Dear friends
In March, the unprecedented interest rate hikes by the U.S. Federal Reserve in the past 12 months began to translate into a rising dollar and a troubling domino effect of challenges in the banking sector.
It all started with shares of Silvergate Capital, the crypto industry’s top bank, plunging nearly 60% after a delayed annual report. Then Silicon Valley Bank, a major lender to tech companies, collapsed after news of a $1.8 billion loss led to a bank run that saw $42 billion withdrawn. The Fed swiftly implemented a program to prevent further bank runs by allowing special loans, but waning investor confidence drove two other major players, Signature Bank and First Republic Bank, into similar trouble. Meanwhile, a study by researchers at Columbia University and Stanford found that another 186 U.S. banks (!) could be similarly at risk of collapse.
In Switzerland, Credit Suisse struggled with the same kind of issues as well and eventually lost the trust of its customers. On March 19, Credit Suisse’s 167-year history came to a bitter end when it was taken over by its long-time rival UBS for “only” $3 billion, at a share price 99% (!) below its peak. The Swiss government facilitated the takeover by providing $9 billion to absorb potential losses, and the Swiss central bank offered UBS on top of that an additional $200 billion in liquidity.
Despite these challenges and remarkable casualties, both the Federal Reserve and the European Central Bank remained committed to fighting inflation and raised interest rates even further. At the same time, they provided more than $400 billion in liquidity to support the banking sector in March, which is already half of what was spent during the 2008 financial crisis.
Even though interest rates are now well above 5%, this is not that unusual in historical terms. Higher interest rates can also encourage saving and drive innovation to improve productivity and growth. Some companies will certainly struggle but the increased focus on savings and efficiency will be more sustainable in the long run and benefit investors.
Despite the high volatility and uncertainty in the market, March results were not that bad, with the S&P 500 +3.5%, MSCI World Index +2.8%, 20-year bonds +4.6% and gold +7.9%.
Our strategies also ended mostly in the green with Universal +0.5%, Progressive -2.0% and CryptoMax +10.0%.
Surprisingly, amid fears of collapsing banks, regional bank runs, and inflationary pressures, investors suddenly seem to agree that things might get better from here on out.
Notably, Bitcoin outperformed other major assets and broke its recent correlation with equities. Bitcoin has once again proven to be a safe haven asset like gold and a unique hedge against economic turmoil in traditional portfolios. In fact, the Fear and Greed Index for cryptocurrencies reached its highest greed level since Bitcoin’s all-time high.
What can we learn from this? Even in turbulent times, when leading banks experience more volatility and sudden price drops than crypto, it is advisable to constantly stay invested with a risk-aware strategy and a well-diversified portfolio.
Stay happy, healthy and wealthy!
Omar