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SPI Management Newsletter 10.03.2023

Banks Lose Billions in Value After Tech Lender SVB Stumbles

On Thursday, SVB Financial Group announced it had lost nearly $2 billion selling assets due to a larger-than-expected decline in deposits. The announcement led investors to dump shares of SVB Financial Group and several other U.S. banks, causing the four biggest U.S. banks to lose $52 billion in market value. The KBW Nasdaq Bank Index also recorded its largest decline since the pandemic started.

The loss in value can be traced to the Federal Reserve's efforts to control inflation by increasing interest rates, which caused existing bonds to lose value. Though most banks aren't selling assets to cover deposit withdrawals, a few have faced trouble recently, fueling concerns that other banks may also take losses to raise cash.

The decline in asset value isn't a problem for banks unless they're forced to sell them to cover deposit withdrawals. But with customers starting to move deposits into higher-yielding alternatives, banks may be pressured to raise interest rates, which would help them retain customers. Banks could also turn to riskier investments in search of higher returns.

While banks may not face problems with large declines in value, SVB's loss has highlighted the importance of maintaining adequate levels of capital to cushion against unexpected losses. SVB plans to raise $2.25 billion in fresh capital by selling new shares to shore up its balance sheet. Other banks may follow suit to reassure investors and maintain their capital adequacy ratios.

SVB's loss caused significant turmoil in the U.S. banking sector, with many banks experiencing steep losses in share value. This serves as a reminder of the risks involved in investing in bonds, especially during periods of rising interest rates. Though most banks aren't yet selling their assets to cover deposit withdrawals, this trend could put pressure on them to raise interest rates or pursue riskier investments in search of higher returns.

Overall, it's essential for banks to maintain adequate levels of capital to cushion against unexpected losses and reassure investors during periods of market volatility.

Joe Biden proposes significant tax hikes in budget to reduce US deficit by $3tn

US President Joe Biden has put forward a comprehensive budget plan which includes significant tax increases for US corporations, high net worth individuals, and investors. According to the White House, these tax increases will reduce the federal deficit by almost $3tn over the next ten years.

The proposed budget will likely not become law due to the Republican control of the House of Representatives following the November midterm elections. Nevertheless, this budget gives Biden the opportunity to present his economic vision ahead of his expected run for a second term in the White House in 2024.

In addition to spending trillions of dollars on various Democratic policy priorities, such as supporting Ukraine and NATO, and increasing healthcare investment for senior citizens and low-income individuals, the White House has insisted that the budget "fully pays for its investments" through raising taxes on large corporations and high earners.

Among the proposed tax increases are a 25% minimum tax rate for billionaires, a 28% corporate tax rate, and an increase in the tax rate on US multinationals' foreign earnings from 10.5% to 21%.

UK economy beats expectations with a rebound in January GDP growth

The UK economy grew by 0.3% in January, exceeding expectations as it continues to fend off an impending recession. Official figures released on Friday showed that economists polled by Reuters had projected a 0.1% monthly increase in GDP. However, GDP was flat over the three months to the end of January, according to the Office for National Statistics.

Despite the better-than-expected January print, economists remain cautious about the outlook for the UK economy. The Bank of England and the Office for Budget Responsibility have both forecast a five-quarter recession beginning in the first quarter of 2023, as high inflation erodes household incomes and business activity. The UK is the only G-7 country yet to fully recover its lost output from the COVID-19 pandemic. The ONS also revealed that monthly GDP is still 0.2% below pre-pandemic levels.

Adapted from WSJ, Reuters, CNBC, NYT, Forbes

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