In view of last weekend’s news, I thought I had best issue a swift update on how we see things. At least today the US has announced that core inflation is still dropping – 6% as opposed to 6.4% so that’s good news too. The bad news is the collapse of SVB – Silicon Valley Bank Inc (and friend of the crypto currency industry too) though no depositors have lost-out. How did this arise? Apparently it started as the Bank announced it had lost $1.8billion on the sale of a $21billion holding of ‘safe’ government bonds…. deposits/investments required by banks from their pockets, to protect their balance sheets etc and to operate at all.
It will appear the shareholders in the Bank have lost everything and unsecured creditors likewise but I suppose we can say it is testament to the ‘new’ system which does work – no depositors lost-out and neither has the tax-payer on either side of the Atlantic. The Bank, the sixteenth biggest by assets in the US, had announced unrealised losses of $15.2billion on 1 March but the bigger worry was that this ‘portfolio’ was funded by short-term deposits – funds accessible by savers at any moment (and a quarter duly disappeared in one day). If the Bank could have held these bonds till maturity, apparently the losses would have evaporated but that is not what happened of course.
Whilst governments stepped-in and savers’ deposits are safe, it has worried the markets and it suggests that easy money for tech ventures will suddenly become harder to secure as it has a domino effect on risk and availability. The UK subsidiary was bought lock, stock and barrel by HSBC for £1 so all safe here too. However, myriad companies have felt the need to reassure investors by publishing their connection to the bank (or none) but despite that, banks and the financial sector have fallen with a bit of a bump regardless. You may not have seen it either but New York based Signature Bank Inc went under the following Sunday too for ‘similar’ reasons.
This is one of those ‘regulation omissions’ again really – it is all very well stress-testing but if the potentially obvious is overlooked (that safe government bonds at minus interest rates after nigh 40-year ascents in capital values cannot endure for ever) and then what are the consequences? It would have been better for the Bank to have simply held cash on deposit – not buying government bonds at inflated prices. This is similar to the ‘Liability Driven investment’ wind-down after the ill-fated mini-budget and the losses several big pension funds suffered.
How many bonds do the world’s big banks, insurance companies and pension funds own and upon what losses are they sitting now? (And what about central banks too which bought-in their ‘own’ bonds?). Any other ramifications? It may just stop the authorities ramping-up interest rates as much, as even the week before they were been thinking that, or give it a week and the storm will have blown-over. At least this time, in the short-term gold (up 2% on the day) and silver (up 6%) and related assets rallied as other stocks fell.
What should investors do? Hold steady and sit tight and see the short-term wobbles in the UK at least as an opportunity to nibble-away at cheap stocks. However, if you are thinking of taking money off the table, probably time to wait a short while for the volatility dust to clear and stability to return. I was ready to issue a ‘warning’ letter to investors suggesting deferral of any planned liquidations and withdrawals but today’s recovery has staved-off the necessity of that – at least for now. Values are lower than they were last week but not markedly so – though in our view generally here in the UK things remain too cheap.
Pension limits
Early days but it seems at last the Chancellor has been listening to the case for lifetime pension allowances. He appears to be ready to increase the maximum and also the amounts which people can contribute which unfairly discriminate against a number of individuals and professions – especially the ridiculous situation which has impacted publicly doctors and consultants who have been retiring early or reducing hours because they have been most heavily penalised by continuing working.
Whilst much of this has already abated as interest rates have risen (and thus the factors used to value defined benefit pension scheme values) it is welcome news and something which could easily have been introduced without great cost to the Exchequer about three years ago. Let us trust that there is not some back-door provision introduced in tomorrow’s Budget to tax the schemes or something, instead!
My best wishes
Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers
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