Edition 48 - How to deal with economic whiplash.

Hey folks,?

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We’ve hit mid-week once again and right now I’m on the train from sleepy Norwich on route to 11:FS HQ in London.

I can’t help but talk about the current financial climate this week as it is quite frankly taking up all the time I get to have talking to clients around the world.

As one bank CEO put it to me this week, “we are witnessing the whiplash of a gigantic market swing from one where interest rates haven’t been very interesting to one where they are quadrupling in a matter of months”. This is fundamentally breaking the spreadsheets running the economics of their products and at an aggregate position in their businesses.

One thing is for certain this is nothing like the 2008 crisis as this time we have a culmination of recession and inflation AND high interest rates. But like in most stories there are always winners as well as losers, and there is a key reason why those who are winning have a tendency to be crisis proof.?

Let’s double click. ????

Naughty noughties.

Arrrrh the noughties. I was young and free. No real responsibilities to talk about and the music made more sense to me. We also had these things called interest rates which haven’t been at the heights as they are today in 2023 as they were back then.?

Back then people had expectations that if you borrowed money or saved money with people that thing called an interest rate would penalise you / benefit you from doing so.

Ironically the last crisis put an end to those days and we entered into a period of “lower for longer”. Rates just dropped off a cliff.

Mortgages were cheaper. Hurray. Savings rates were appalling. Everyone chased the stock market for those hits of increases and crypto somewhere in there tried to plug that hole of people looking for a quick buck.

This went on for some time until late 2021 when like a flared trouser or even the fabled mullet hair cut… it comes back into our lives.

When you’re just at the Bank of England number from late 2021 to today you cannot truly be in any way surprised by just how weird a market we are operating in.?

Some people are killing it. If you have a massive mortgage book then you are making more money without doing anything differently. If you are a credit card company, times are hard. If you are a savings business you are having to give up more and more interest and so on and so forth. There are winners and there are losers.

Darwin knew it best.?

Every week at the moment there is a headline talking about rising interest rates and we’re now facing the repercussions of years of not having to think about those things.?

Businesses are having to shift because markets are changing and systems just aren’t dealing with that speed of change. When I say systems I mean the spreadsheets that run these businesses where all their products profit roll up into their group spreadsheets. Let’s pretend that's not what happens.

Take SVB. They had a spreadsheet that ran the whole business. Their what if’s didn't account for such dramatic shifts in rates. For them, it was like getting sunburnt when you’re skiing. You don't expect it the first time it happens. Unbeknown to them doing the BAU that they ‘do best’, there was a looming threat that only became apparent when holding a mirror up to their operational structure.?

While the narrative for many people's analysis of SVB was how silly tech people don't get banking then we need to look at Credit Suisse - a 300 year old bank who is struggling also. A company who does know better with super smart people who I know personally working there.

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change. - Charles Darwin?

While I know many people at big organisations, who are struggling in these times, are incredibly smart then in these times it doesn’t matter how many customers you have or how long the organisation has been running when the world you know stops being.

Any organisms, or organisations for that matter, ability to survive changing environmental conditions is firstly based on their ability to recognise the pattern and secondly shift their ways of thinking to that new reality, and not allow brain drain back to the ways of before.

How do you deal with economic whiplash?

If you’re a monoline credit card company right now the world sucks but on the flip side if you’re a mortgage lender the likelihood is you’re doing super well with the market soaring! Stocks are crashing and some banks are failing.

There’s a common theme with all of these scenarios though which is good advice for everyone whether it's you investing your own money or a bank investing in the pursuit of product revenue opportunity.

It is one that when you say it out loud it kinda becomes a no brainer. The way to dispel volatility and ensure that you never lose is by managing risk across a portfolio. In other words, spread betting.?

For banks it's called universal banking. Retail banks, investment banks, mortgage products and savings products. All balance. You win some; you lose some but you balance and you systematically survive and thrive whatever the market conditions.

For people it is all about spreading risk. Like not putting all your money on the 3:40 at Kempton. You don't want to concentrate all your resources on one risk. Make investments across different pools and pots so when the market does a backflip you don't have to leave your house.

It’s probably about now that I’m legally obligated to say that this isn't financial advice… but also… it is.?

As my Dad always taught me, spread your risk and only gamble money you're able to lose.

See you next week.

Dx