Jugs and wells
The proverbial jug goes to the well until it breaks whilst the literal central bank can only raise rates until the damage from associated blow ups reaches a critical level.
Have we reached this point with Silicon Valley Bank failing? Probably not but it is clear that the increase in risk-free rates is exposing more and more of the weak players in the economy.
“Only when the tide goes out do you discover who’s been swimming naked.” Warren Buffett
The famous Warren Buffett quote perfectly nails the current environment and, unfortunately, I believe we will see more accidents like these happening in the future as management ineptitude, greed, operational weaknesses, outright fraud and poor risk management practices are being revealed.
In an environment where the price of money was zero and liquidity abundant, there was no catalyst to bring about the unravelling of an otherwise untenable situation. Zombie companies with no earnings and no prospect of generating sufficient returns have been kept alive by ignorant investors for too many years.
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