March Newsletter: ‘What If We All Jump Together?’

21 March 2023

As the story goes, if all the people in China were to stand on their chairs and then, at the same time jump off, the resultant landing of 1 billion people would push the world off its axis. Calamity would ensue. In reality though the world is a lot more resilient. Nothing in fact would happen!

A similar story is evolving around the world banking sector. A relatively small Californian bank makes a mistake. It is in financial difficulties. All its depositors (savers) jump off at the same time. And the financial world is expected to fall off its axis. Despite all the headlines on the fragility of the financial system. Despite all the doom-mongers. The financial world is more resilient than that.

Continually though markets seem to be hit ever more frequently by this ‘jump off the chair’ syndrome. We humans after all are hardwired to herd. Few want to be ridiculed by being left out of the crowd. To look too different. We even have things called mirror neurons in our brains that help us mimic others behaviour. So, when something alarming happens we all head for the same exit door.

Now we have gone a step further. We have built computer programmes that mimic our herding behaviour. Just at a faster pace. We have built machines that are programmed to jump off a billion chairs. Get straight back up again and repeat ad infinitum. Why did we do that? For whose benefit? And commentators wonder why we lurch from apparent crisis to crisis….

Still high debt levels around the world are a cause for concern. And banks by their nature are debt laden. That is, after all, why they exist. But they are considerably more robust than at other times in history. Regulation changes over more than a century continue to be focussed on preventing the collapse of banks and the catastrophes that would follow. This time the central bank of the USA, the Federal Reserve, even guaranteed all the deposits (the savers money) held at the collapsing Silicon Valley Bank. All of them. That is effectively saying we won’t allow the jumping off of chairs to lose savers money. Runs on banks at that moment, in the US at least, should have been consigned to history. Yet the herd is rampant. Unable to hear for the thunder of hooves. Already targeting the next victim.

At MVAM we don’t proudly shout out that we stand out from the herd. That somehow in a world of eight billion we can consistently see things differently. But we pick our moments. So, at this moment we aren’t buying the banks collapsing/contagion story, we are buying bank shares instead.