THINGS ARE STARTING TO BREAK
This past week we started to see the effect of the largest string of increases by the Federal Reserve in the past 40 years. SVB (Silicon Valley Bank) and Silvergate Capital both failed. Marking the largest failure in banks since the Great Recession on '08 / '09. Normally, the Federal Reserve loves to talk a big game and they even convinced themselves they know what they are doing to fight inflation. Their plan was to suppress demand by raising rates even though the bulk of the inflation was due supply issues in both labor and goods.
The Federal Reserves thought process was simple, since we increased M2 monetary supply by the biggest amount ever (due to COVID) we should also raise rates as fast as possible to counteract all the free money. The Federal Reserve was unfortunately late to the party, they thought the initial inflation was "transitory", meaning it would only be a brief spike in inflation. They came to realize the truth and now have had to play catch up.
Going too far, too fast is what the FED does, they always have and seemingly always will. They raise rates until they break something and this week things are breaking. The only questions we are left with is, are there other institutions in trouble and we just don't know about it yet? or are Silicon Valley Bank and Silvergate simply the exceptions?
I personally think the FED will back off their fight on inflation at least for now. I also truly don't know if it is too late, the damage might have already been done and we are just finding the first few casualties of many. There is a lagging effect from interest rate hikes and we can continue to feel that for the next year or so.
Bottom line is how does this effect us and our portfolios? The answer for me is I need to be in a system that adapts to the changing environment. We came into last week with about 37% cash. I expect next week's update (unless we have a miraculous recovery) to get even more conservative if not downright bearish.
I've been through these times before professionally '01 '08 & '20 and it is not a time to be a hero with your investments. Yes, you can make a ton of money if you pick the bottom and everything rebounds, but the risk of doing that in this type of environment is very high. Be prudent, let the market prove to you that it deserves to have your money. Until it does, it is a guilty until proven innocent type of environment.
Thank you for putting your trust and time into my ability to create a model that will hopefully add value to all of us. I've started this journey in 2000 as a Nasdaq Market Maker. I also worked as a Proprietary trader, Financial Advisor and currently I manage a hedge fund. I have learned many lessons throughout my career and still continue to learn to this day. I look forward to sharing my experiences with you via this newsletter.