallocation of capital. There will be more permanent losses of capital, just as there was for investors of Silicon Valley Bank. We are in a new interest rate/inflation regime. Risk management must be a priority. Investors cannot invest blindly regardless of price, as they have for the last 14 years.
At the core of our investment process is evaluating both risk and return. We will make mistakes, but rest assured as this process of normalizing takes place, we will have a lot of opportunities, but we will not make bets without thinking through what could go wrong as part of the process. In the end, markets will be healthier and safer, but the probability is increasing that investors across the globe will experience pain.
We will elaborate on our thought process as we write our letter at the end of the quarter. We are happy to discuss your investments in more detail at any time and please don’t hesitate to call. Thank you for your continued trust in us.
