Interim Market Updates

 

 

March 19, 2023

 

 

To:  HIAS LLC Clients and Investors

Fr: J. Britt Hughes

 

Subject:  2023 Banking/Financial Distress

 

I don’t often make updates to my financial outlook in between quarterly outlook letters but with recent negative financial developments, this is the appropriate time.  I will do my best to summarize the current situation in a succinct fashion, including enough to adequately describe what’s happening while not including so much that it renders this explanation useless.

 

I have been investing since 1980 and seen multiple financial crises over the last 43 years.  I have been a student of understanding the last crisis in 2008/09 to understand the causes and nature of that crisis.  All of which helps but does not quickly or easily solve my understanding of the current situation.

 

There is a lot of uncertainty in all financial markets both here in the US and abroad.  Here are the questions that I will answer in this letter:

 

1.  Is this a real crisis?

2. What do we do about it?

3. What are the possible/likely outcomes?

 

In order:

 

1.  Yes, this is a real financial and political crisis.  It is the result of financial/political mistakes made mostly since 2009 with the Federal Reserve keeping interest rates too low for too long and their policy of QE or Quantitative Easing.  I have been critical of many of these policies and written about them in my Q Outlook Letters over the years.  These policies, running budget deficits and overspending in Washington caused inflation to soar to levels not seen since the early 1980’s.  With reality finally coming home to roost, the Federal Reserve is belatedly taking the steps necessary to fight inflation with rapid interest rate increases, resulting in the current problem.  
   
   What is this problem?  Quite simply, losses incurred by anyone holding large amounts of bonds and banks large, medium, and small all own these bond portfolios. The losses on these bond portfolios are real and negatively impacting the capital ratios of many financial institutions currently.  That is the reason 2 large banks have already become insolvent and more will likely follow.  So why doesn’t the Fed just stop raising rates and in fact lower them?   They want to; however, the bigger and more important fight is to solve the inflation problem which must come first before the Fed can let up on their interest rate hikes.
    

2. As your advisor I have mostly already taken the steps necessary.  Not holding long term bond exposure and only owning companies in excellent financial condition, have high profitability, and can raise prices to offset the inflationary environment that we are in.  Our assets being at our custodian, Fidelity, are as safe as in any financial institution in the US thanks to FDIC Insurance, additional private insurance and by maintaining any cash balance assets in Treasury Money Markets, Treasury Bills and keeping no balances over 250K.  These steps do not mean that our investments in the companies and assets that we do own will not go up and down depending upon the day’s trading activity, but it does mean that there will not be a “Silicon Valley Bank” like event with our assets.   For your personal assets outside of Fidelity I recommend not keeping any balances of 250K or over without having extra insurance over and above the FDIC 250k limit.  It’s very possible that the Fed’s will increase this FDIC limit in the days ahead by guaranteeing all deposits, of all amounts, but that step has not been done yet and will not be taken lightly as it essentially would fully nationalize the entire US banking system.
    

3. As in 2008/09 Washington is doing their best to curtail the crisis and related fallout but as I write, this has not yet been accomplished and I do believe that there are more shoes to drop.  The most likely outcome will also, in my judgment, result in a very hard landing for the economy – meaning a steep recession.  Hopefully this will be relatively brief, will help solve the inflation problem and therefore allow the Federal Reserve to go back to lower interest rates which will be, as always, the medicine needed to get the economy back into growth mode.  The above process will likely take the balance of 2024 to unfold with the most action taking place in the days ahead.  In addition to asset preservation and protection of principal there will be opportunities to invest in great assets at the right prices.

 

Rest assured that I am monitoring the financial markets with laser focus and am available to you for any questions that you might have in the days, weeks, and months ahead.  Please do not hesitate to contact me with any questions or concerns on the above analysis.

 

Sincerely,

 

J. Britt Hughes 

Investment Advisor Representative

Bay Colony Advisory Group, Inc.

britthughes@hiasllc.com

www.hiasllc.com

 

Investment advisory services offered by Bay Colony Advisors, a registered investment advisor, doing business as Hughes Investment Advisory Services LLC.  No Advice may be rendered by Bay Colony Advisors d/b/a Hughes Investment Advisory Services LLC unless a client service agreement is in place.  Bay Colony Advisors does not provide accounting, tax, or legal advice.    No part of this newsletter should be considered investment advice.  If your financial circumstances have changed, you should contact your investment advisor representative.  Principal Office:  86 Baker Avenue Extension, Suite 310, Concord, MA 01742.  Phone: 978-369-7200.