To Our Investors and Friends,
The S&P 500 Index increased about 3.5% in March, finishing the quarter up a respectable 7.0%. Oil was down 6% in the quarter, ending at $76 a barrel as economic optimism diminished in March. A handful of important bank failures were the catalyst for interest rates dramatically changing direction. After first rising earlier in the quarter, the 10-year Treasury bond reversed course, ending 40 basis points lower in the quarter to finish at 3.5%, while short-term rates fell 80 basis points, ending at 50 basis points above the 10-year. Many claimed the Federal Reserve (Fed) would increase interest rates until something broke, and that appears to be exactly what is happening. Renewed economic uncertainty and a now highly anticipated recession turned large growth into safety and small caps into a high-risk asset class. For the entire quarter, the Russell 1000 Growth Index finished up 14.4%, the Russell 2000 Growth Index up 6.1% and the financially sensitive value indexes performed worse; the Russell 1000 Value Index was up about 1.0% and the Russell 2000 Value Index ended down .7%.
The rapid collapse of Silicon Valley Bank and Signature Bank in the middle of March is the direct result of something enabled by the digital economy – the fastest bank runs in human history. Silicon Valley Bank experienced a $140 billion deposit withdrawal in two days as a very nervous deposit base, startups that have no easy sources of additional capital BUT are incredibly digitally savvy, pulled their money out as fast as their iPhones could process their instructions. The shuttered banks are just a subset of the bank run crisis, as many other tier-two and community banks saw significant deposit flights that will be fully revealed when these banks report first quarter results in the coming weeks. We will most certainly see continued wind-down of the asset/liability mismatch facing many banks in the months ahead, reducing available credit in the economy.
We believe the Fed/FDIC/Treasury reacted effectively and appropriately with impressive speed, restoring credibility to the banking sector. They also importantly cut the cryptocurrency economy from the dollar-based financial system through the closure of Signature Bank and Silvergate Capital before that. Cryptocurrency holders will now have a more difficult time exchanging dollars for crypto and vice versa for the foreseeable future, preventing what could be an even bigger problem down the road. We have not yet found an investable business built on crypto, and with 17,195 different cryptocurrencies in existence, according to the Coinbase database, the “asset class” may create far more losses for speculators than even the SPAC industry will in the years ahead.
What is becoming clearer is that the new digital age can create losses for the unaware and uninformed faster than ever before. The fight or flight response of people is only getting more intense in the digital world and will likely create and destroy fortunes faster than the speed of light.
At Kingsland Investments, we seek great businesses that we believe have the potential to create fortunes over years. The new digital era has brought us better ways to connect, but an equal number of ways for the technology savvy to take advantage of the naive. With far more perils ahead, it is more important than ever to take the time to understand each investment opportunity than to jump into the abyss without a parachute.
All the best to you,
Arthur K. Weise, CFA
The views expressed are those of Kingsland Investments as of April 1, 2023, and are not intended as investment advice or recommendation. For informational purposes only. Investments are subject to market risk, including the loss of principal. Past performance does not guarantee future results. The stocks mentioned are for illustrative purposes only and are not a recommendation to buy or sell. There can be no assurances that any of the trends described herein will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of future events or results. Investors cannot invest directly in an index.