The SVB Solution Set
Where do we go from here?
INTRO
Lots of smart people are handicapping the Silicon Valley Bank (SVB) situation. There is no shortage of views on what happened and why it happened. And everyone’s favorite sport – guessing and betting on what will happen next. It would be great if we could read more about the solution set. What does this mean for me or my portfolio? What if this is the big one? What can/should I do now to decrease my odds of becoming collateral damage or increase my odds of surviving an extra day?
BACK-CASTING – FROM A WORST-CASE SCENARIO
Back-casting is a planning method that starts with the desired outcome or goal and works backwards from there. We’ll leave two concepts here: a “Crack-up Boom” and an “Ice-9”. Either outcome would be catastrophic. And because the probabilities are not zero, we need to discuss. Let’s define first:
THE WORLDWIDE CRACK-UP BOOM1
But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
ICE-9
From ChatGPT:
Now we see two POTENTIALLY disastrous outcomes. They are not predictions, simply a thought experiment. Situations like this (the rapid fail of SVB) tend to shed light on the fragility of our current system. And it is the interconnectedness (globally) of this fragility that increase the odds of a worst-case scenario (WCS).
A FINANCIAL SOLUTION
We talked about the risks in a 60/40 portfolio (see post here) and offered up a multi-asset solution (here). It is easy (and irresponsible) to say and think that in the WCS, we are all doomed. You’d be correct to think that many/most will be doomed, but these are also generalizations that give us cover for doing nothing. And maybe that is a good thing – to not bother wasting time thinking about this stuff, knowing we are all dead in the end. But, as students of volatility, we live in rabbit holes and relish digging deeper.
We can refer to the above WCS as a pencils-down moment. Just like when your teachers claimed the test time is over – so are the “”markets”” as we know them. All of the sudden our 60/40, our multi-asset, and most every other portfolio won’t look too pretty or be very helpful. We need to ask ourselves – What WOULD be helpful?
We can instantly make a case for financial assets to be outside of the system. This is part of the reason for our 20% allocation towards precious metals (and Bitcoin) in our multi-asset portfolio. The 20% allocation towards real assets may also get out unscathed, depending. We are left with assets that MAY survive the WCS. Yes, 20% is a big allocation for precious metals, and we can debate the proper weight for any person in any given situation, but the punchline is the same – having an allocation of zero is also risky…and uncomfortable.
LOCALISM AS A PANACEA
Let’s dream about OUR version of a 15-minute city. We’d have everything around us within a 15-minute walk or bike-ride. This is a simple and beautiful solution: access to our own water and food sources and a vibrant community with aligned incentives all participating. These systems exist today (think Amish), so we can get a glimpse of this solution.
Yes, this local solution may not be the dream we’ve always had and may not fulfill many of our existing goals. But we are talking about a (broken) system that needs to be rethought. We are talking about new perspectives and new solutions.
A BIG GAP TO FILL
There exists a large gap between our current system and the day-to-day localism we mention. But the solution is out there, and now we have to figure out how to close this gap. How can we be part of this solution? How can we get from here to there?
One of our goals at C&P is to be part of the solution. Today we are planting the seeds for our JOURNEY TOWARDS VOLATILITY SOLUTIONS.
Stay tuned….