Portfolio Strategy Review Q1 2023

by | Apr 15, 2023 | Portfolio Strategy


Bank-run fever drove the headlines as the Clickbait culture helped fuel SVB’s stunning and rapid descent. Signature and Silverlight banks followed suit.

Out came the shameless charlatans of all stripes vying for political points, likes, or trading gains. The conspiratorial crowd falsely compared bank managerial incompetence with woke and ESG mandates; the You-Tubers posted doom & gloom titles to get clicks; the short-sellers looked to force momentum in their favor.

The size of these bank failures did not pose “systemic risk” to the banking system. However, the commentaries that ranged between stupid, self-serving, and irresponsible had the potential to spread beyond economic reality into something bigger. The market got a little nervous.

Fortunately, calm and objective rationale of bank experts like Sheila Bair, Mike Mayo, and Chris Whalen helped cool contagion fears even as they exposed fundamental weaknesses that lead to these failures:

Banking 101

Management failure: SVB’s overreliance on long-term assets to pay for short-term liabilities fails Banking 101. Poor investment with a volatile, highly concentrated funding base is a train wreck waiting to happen. And so it was.
Supervisory failure: the regulator should have intervened much earlier.
Auditor failure: intent to hold securities to maturity is one thing; auditors should also question a bank’s financial capacity to execute this intent.

Of Conspiracies: The Elite vs. the Elite

Why did the venture capital community incite a panic? Surely, these elite sophisticates knew what would ensue. Note that many venture capitalists back crypto firms, tools, and technologies. Many self-styled libertarians think crypto is superior to the status quo evil elite banking system (except when they need to call a friend in high places for a bailout). A master chess player might think stirring up a short-term panic to undermine bank confidence is a useful pawn in a long-term plan to makeover the system in its ideology. Is it credible to believe that these venture capital elites are in search of a more egalitarian banking system? Or are they looking to tip control in their control favor. Unlike most crackpot conspiracies in vogue, this one passes a sanity check.

As the turmoil subsided, stock and bond markets rallied, viewing these banks as isolated failures. Aggregate inflation fell below 5% for the first time since May 2021. Signs of progress. Yet core inflation increased slightly indicating that inflation and higher rates may be with us longer than we would prefer. There still could be pain ahead.

Recession Fears Remain

Recessions are a common feature of economic cycles. When and how mild or severe is the real question. Listen to CNBC for about 45 minutes and you’ll get enough ammo to make any case you like. Which makes my point: chances of getting the direction and timing right are a coin flip at best.

Will the Fed keep raising rates until something else breaks? Long-term interest rates appear to be signaling that a recession is ahead. Or that the Fed will reverse course and start lowering rates. Or an optimistic view posits that disinflationary forces like technology and supply chain activity will take hold and inflation will further recede. Some counter and say globalization is dead as reshoring makes the headlines. I doubt it. The profit margin is a mighty corporate incentive. Re-globalization might be more accurate.

Credit drives economic activity. The concern is that lending activity will decline as the spread between long-term and short-term rates narrows. Bank profit margins would decline, and they would be more cautious in making loans. Adding to this concern, community and regional banks account for up to 70% of commercial real estate lending. Many of these commercial markets are distressed with vacancy rates at record highs (over 20% in Manhattan, Silicon Valley and other legacy markets). High vacancies drive down rents and the value of the buildings.

If rates keep rising, credit losses could be the story for the rest of the year and into 2024. Then we have the shifting alliances on the global stage. China, Russia, Saudi Arabia and down the list. The gold bugs light up with de-dollarization forecasts that would accelerate inflationary trends. That’s a lot to digest. And impossible to know how it will play out.

We diversify your portfolio across multiple assets, so we can reduce short-term declines and get their upside benefit over time. Diversification helps to avoid huge declines that can impair your goals.

And then we ask three key questions to get your investment mix right:

• How much risk do you need to take?
• How much risk can you afford to take?
• How much risk is comfortable for you to take?

There is no such thing as the perfect investment portfolio. And trying to time the markets based on the economic environment is pure guess work. History shows that the rising tide of capitalism gives us strong odds for long-term success.

Jerry Matecun – Founder, President
Expert guidance to plan your future, preserve your lifestyle, and retire with confidence. For a confidential consult, contact me at jerry@compoundvalue.com.

PLEASE NOTE: You can’t invest directly in an index. Past performance does not guarantee future performance. All investments are subject to risk, including possible loss of the money you invest. Diversification does not guarantee profit or protect against a loss. Nothing herein or elsewhere on this site constitutes investment, legal, or tax advice. For details please see Disclosure.


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