1Q 2023 Market and Economic Overview

History is littered with examples of ‘unintended consequences’. The latest are the wrecks that remain of Silicon Valley Bank (SVB) and Credit Suisse (CS). Granted that the issues at CS were more related to mismanagement and an organisational culture that appeared to not have learnt from the lessons of previous risk-taking, but the effect was similar: a broad-based loss of confidence. To provide some background, we provide an excerpt from the VT Argonaut Absolute Return Fund factsheet as at March 31. The fund manager, Barry Norris writes: Let’s recap events the events of the last month, on Wednesday March 7th, Silicon Valley Bank (SVB) attempted (and failed) to raise new equity to repair its balance sheet, following the sale of part of its securities portfolio, which resulted in $2bn of losses from Treasuries and MortgageBacked Securities, which it had previously told the market was “safe”. On Friday March 9th, Silicon Valley Bank was designated as “failed” by the Federal Deposit Insurance Scheme (FDIC) since it did not have enough liquidity to meet depositor demands for cash. Then on Sunday 11th, Signature Bank was closed by New York regulators over liquidity and lingering money laundering concerns relating to its crypto payments network. The crisis then spread to Europe with specific concerns about Credit Suisse which had already disclosed it had lost 38% of its deposit base in the previous quarter. By Sunday March 19th, faced with the threat of being taken into government ownership, its management accepted a rescue bid of $3bn, worth half its previous trading price from rival UBS, following which the Swiss government announced that the bank’s $17bn AT1 bonds would be zeroed (i.e. be cancelled/not repay investors), causing considerable consternation over the hierarchy of credit risk. To interject, we repeat: the reason that SVB needed to repair its balance sheet through the issuance of new shares was because the bank had lost USD 2bn on the portfolio of fixed income securities that it held on its own books. How could it have lost so much money on what is ostensibly a relatively safe asset class?