Contrarian Edge: What to Expect After the Silicon Valley Bank Collapse

The past 15 years have been dominated by the 2008 housing meltdown and its aftermath. For years afterward, interest rates were kept at zero percent. While borrowers were still initially reluctant to borrow immediately following the housing crisis… life moves on.

Low interest rates made many projects look attractive that wouldn’t have at higher rates. Many companies used low interest rates to take on corporate debt and buy back shares.

That led to higher share prices. And the interest on the debt, while low, was an expense.

That’s just one way that low interest rates created an environment where risk could increase without feeling risky. Today, investors can feel that risk.

Those who issued debt at low interest rates are feeling the pain as rates rise and the price of that debt falls to match. Long-term mortgages have fallen 20-30 percent, wiping out trillions in value on bank balance sheets.

The good news? The financial system is in far safer shape today. Or at least the housing market is, as borrowers have had to make sizeable down payments and verify income.

But it’s clear that the rapid increase in interest rates is having consequences. And Silicon Valley Bank, which bought long-term government bonds ahead of this jump higher in interest rates, may just be the tip of the iceberg.

What seems like an extreme event may simply be a preview of problems ahead.

To read the full analysis, click here.