ACTV - Can't Find Totally Riskless Conditions - Weekly Blog #775
2023-03-13 09:55:00 ET
Summary
- Absolute “risklessness” does not exist, nor can there be such an asset in an absolute sense. There are known and unknown opportunities to lose all or some value of an asset.
- It’s likely investors in SVB never considered they were at risk of a “run on the bank” by unrelated depositors. But such a run happened, putting the bank in an insolvent condition, which led to bankruptcy.
- Today, every consumer and investor is a globalist, whether he or she likes it or not. This impacts transaction prices for everything he or she does, including wages and taxes.
A Real-World Problem for Investors
Investors turn to advisors to get assurances that they are not taking risks with their money and their future. We can discuss the numerous risks of losing some or all of their money, and should do so. But the news of Silicon Valley Bank ( SIVB ) (being forced to close and then taken over by the FDIC) shows that these types of discussions were not had.
This weekend, I spent considerable time thinking about “risklessness” and concluded that it does not absolutely exist, nor can there be such an asset in an absolute sense. There are known and unknown opportunities to lose all or some value of an asset.
The reason is that we do not live in a one-dimensional world where all is known, and unknown conditions exist. We and our assets exist in multiple dimensions. Few, if any, of the investors who sold securities in an IPO and deposited the cash proceeds in SVB were waiting for an opportunity to buy appropriate assets. I suspect most investors felt their cash was being held at one or more underwriters for a short period, not at a corporate depository.
If they considered it at all, they were pleased that their assets in the company were unencumbered by loans. My guess is that they never considered they were at risk of a “run on the bank” by unrelated depositors. But such a run happened, putting the bank in an insolvent condition, which led to bankruptcy.
Ecology
While it may come as a surprise, some investors were concerned about changing climate conditions many years ago. They felt it was not being appropriately considered by institutional investors in making investment decisions. The “buzz” word at the time was ecology. Which meant that if something changed, more things could change.
Today’s investors should dust off the old studies on ecology. A current example might be a military battle in the Ukraine causing the price of flour to rise in Egypt, which in turn factors in the price of Mideast oil rising, which in turn impacts gasoline prices in middle America and consequently the prices of local homes in the Midwest.
The World View
Today, every consumer and investor is a globalist, whether he or she likes it or not. This impacts transaction prices for everything he or she does, including wages and taxes. Funds that invest in Europe are increasing in price as they attract flows from America, where prices of US-dominated funds are going down, leading to a decline in purchasing power for the US dollar.
US Investors vs. Washington Politicians
The current administration in Washington has proposed raising taxes while continuing to curtail domestic production of goods and services. This will add to inflation as the world continues to fund a major war. Similar to society turning its back on climate and ecology years ago, which resulted in today’s conditions. Our government is pro inflation through restraint of trade and raising prices.
Last Week: Another Warning ex SVB
While most of the financial headlines on Thursday and Friday were focused on the implications of SVB, there was worse long-run news for American investors, consumers, and citizens. The Standard & Poor’s 500 declined -1.58% for the week ended Thursday, similar to its performance for many prior weeks. However, the depressing news was that China Regional Funds, the largest contributor to world growth, had declined -6.31%. While China exports more than its imports, the major exporter to China is the US. If the US is going to get out of its near-recessionary condition, it will need to export a lot of US products and services.
What Are We Looking For?
Last week, there was significant weakening of market conditions. While paying close attention to present conditions, we are nevertheless searching for the stocks and managers that will participate and, in some cases, lead the next significant “bull” market. We are in the early stages of our search, and it’s still conceivable we may go through a longer period of stagnation. We are searching for the kind of corporate leadership and product/services that demonstrate superiority. Some may be overseas, but many will come from the US. Please help us.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Can't Find Totally Riskless Conditions - Weekly Blog #775