Eventful first half in 2023 – 5 interesting themes. The pendulum has swung from “Too Big to Fail” in 2008 to “Too Small to Survive” in 2023.

1. SVB, Signature, and First Republic Bank failed in 1H23 mainly due to interest rate bets and deposit runs.

Despite Bank of America nursing a $100bn paper loss after a big bet on bond markets during the pandemic per FT, BofA will never have to realize those losses due to the mega balance sheet, capital, and liquidity strength.

Size does matter.

2. I was employed at General Electric Capital business unit in 2008 (c.$ 650 billion balance sheet, top 10 US lender).

#GECapital was designated as SIFI (Systemically Important Financial Institution) post-GFC. Additional cost, funding, capital, and liquidity requirements diluted returns.

Scaling the balance sheet in the short term without diluting returns was mission impossible.

Ultimately, GE Capital exited financial services selling at or above book value to multiple buyers and returned cash to the parent company.

Watch out for sub-scale businesses, they will not survive in a volatile environment regardless of sector.

3. #inflation or #recession: If the choice is between Recession and Inflation, the central bankers have made it clear that fighting inflation is a priority despite the recession risk.

It is no surprise, persistent inflation causes social, economic, and political instability in the long term. Recession is short-term pain for long-term gain.

4. #interestrates: Paul Volcker’s greatest legacy as Fed chief was breaking inflation with shockingly high-interest rates.

Volcker raised Fed funds rate above 20% in 1981 to reduce 15% inflation to 2.5% within 2 years. 30-year fixed mortgage rates topped at 18%, it is hard to imagine today.

Paul Volcker is still remembered as the knight who slayed the dragon of inflation against all odds.

The present-day central bankers are executing Volcker's operating manual. see his image below.


5. #Deglobalization: Isolation is a symptom of underlying problems. Humans are innately tribal and humans make nations.

Nations cannot flourish in isolation, let’s hope de-globalization is a temporary stance to posture rather than a fundamental change in thinking.


What next? if only I knew, life will not be as interesting.

Note: Views are personal and certainly not investment advice.

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