Throughout 2022, we commented that it felt like central bankers were going to tighten rates until they broke something.  That 'something' appears to be confidence in the banking system. 

 

The bad news is that our modern banking system is completely dependent on confidence to function. 

 

The good news is that a crisis of confidence in the banking system is a problem that central bankers and regulators know how to deal with. The playbook for restoring confidence in the banking system was thoroughly tested and updated during the Great Financial Crises in 2008/09; thankfully, the problem in this cycle isn't underwriting standards or asset quality it is a duration mismatch between short duration liabilities (deposits) and longer duration assets (government bonds and mortgages). This is a problem that central banks can paper over by providing banks access to cheap abundant liquidity to allow them to return deposits (and restore calm) without needing to sell their longer-duration assets.

 

The second bit of good news is that central bankers and regulators have moved incredibly quickly to take action that will bolster confidence. I applaud Switzerland.  I can't remember a European country ever surprising me by acting faster and more decisively to deal with a financial problem; the Swiss did it twice in the same week! Global central banks have also stepped in, in a coordinated manner to provide the liquidity that banks may need in the near-term to restore confidence in deposits.

 

What’s an Investor to do?

 

The bearish arguments alway sounds more interesting and intellectual, but it's important to remember that this too shall pass. We recommend investors save and invest at a regular cadence, like putting a portion of earnings aside every week, or every month, or every year. By saving and investing at a consistent rhythm across market cycles, an investor will end up buying more securities when the market is inexpensive and fewer securities when the market is expensive.
 
We continue to recommend a barbell strategy where high-quality companies exposed to secular themes provide exposure to equity markets. The other side of the barbell is cash, actively managed fixed income, and alternative investments that are used to reduce volatility and provide ballast for portfolios. For investors in the distribution phase of their lives, the focus is expanded to optimize the tax efficiency of distributions.
 
Please contact me for a more detailed discussion.
 
Delli (delli@cibc.com)
 
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