An Interesting World

In late March, Credit Suisse was acquired by its larger rival, UBS.  Credit Suisse was founded in 1856 to help fund the development of Switzerland’s railway network.  Its demise generated some fascinating decisions.

Just a few days later, Xi Jinping of China spent several days in Russia with Vladimir Putin.  And this comes after Xi helped broker a peace treaty between Iran and Saudi Arabia.

Credit Suisse

Swiss regulators apparently deemed CS systemically important which led to two critical decisions in the CS/UBS “take-under”.  First was the decision to approve the CS sale to UBS without shareholder approval.  The logic is or was that shareholder rights can be overrun in the interest of the “greater good”. 

The second decision was to simply reduce the value of the CS contingent convertible bonds, known as CoCo’s, to zero.  It has been a doctrine of finance as long as I can remember that bondholders rank above stockholders in the capital structure.

Silicon Valley Bank

Across the pond, U.S. regulators decided to insure all deposits in SVB, regardless of amount.  Again, the bank, or its depositors, or its size, were deemed systemically critical or important.

Currency

For many decades, the U.S. has capitalized on the fact that the U.S. dollar is the world's currency reserve.  China has its sights set on being the dominant economic, military, and political power in the world.  This requires, among other things, a meaningful reserve currency.  China is using its massive consumption and internal resources to build this power base.  Will China at some point achieve some of its goals?  Will the dollar at some point be challenged as the world’s currency reserve?  And if so, what are the implications?

Western Civilization

During our college years, many of us took a class called Western Civilization, or Western Civ.  A handful of ideas have allowed Western Civilization to flourish.  Three are the rule of law, property rights, and individual human rights. 

Regulatory decisions in both Switzerland and the U.S. appear to be undermining these ideas.  How will these incentives change future decision-making and what unknown hazards are being introduced?  What are potential outcomes?  How will China capitalize on this change in decision-making?  We don’t know at this point.  The economies and systems involved are complex.  Though negative outcomes are much more likely than positive ones.

Action

These thoughts aren’t shared to create fear.  Simply to raise awareness of decisions being made.  It can take several years before decisions of this nature filter completely through an economy.  Our recommendations?  Keep no more than $250,000 in any one bank account.  Choose to do business with a local or regional bank rather than the large national banks.  Maintain a very strong cash position.  Eschew debt.  And enjoy life.  The sun continues to come up each morning.

And finally, remember that the best is always yet to come.

Until we see you again, wishing you only the best.