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First Quarter Market Update Letter

First Quarter Market Update Letter

April 21, 2023

Of all my travels, the destination that ranks near the top of my list is Iceland, the land of fire and ice. The country’s landscape and geologic wonders transport visitors to an otherworldly realm where vegetation is sparse, population is scarce, manmade structures are largely corrugated metal, and where extreme temperatures of the earth’s inner fire break through the opposite extreme of the icy surface to create natural hot springs and columns of steam accenting the frozen vistas. How can such beauty result from the co-existing and meeting of equally harsh and opposing conditions?

The Fed, and investors, are hoping for just that in the economic realm as the ice of higher interest rates appears to be cooling the fire of inflation, but whether we will continue on the same moderate trajectory is unknown at this point. Unfortunately, it is looking less likely that we’ll be relaxing in the soothing hot springs of a soft landing of low inflation and slow growth. While we entered the new year anticipating that a mild recession was possible, the unexpected consequence of the Fed’s rising rate campaign in the form of unrealized losses on the asset side of the balance sheet ledger of various mid-size and smaller banks (interest rates and bond prices move in oppositive directions) makes the recession now both more probable and likely more severe that we had previously forecasted. Not only are higher rates a headwind for borrowers, but now banks, in the spotlight, will be ratcheting up their lending standards for both financial reasons and optics alike. So not only did the fire warm the ice, it also burned down a couple of metal buildings in the local village.

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Q1 Market Update Letter