NEW YORK: Cracks are appearing in the global financial system as the decade-long era of cheap money ends, with some investors worrying the shock collapse of Silicon Valley Bank signals world markets may be on the cusp of a reckoning.
Over the past year, the US Federal Reserve launched its most aggressive interest rate hiking cycle since the early 1980s and other central banks joined in, leaving global investors to face a gamut of consequences.
They have seen the longest selloff in technology shares since the dotcom bubble at the turn of the millennium, a collapse in the cryptocurrency industry, a run on US and British real estate funds and an intervention by the Bank of England to prevent a near-collapse of British pension funds.
After the second largest bank failure in US history on Friday (Mar 10), market participants worry more disruptions lay ahead, as climbing interest rates cut off access to cheap money and expose vulnerabilities in the economy.
Big investors including Kyle Bass and Bill Ackman argue the government must take quick action to avoid Silicon Valley Bank’s collapse sparking more widespread withdrawals in the banking system.
So far, the pain has been largely felt by investors and institutions who placed risky bets. It remains to be seen whether the pain spreads to others and a new crisis emerges. That could be determined by how hard the world’s central banks continue to push interest rates higher.
“When you go this aggressively into a hiking manoeuvre after creating so much inflation you’re going to break something,” said Kyle Bass, founder and chief investment officer of Hayman Capital Management.