My Worst Investment Ever Podcast

BIO: Paul Hodges is a trusted adviser to major companies and the investment community and has a proven track record of accurately identifying key trends in global marketplaces. He is chairman of New Normal Consulting and a Global Expert with the World Economic Forum.STORY: Paul invested in a company in the cinema industry, which according to his research, was a well-performing business. After investing, his bank’s asset manager advised him to sell this stock. The stock grew 10-fold after that. Paul missed out on that windfall.LEARNING: There’s no substitute for judgment. Distinguish between opinion and knowledge. Opinions are not knowledge. “Distinguish between opinion and knowledge. There’ll be many people who know more than you do, but they don’t actually know what they’re talking about.”Paul Hodges Guest profilePaul Hodges is a trusted adviser to major companies and the investment community and has a proven track record of accurately identifying key trends in global marketplaces. He is chairman of New Normal Consulting and a Global Expert with the World Economic Forum.His consulting work focuses on the major paradigm shifts taking place in the global economy in Demand Patterns, Reshoring of Supply Chains, Renewable Energy, Circular Economy, Advanced Manufacturing, and Financial Markets. He is a regular speaker at international and industry conferences.Worst investment everPaul was lucky enough to work for one of the UK’s biggest companies, where he had access to the best pension fund advisors. Paul went to one of those advisors and told them he had 20,000 pounds to invest. The advisor gave him a portfolio of eight businesses.A couple of years later, Paul started seriously thinking about a company he had kept an eye on for a while. It was in the cinema industry. The company was paying a very high dividend of 10%. It had quite a lot of cash in the bank, but everybody hated it. However, Paul went to the cinema a lot. He figured many other people also went to the cinema, so it would be a good company to invest in. Paul invested some money into that stock and added it to his portfolio.One day his bank wrote to him, saying they’d happily give him an expert review of his portfolio. They told him he had an excellent portfolio but advised him to sell the cinema company, which he did. The stock went up 10-fold after Paul sold his shares.Lessons learnedThere’s no substitute for judgment.The key to success in anything is persistence.Distinguish between opinion and knowledge.Andrew’s takeawaysEverybody’s got an opinion, but not everybody has knowledge.Opinions are not knowledge.Paul’s recommendationsPaul recommends reading a lot to continue learning.No.1 goal for the next 12 monthsPaul’s number one goal for the next 12 months is to focus on his family, especially his kids and grandkids.Parting words “It was great being here!”Paul Hodges [spp-transcript] Connect with Paul HodgesLinkedInTwitterWebsitePodcastBookAndrew’s booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master ClassThe Become a Better Investor CommunityHow to Start Building Your Wealth Investing in the Stock MarketFinance Made Ridiculously SimpleFVMR Investing: Quantamental Investing Across the WorldBecome a Great Presenter and Increase Your InfluenceTransform Your Business with Dr. Deming’s 14 PointsAchieve Your GoalsConnect with Andrew Stotz:astotz.comLinkedInFacebookInstagramTwitterYouTubeMy Worst Investment Ever Podcast

BIO: The founder of FI Freedom Retreats, Amy Minkley’s, life changed when she discovered the Financial Independence movement in 2019.STORY: Amy was working in Bangkok, living an unhappy life of overworking and over-saving. This way of life gave her zero balance, and she was burning out. Ultimately, this led her to a new path that saw her quit her job in search of a more balanced life.LEARNING: Be clear about your values and spend on that and not what others value. Separate creating wealth from growing wealth. “Knowing what your enough is allows you to grow the gap between your income and spending and then invest that gap.”Amy Minkley Guest profileThe founder of FI Freedom Retreats, Amy Minkley’s, life changed when she discovered the Financial Independence movement in 2019. After working in Asia for 18 years, she was burned out. In a frantic bid to save her sanity and relationship, a late-night online search led her to the FIRE (Financial Independence, Retire Early) movement. Armed with the knowledge of hundreds of FIRE blogs and podcasts, Amy gained a new sense of hope, overcame the “one more year” syndrome, and quit her job in Bangkok. In 2021, she moved to Bali to live her dream life and share the message of Financial Independence and purposeful living. She is now happily engaged to her Australian beloved and organizing transformational FI retreats.Worst investment everWhen Amy worked in Bangkok, she was unhappy and ran on an old pattern of overworking and over-saving. She was saving 90% of her income and investing it all. This cycle saw Amy tell herself she needed to work one more year and save more. So she continued overworking herself into the ground, leaving her with no work-life balance.Then one day, Amy had this idea to have a conference in Asia. This led her to a new path that saw her quit her job in search of a more balanced life. Amy will host a FI Freedom Retreat in Bali, Indonesia, from September 27 to October 1.Amy will be bringing in great speakers with a lot of expertise. She aims to have speakers offering attendees information and knowledge that will transform their lives.Attendees will not only go on adventures in Bali, connect with the Balinese people, and immerse in the Balinese culture but also get the intrinsic value of community.Lessons learnedBe clear about your values and spend on that and not what other people value.Ask yourself what is your enough. Once you know what is enough to make you happy, you can grow the gap between what you’re earning and what you’re spending and then invest that gap.Even as you create, grow, and protect your wealth, make sure you also enjoy spending on what you value.Andrew’s takeawaysSeparate creating wealth from growing wealth.Once you grow your wealth, ultimately, you have to protect it.Amy’s recommendationsIf you want to learn more about investing and financial investment, Amy recommends reading The Simple Path to Wealth: Your road map to financial independence and a rich, free life, listening to relevant podcasts such as the ChooseFI podcast, and attending in-person events near you.No.1 goal for the next 12 monthsAmy’s number one goal for the next 12 months is to create an incredible FI freedom event where she’ll bring together exceptional speakers and a great group of people. She hopes the event will allow attendees to talk, connect, and build relationships.Parting words “Take the plunge in your life and really reflect on what you want. Then ask yourself if your money aligns with that. If yes, take a plunge with it.”Amy Minkley [spp-transcript] Connect with Amy MinkleyInstagramWebsiteAndrew’s booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master ClassThe Become a Better Investor CommunityHow to Start Building Your Wealth Investing in the Stock MarketFinance Made Ridiculously SimpleFVMR Investing: Quantamental Investing Across the WorldBecome a Great Presenter and Increase Your InfluenceTransform Your Business with Dr. Deming’s 14 PointsAchieve Your GoalsConnect with Andrew Stotz:astotz.comLinkedInFacebookInstagramTwitterYouTubeMy Worst Investment Ever Podcast

BIO: Ben Claremon joined Cove Street in 2011 and has been a Co-Portfolio Manager for the Classic Value | Small Cap PLUS strategy since its inception in 2016.STORY: Benjamin has made the biggest mistakes and lost the most money by buying cheap companies that get less valuable over time.LEARNING: Know what kind of investor you are and let your portfolio reflects that. Just because it’s cheap doesn’t mean you have to buy it. Invest in a business you can own for years. “It’s hard to establish a true margin of safety when the intrinsic value is falling over time. It’s like catching a falling knife.”Benjamin Claremon Guest profileBen Claremon joined Cove Street in 2011 and has been a Co-Portfolio Manager for the Classic Value | Small Cap PLUS strategy since its inception in 2016. His background includes positions on the long and short side of hedge funds as well as commercial real estate finance and management. Ben is the proprietor of the value investing blog The Inoculated Investor, the founder of the 10-K Club of Southern California, and the host of the podcast Compounders: The Anatomy of a Mutlibagger.Worst investment everThe place where Benjamin has made the biggest mistakes and lost the most money is with companies that get less valuable over time. These are businesses facing secular headwinds or outright secular decline. Every day, the businesses become worth a little bit less. They seem lucrative to buy when they’re cheap and sell when the valuation goes from highly depressed to merely depressed. However, businesses that don’t get more valuable, over time, tend to throw curveballs at you that you might not be expecting. Whether it’s a balance sheet issue, a capital allocation issue, or a management change, trouble just breeds more trouble.There was such a company that Benjamin was relatively public on. When investing in this company, Benjamin thought there was a distinctive margin of safety. He believed the management team understood how to create value for shareholders. The company had valuable assets that could be sold at higher prices in the current valuation. And that capital allocation changes could have increased the company’s value relative to the current stock price.For this reason, Benjamin thought that the business connectivity and the business services sides were worth a certain fair amount more than the stock was trading for. He was looking at a situation where the value was much higher if they could just unlock it via divestitures. Amazingly, that’s precisely what the management did. They sold three businesses, all of which were at multiples higher than the stock price. But, to date, the stock is still down.Lessons learnedBefore you invest in a company, ask yourself, does this business look like it is getting more valuable over time and has a chance to compound? If the answer is no, don’t waste your time on it.Know what kind of investor you are, what fits your temperament, and what allows you to sleep well at night. Then let your portfolio reflects that.You’re better off investing in a business you can own for years instead of one meant to be sold.When investing, consider the moat trajectory and determine if the company is stable, expanding, or contracting. If it’s contracting, don’t assume that a cheap valuation will protect you from what will happen over the next couple of years.Andrew’s takeawaysGrow and learn from mistakes, and don’t let them scar you.Companies go through upcycles and downcycles all the time. Understand which cycle you want to invest in, then find your investing style.Whether it’s in your personal, investing, or business life, remember the impact of taxes can be enormous.Just because it’s cheap doesn’t mean you have to buy it.During a mergers and acquisition deal, buy the company being acquired, don’t buy the acquirer.No.1 goal for the next 12 monthsBenjamin’s number one goal for the next 12 months is to be a better investor than he is today. So everything he does on the investment side is focused on being consistent, repeatable, thoughtful, reflective when he’s wrong, and willing to learn from others.Parting words “The cool thing about this industry is that people share so much of what’s made them successful. You can just pick, choose and steal very liberally, and create your own frame and understand what kind of investor you are.”Benjamin Claremon [spp-transcript] Connect with Benjamin ClaremonLinkedInTwitterWebsiteBlogPodcastAndrew’s booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master ClassThe Become a Better Investor CommunityHow to Start Building Your Wealth Investing in the Stock MarketFinance Made Ridiculously SimpleFVMR Investing: Quantamental Investing Across the WorldBecome a Great Presenter and Increase Your InfluenceTransform Your Business with Dr. Deming’s 14 PointsAchieve Your GoalsConnect with Andrew Stotz:astotz.comLinkedInFacebookInstagramTwitterYouTubeMy Worst Investment Ever Podcast

BIO: Edward McQuarrie is Professor Emeritus at Santa Clara University. He writes on market history and personal finance, and his research has been mentioned in columns in the Wall Street Journal, Marketwatch, and Barron’s.STORY: Edward opened an account to trade naked puts. When the financial crisis of 2008 hit, he thought it was a good time to sell his puts. He ended up losing almost all the money in his account.LEARNING: Keep your play money small. Never trade your treasury bond until maturity to avoid losses. “I find intermediate treasuries to be superior to total bonds, especially for new investors.”Edward McQuarrie Guest profileEdward McQuarrie is Professor Emeritus at Santa Clara University. He writes on market history and personal finance, and his research has been mentioned in columns in the Wall Street Journal, Marketwatch, and Barron’s. His papers can be downloaded from SSRN.com, and he posts as McQ at Bogleheads.org, where you can view some of the charts mentioned today.Worst investment everYears ago, Edward gave himself a small play account to keep his hands off the money in his 401(k) account. In that play account, which he opened with a broker, Edward began to trade options, and more particularly, he began to sell naked puts.Then the great financial crisis of 2008 hit. Edward had been trading puts and calls for four or five years at that point. By November 2008, the Lehman Brothers had already gone bust, and the markets were going down, so Edward thought this was an excellent time to sell a naked put.At that point, Edward had $21,000 in his play account, and his maintenance requirement was only $11,000. A day later, he logged into his account and found a balance of $11,000 and a $21,000 maintenance requirement. This meant Edward was $10,000 short. His best option was to take the loss and reduce the maintenance requirement. So after 30 minutes of frenzy to position covering, Edward still got a margin of about $2,000, which he had to cover with money outside the play account.Lessons learnedKeep your play money small.Always have a lifeline in case you totally screw it up.Nobody holding a US Treasury to maturity loses their money nominally. It’s when you trade them before maturity that you can lose significantly.Andrew’s takeawaysAlways have a backup plan to survive.Get into a short-duration bond when you think that bond prices will fall. On the other hand, invest in a long-duration bond if you think that prices will rise.No.1 goal for the next 12 monthsEdward’s number one goal for the next 12 months is to write as much good stuff as he can pump out the door.Parting words “Own the total stock market, just like Andrew said.”Edward McQuarrie [spp-transcript] Connect with Edward McQuarrieLinkedInWebsiteBooksAndrew’s booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master ClassThe Become a Better Investor CommunityHow to Start Building Your Wealth Investing in the Stock MarketFinance Made Ridiculously SimpleFVMR Investing: Quantamental Investing Across the WorldBecome a Great Presenter and Increase Your InfluenceTransform Your Business with Dr. Deming’s 14 PointsAchieve Your GoalsConnect with Andrew Stotz:astotz.comLinkedInFacebookInstagramTwitterYouTubeMy Worst Investment Ever Podcast

Is global CPI going to follow the US CPI slowdown?Global MarketsGlobal CPI has leveled off and is slowing in DMs, but still rising in EMsEconomies across the world have GDP of about US$90trn and an average CPI rate of 7.4%The developed world has GDP of US$52trn and CPI of 6.9%And the emerging world has GDP of US$38trn and a higher 8.2% CPI rateWorld Jan. 2023 CPI was 7.4%, up 2.1ppts YoY; MoM DM continues to fall, while EM is risingDM Jan. 2023 CPI was 6.9%, up 1.5ppts YoY, but falling slightly MoMEM Jan. 2023 CPI was 8.2%, up 2.9ppts YoY, and is rising MoMKey pointsGlobal CPI was 7.4% in January, up 2.1ppts YoY, but it was flat MoMDeveloped world CPI was 6.9%, up 1.5ppts YoY, but falling slightly MoMEmerging world CPI in January at 8.2%, up 2.9ppts YoY, and it rose MoMDeveloped Markets RegionsCPI is contained in DM Americas, peaking in DM Europe, and rising in DM AsiaWith in the Developed Markets, DM Americas is the largest with US$25trn of GDP and 6.3% CPIDeveloped Europe has US$15trn of GDP and a higher 8.3% CPIDeveloped Pacific is smaller at US$8trn and has the lowest CPI of the developed regions at 5.1%DM Americas CPI falling, DM Europe peaking, DM Asia rising12 months ago, DM Americas had a 7.4% CPI which is now down to 6.3%, a 1.1ppts fallThis means that CPI went from 2.1ppts above the global average to 1.1ppts belowDM Europe rose from 4.4% 12 months ago to 8.3%, up 3.8pptsThis means it went from 0.9ppts below to 0.8ppts above the global averageCPI is racing up in DM Pacific from 1.5% 12 months ago to the current 5.1%, that’s a 3.6ppts increaseIt has gone from 3.8ppts lower than World CPI to 2.4ppts lowerKey pointsDM Americas 6.3% January CPI is down from 7.4% 12 months ago; and has now shifted from being 2.1ppts above the global average to 1.1ppts belowCPI nearly doubled in DM Europe over the past 12 months from 4.4% to 8.3%, shifting from about 1ppts below to 1ppts above the global averageCPI in the must smaller DM Pacific region raced up from 1.5% 12 months ago to the current 5.1%; despite that massive 3.6ppts increase, it remains about 2.4ppts lower than the global averageEmerging MarketsEM CPI rising in Asia, Middle East and Africa, and Frontier markets on fireEM Americas had a small GDP of US$3.8trn and CPI of 7.9%EM Asia had a massive GDP of US$25.7trn and 3.2% CPIEM Europe had US$3.9trn GDP and a massive 23% CPIEM Middle East and Africa had a small US$1.7trn GDP and a high 10.2% CPIFinally, Frontier markets had US$2.9trn GDP and 30% CPIEM CPI rising in Asia, Middle East and Africa, and Frontier markets on fireEM Americas CPI was 7.9% in January, down slightly from 8.5% 12 months agoEM Asia CPI went from a tiny 1.9% 12 months ago to 3.2% and is still 4.3ppts below the World CPIMost notably, this has ticked up slightly MoMEM Europe CPI was 23% and over the past two months has been falling; though it is still 15.5ppts above the World averageEM ME&A CPI was 10.2% compared to 3.7% 12 months ago. It has now risen to be 2.8ppts above the world average compared to 1.7ppts below 12 months agoConsumer prices are on fire in Frontier markets up 30% YoY in January; this is double where they were 12 months ago; CPI keeps rising MoM and is now 22.5ppts above the world averageKey pointsEM Americas CPI was 7.9% in January, down slightly from 8.5% 12 months agoEM Asia CPI went from a tiny 1.9% 12 months ago to 3.2% and is still 4.3ppts below the World CPI. Most notably, this has ticked up slightly MoMEM Europe CPI was 23% and over the past two months has been falling; though it is still 15.5ppts above the World averageEM ME&A CPI was 10.2% compared to 3.7% 12 months ago. It has now risen to be 2.8ppts above the world average compared to 1.7ppts below 12 months agoConsumer prices are on fire in Frontier markets up 30% YoY in January; this is double where they were 12 months ago; CPI keeps rising MoM and is now 22.5ppts above the world averageDeveloped MarketsCPI is flattening in major developed markets, led by US CPI fallTop five DM countriesOnly US CPI is falling YoY; UK has started falling MoM; Germany, Japan, and France are risingUSA CPI was 6.4% in January, down from 7.6% a year ago; it has gone from 2.2ppts above the global average to -1.1ppts belowFebruary just came out for US CPI at 6.0%. Unfortunately, February numbers are not out for all the other countries, so we focus now on JanuaryJapan's CPI went racing up from 0.5% 12 months ago to 4.4% in January; though it remains at a deep discount to the global average, it appears to be closing that gapGermany's CPI doubled from 4% 12 months ago, which was 1.4ppts below the worldwide average, to 8.8% now, 1.3ppts above the global averageUK CPI started 12 months ago relatively high at 5.4% and is now has doubled to 10.2%; though it has fallen slightly MoMFrance's CPI was a low 3% a year ago and has doubled to 6.1%, which is still 1.3ppts below the global averageKey pointsUSA CPI fell to 6.4% in January and 6.0% in February, going from 2.2ppts above the global average to 1.1ppts belowJapan's CPI increased by 8x from 0.5% 12 months ago to 4.4% in JanuaryGermany's CPI doubled to 8.8%, going from 1.4ppts below the worldwide average to 1.3ppts aboveUK CPI doubled to 10.2%; though it has fallen slightly MoMFrance's CPI doubled to 6.1%, which is still 1.3ppts below the global averageEmerging MarketsCPI uptick in EM Asia giants, China and India, could keep EM CPI risingEmerging worldCPI is rising YoY in China, India, Korea, and Russia; falling only in BrazilChina's CPI at 2% is low but rising; 12 months ago, it was at 0.8%, and it has been slow to rise, partially because of the covid lockdown; it is 5.4ppts below the global average and could rise substantiallyIndia's 6.5% CPI was almost flat compared to 12 months ago, hovering at about the global averageKorea CPI at 5.2% has been steady at about 2ppts below the global average and is up 1.7ppts from 3.5% 12 months agoRussia's CPI was 11.8% in January and has been on a steady decline from its 18% peak in April 2022 near the start of the war; though it is still 4.3ppts above the global average12 months ago, Brazil was struggling with about 10% CPI, but previous aggressive rate hikes have cut CPI in almost half to 5.8%, taking it from 4.9ppts above the global average to 1.7ppts belowKey pointsChina's 2% CPI is 5.4ppts below the global average and could rise substantiallyIndia's 6.5% CPI has been steady at about the global average, low risk of shockKorea CPI 5.2% was up 1.7ppts but has been steady at about 2ppts below the global averageRussia's CPI has been on a steady decline from its April 2022 18% peak to 11.8%Over the past 12 months, Brazil cut its CPI in half to January's 5.8%, moving it from 4.9ppts above the global average to 1.7ppts below Click here to get the PDF with all charts and graphs Andrew’s booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master ClassThe Become a Better Investor CommunityHow to Start Building Your Wealth Investing in the Stock MarketFinance Made Ridiculously SimpleFVMR Investing: Quantamental Investing Across the WorldBecome a Great Presenter and Increase Your InfluenceTransform Your Business with Dr. Deming’s 14 PointsAchieve Your GoalsConnect with Andrew Stotz:astotz.comLinkedInFacebookInstagramTwitterYouTubeMy Worst Investment Ever Podcast

Did the Fed finally break something with its aggressive rate rises? I’ve been repeating in my investment strategy that the Fed will eventually break something, and yes, they did. They did.Was the collapse of the Silicon Valley Bank the beginning of the 2023 US banking crisis?Has quantitative tightening ended?Are we in quantitative easing?Could this spread throughout the US?Or the global banking system?Was this caused by the government or the bad behavior of banks?Is the dollar going up or down due to what’s happening?Could this trigger a much-anticipated recession in America?And how does this impact Feds tightening and inflation the Fed is meeting this week?Did the Fed finally break something with its aggressive rate rises?Was the collapse of the Silicon Valley Bank the beginning of the 2023 US banking crisis?First, we start with the situation of Silicon Valley Bank, which is going bust. In Silicon Valley Bank’s case, first of all, there was a huge influx of deposits into Silicon Valley Bank over the last couple of years, as well as the whole banking sector in the US.Where did these deposits come from? In the US, those deposits came from the US government pumping money into the hands of individuals and companies through the various and massive stimulus programs during the covid shutdown. Those stimulus packages passed by Congress went into the banks as deposits from individuals and companies.Consider the fact that most countries around the world couldn’t do this. Thailand where I am right now, there’s no way the government could print all that money because the currency would have collapsed. And therefore, most governments did not have the privilege of having a reserve currency asset and the ability to print as much money as needed. So America is quite unique in this, and that’s one of the reasons why what’s happening in the US is may not spread to such an extent globally.What did Silicon Valley Bank do when they got all these deposits?Well, they didn’t have enough loans available to lend this money out. A bank does basically three things with the deposits that it receives: 1) it can hold it as cash, 2) it can buy some security or investment, like a security that could be traded, or 3) the traditional business of a bank, is they lend out money.Now if they had a lot of opportunities to lend that money out, they would have locked that money up in loans. Now imagine that a bank had 5% cash, 5% securities, and 90% loans. If people wanted to pull their deposits out of the bank, the bank would have 5% of the money available of their total, and then another 5%, they could sell those securities and repay deposits.Now they could also go to the government to the Fed and borrow some money to repay deposits to prevent a bank run. But it’s not so easy to get out of loans, right? If you’ve lent money to a company and need that money back, you can’t get that. So the loans are very illiquid, but securities are very liquid.After the 2008 crisis, new regulations tried to force the banks to hold more cashNow, let’s add that after the 2008 crisis, basically, the US government came up with new regulations that tried to force the banks to hold more cash and more securities, with the idea being that the combination of cash and securities would be highly liquid assets. And basically, the banks would then be able to pay back if any depositors came, they would be able to pay back.In fact, at the peak liquidity of the banks, you had almost 20% of the US banking sector’s assets in cash and almost 20% in securities. That means almost 40% of the bank’s balance sheet was in highly liquid assets.Now also what the US government did is they said, look, if you buy US Treasuries, we’ll count them as purely risk-free, meaning that you don’t have to put aside any capital for that. And remember, the US government was borrowing tons of money. So they needed the banks to own these treasuries. So they provide an incentive for the banks to own government securities, knowing that 1) those are risk-free assets, and 2) knowing that the federal government was borrowing a ton of money, and they needed the banks, not just the Fed, to buy those to buy the bonds that the Treasury was issuing.I thought that US Treasury bonds were risk-freeAnd now we have all this risk that we’re talking about? Well, where US Treasuries are risk-free is they are credit risk-free. In other words, it’s almost impossible to imagine that the US government wouldn’t print the money needed to pay back the debts that they owe.Now, when they print money to pay back debts that they owe, of course, they’re devaluing the US dollar, but still, you’re gonna get paid. So when we talk about risk-free, we’re talking about credit risk-free, but that doesn’t mean that they’re not interest rate risk-free. In other words, what does that mean?Remember that the Treasury rate for a 10-year bond, going back a few years, was about 1%. Imagine a bank buying a huge portfolio of these 1% government bonds. And then, all of a sudden, the Fed starts to raise interest rates.Let’s say that you own three-year government bonds. And then the Fed starts raising interest rates, and suddenly, someone out in the market could buy a three-year government bond at a, let’s say, 4-5% interest rate. And now you’re holding one that only pays 1%, holy crap; yours is not worth that much compared to others. To get other people to buy the bond you may want to sell, you’ll have to reduce the price. And it’s going to be a price reduction somewhere between 10% and 30, or 40%, depending on the maturity. In this case, we said three-year maturity. And so that means probably a 10 to 20% loss on that bond.Did the Fed cause this problem?Well? Yeah, I think so. Basically, what the Fed did is the Fed aggressively raised interest rates, knowing that all the banks were sitting on a large amount of US Treasury bonds. Now, in the case of US Treasury bonds, whenever you own a bond, you’re exposed to interest rate risk. So what is the risk management of a bank?Well, the risk management of a bank basically looks at all these different risks and says, how do we hedge this particular risk? So technically, the bank’s not really in the business of trying to make a lot of money on this; they’re in the business of raising deposits and lending those out.So what they want to do is protect the risk on their portfolio so that the value of the bond doesn’t collapse, and then all of a sudden, the bank is wiped out? Well, basically, what happened is that many of them, the larger ones, in particular, did do some hedging to try to cover this risk. Now, in the bank’s financial statements, you can see analysis, the type of analysis that they do, which is looking at interest rate risk, and they basically say if the interest rates go up by 100, or 200, or 300 bps, it would cause this amount of potential interest rate risk.Now, if you’re holding a bond to maturity, it’s a little bit different, right? Let’s just say that you as an individual bought a US government bond, that’s a 10-year bond, and you’re gonna hold it for 10 years, and it’s earning 1%. Now, if US Treasury bonds, 10-year treasury bonds now are trading at 5%. If you wanted to sell that bond into the market, yes, you’re going to experience a loss because that bond is no longer attractive because it’s only paying 1%. So you got to reduce the price to equalize the return of that bond between this from 1% to 5%.However, if you say, well, I don’t really care, I bought this bond for 10 years, I’m gonna hold it for 10 years to maturity, then you are not going to experience this risk, or this lower price, in fact, you’re going to get all of your money back. And so when you get all your money back at the end of the 10 years, you have gotten a pure 1% return.And that’s part of what Silicon Valley Bank had done is that they had put there, the excess liquidity that they had, they had put into held-to-maturity bonds. When you hold to maturity under US accounting rules, you don’t need to account for this interest rate risk, because you’re going to be holding to maturity.And there’s a lot of debate about if you were to put that security up for sale; that’s called available-for-sale securities. And for that one, you are going to have to mark it to market and say, well, there’s a big loss on this. But if you hold it to maturity, then you don’t have to. Well, also, what you’re doing is you’re not marking it to market through the P&L. You’re marking it to market through the balance sheet and the equity section of the balance sheet.Silicon Valley Bank received a lot of deposits, they have a lot of customers, and they’re happy with their deposits there. And then something went wrong. And when that one thing went wrong, all of these friends who are all tech startups and tech companies, all of a sudden told each other, hey, take your money out; there’s a risk at Silicon Valley Bank.And all of a sudden, Silicon Valley Bank had a run on the bank, meaning that its deposits were withdrawn superfast. So they sold their available-for-sale securities first because they’d already marked down the value of those. So they didn’t have any major loss from those.But then they had to sell their held-to-maturity assets. It is just like if you owned a 10-year bond, you’re not going to sell it, you’re going to hold it for 10 years, but then you have an emergency in your family, and you are forced to sell it.What is a liquidity event? How does it happen?This is kind of a liquidity event where you need the liquidity. And what happened is that Silicon Valley Bank had to start taking losses on their held-to-maturity securities. It’s a debate because I know that in the EU and other places, banks are basically required to show the potential losses on their held-to-maturity. Also, there’s other issues about how you hedge that and how you report the hedging on it.These are remarks by FDIC Chairman Mark Martin Greenberg at the Institute of international bankers. And he gave this presentation on March 6, so before Silicon Valley Bank collapse happened, and what did he say? I think the most important thing that he said is the following.“The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies. First, as a result of the higher interest rates, longer term maturity assets acquired by banks when interest rates were lower are now worth less than their face values. The result is that most banks have some amount of unrealized losses on securities. The total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at yearend 2022. Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry.”Then on March 12, there was a joint statement by the Treasury of Federal Reserve and FDIC, which means Janet Yellen and Jerome Powell and FDIC Chairman Martin Greenberg. So just six days later, they said to take decisive action. I’m quoting from the the announcement,“Today we are taking decisive actions to protect the US economy by strengthening public confidence in our banking system. This step will ensure that the US banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”Everything that the federal government does is supported by taxpayersOf course, everything that the federal government does is supported by taxpayers. And the result of this is that if they say that this money is coming out of a fund, the banks have contributed to the other banks, belt, also, that comes from the back of the taxpayers. So what we have here is the Fed coming in, and the Treasury and the FDIC, and basically saying, everybody’s gonna get their money back.Now, this is a big problem. Why is this a problem? Because only a small number of depositors at Silicon Valley Bank were actually guaranteed by the FDIC. And yet here we have a blanket guarantee. And this is a particularly big moral hazard. Now, some people would say, well, you have to do that; otherwise, money’s going to come out of every bank. They’re going to move money, either home and put it under their mattress, or they’re going to go and put their money into a bigger bank that they trust more.The Fed knows that other banks are sitting on unrealized losses related to their bond portfolio of US Treasury bonds because they’re holding 1% yielding bonds, and the Fed has increased interest rates up to almost 5%. And the result of that is that they have massive unrealized losses.We’ve seen the chairman of the FDIC say those losses amounted to about $620 billion in his estimate at the end of 2022. Just imagine that there’s probably more that come out, you know, from under the woodwork.Also on March 12, the Federal Reserve Board announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. Okay, so this is where the government comes in and says we’re going to protect the whole system.How are we going to do that? The Bank Term Funding Program (BTFP)“The Fed set up a new borrowing facility, the Bank Term Funding Program (BTFP) offering loans of up to one year in length to banks, savings associations, credit unions and other eligible depository institutions, pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The Fund has $125 billion (bn) and it can borrow another $100 bn from Treasury.The assets will be valued at par, so that banks won’t have to sell US treasuries at a loss in order to redeem deposits as was the case for SVB.”So the fund can borrow 100-125 billion and another 100 billion from the Treasury. But the kicker is, remember, all of these unrealized losses are because the value of those bonds that were yielding 1% has collapsed. And those bonds now are maybe 20-30% down in price. They say the assets will be valued at par so that banks won’t have to sell US Treasuries at a loss to redeemed deposit. As was the case with Silicon Valley Bank.Okay, so let’s talk about this for a second. What did they do? First, they gave kind of an implicit guarantee of all deposits at Silicon Valley Bank. And then the next thing they did is they said, if any other bank is facing this problem, and you’ve got massive losses, good news, we’ll help you hide those losses. We’ll hold those losses for year off your balance sheet. This is a very sneaky way of basically trying to prevent losses from hitting the balance sheets of the banks and collapsing the whole system.Fed will hold the losses for banks at riskNow what’s happening is all of these small and midsize and regional banks, remember, America has almost 5,000 banks, all of these guys are facing deposit outflows. The result of those deposit outflows are that they have to sell government securities. And suppose they have to sell those government securities at a loss. In that case, it’s going to crush their capital, and all of a sudden, you’re gonna have hundreds, if not thousands of banks, that could be in a difficult situation as far as capital is concerned.So instead of that, what they’re basically saying is all you guys can come to the Fed. And you can pledge that security at 100%. We’ll hold those losses for a year, and at the end of the year, we’ll figure out what we’re going to do.Is this quantitative easing (QE)?Well, there are some people that say that this is not quantitative easing because it’s a swap so that it’s just one asset on the balance sheet of that now has been swapped out as cash. So technically, you could say that when you’re swapping assets with the central bank, it’s not really QE.However, a second reason why people say that it may not be QE is because it’s also a short-term situation where in one year, those assets are going to go right back, and the losses are going to go on to the bank’s balance sheets.Well, come on, you think that the Fed, if things go bad, a year from now, they’re going to force all the banks handle the losses?One of the best ways to understand this, is just look at the assets of the balance sheet. Remember, that for the past year or so the central bank of the US, the Fed has been telling us that they’re doing quantitative tightening, and quantitative tightening means they’re reducing the size of their balance sheet. And also quantitative tightening has to do with, you know, increasing interest rates.From my experience and what I’ve seen in the banking system, as well as with the Fed, my prediction is quantitative tightening won’t last for long; eventually, quantitative easing will come back. Why?Because now, the US is in such a situation where it just can’t bear pain. Politicians can’t bear pain. Individuals can’t bear pain. And if you’re bringing pain upon the system, you’re gonna get voted out of office. Why let them bear pain when you can solve this problem?And that’s one of the reasons why looking at the repeated times that the Fed tried to get off quantitative tightening and to quantitative easing. They wanted to do quantitative tightening but every time they did it, they barely did it. And then eventually, they had to reverse it. And they had to go back to quantitative easing.So to answer the question that I asked at the beginning, is this the end of quantitative tightening and the beginning of QE? Yes, it is. How do I know? Because the assets of the balance sheet or the assets of the Fed just increased after roughly a year of small decreases? It increased by nearly $300 billion as a result of them providing funding and buying the assets from the bank. So the answer to that question is yes, we are now in QE5; how long it will last?11 banks announce $30 million in deposits into First Republic Bank“Washington, DC -- The following statement was released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, FDIC Chairman Martin J. Gruenberg, and Acting Comptroller of the Currency Michael J. Hsu:Today, 11 banks announced $30...

Is US CPI going up or down by yearend 2023?Feb 2023 US CPI was 6%, down from 6.4% in Jan and off its June 2022 peak 9.1%Food accounts for 13.5% of CPI and was a high 9.5% in FebruaryFood has come off its Aug 2022 11.4% peakEnergy accounts for 7.1% of US CPI and was up only 5.2%Energy has come down considerably from its 41.6% June 2022 peakWhen oil price rises, it causes a similar, but muted rise in the US CPI energy componentCorrelation between oil price and the energy component of CPI is about 90%Food and energy are a tiny part of US CPI, 79% of the weight comes from all other itemsNon-food and energy items are less volatile and total CPI is coming back down to that levelThis less volatile and slow to adjust group of products and services illustrates why I was previously arguing that overall CPI was unlikely to come down fastMost volatility in US CPI comes from the energy component, which accounts for only 7% of CPIThe largest impact on the food category is “Food at home” which was up 10.2%This is coming from supply chain pressures that take a long time to work throughThough high, food at home peaked in August 2022’s 13.5% high and has fallen 3pptsFood away from home never was exceptionally high and as a result is slowly fallingEnergy is 7% of US CPI and is broken equally into commodities related and servicesCommodities is related to the oil and gas that Americans buyEnergy services show how energy costs feed into the price of electricity that individuals and businesses payGasoline prices were the main driver and at its peak in Jun 2022 was up 60%Biden’s first drawdown of emergency oil stockpiles from the Strategic Petroleum Reserve was in November 2021, just before the electionIn 2022, Biden released 222 million barrels of oil from the Strategic Petroleum ReserveThis 38% reduction increased worldwide supply and helped bring down oil price21% of CPI comes from products like cars and cars, which were only up 1%The cost of homes is the largest part of the US CPI at 34% and it was up 7.3%Services excluding energy services is mainly comprised of owner's equivalent rentOER is still slowly adjusting up as a result of the rise in home pricesThis accounts for 30% of CPI and will take months to adjust downOil price moved from US$39/bbl in Oct 2020 to US$82/bbl 12 months laterThe peak was US$114/bbl in June 2022US housing price were rising at 5% per year since 2012They shot up 12% in 2020 thanks to the Feds near zero interest ratesThen they went up a massive 18% in 202130-year fixed mortgage rate hovered around 3% from July 2020 to October 2021. Now 6%SummaryFeb 2023 US CPI was 6%, down from 6.4% in Jan and off its June 2022 peak 9.1%Food accounts for 13.5% of CPI and was a high 9.5% in February; “Food at home” was up 10.2%, showing lingering supply chain pressuresEnergy is a small component of US CPI and was up only 5.2%, down considerably from its 41.6% June 2022 peakThe correlation between oil price and the energy component of CPI is about 90%, so with oil prices down, US CPI is downBiden’s 38% drawdown of the Strategic Petroleum Reserve in November 2021, just before the election, increased worldwide supply and helped bring about that oil fallOil prices feed slowly into the price of electricity; hence energy services were up 13.3% and will be slow to fall79% of the weight comes from ex-food and energy items, which is much less volatileCars, apparel, and the like are about 21% of CPI was only up 1%The cost of homes is the largest part of the US CPI at 34% and it was up 7.3%, comprised mainly of owner's equivalent rent which have slowly adjusted for rising home prices and is not yet reflecting the fall in home pricesUS housing price were rising at 5% per year since 2012 and then shot up 12% in 2020 thanks to the Fed’s near zero interest rates, then prices rose a massive 18% in 202130-year fixed mortgage rate hovered around 3% from July 2020 to October 2021. Now 6%It will be many months before the slowdown in the mortgage will be reflected in US CPIClick here to get the PDF with all charts and graphs Andrew’s booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master ClassThe Become a Better Investor CommunityHow to Start Building Your Wealth Investing in the Stock MarketFinance Made Ridiculously SimpleFVMR Investing: Quantamental Investing Across the WorldBecome a Great Presenter and Increase Your InfluenceTransform Your Business with Dr. Deming’s 14 PointsAchieve Your GoalsConnect with Andrew Stotz:astotz.comLinkedInFacebookInstagramTwitterYouTubeMy Worst Investment Ever Podcast

BIO: Michelle Leder has probably read more SEC filings than just about anyone else on the planet since writing her book, Financial Fineprint: Uncovering a Company’s True Value, and starting her website, footnoted.com nearly 20 years ago.STORY: Michelle invested in a company without going through important SEC reports.LEARNING: Dig deep into the company’s 10-K annual report before investing. Look at the risk factors and what the company says about risk. “Pay attention to the stuff in the 10-K if it is a significant position for you.”Michelle Leder Guest profileMichelle Leder has probably read more SEC filings than just about anyone else on the planet since writing her book, Financial Fineprint: Uncovering a Company’s True Value, and starting her website, footnoted nearly 20 years ago.Michelle recently relaunched Friday Night Dump, a weekly newsletter. It focuses on SEC filings made after 4 pm on Friday afternoons when companies tend to bury the most negative information that they are required to disclose.Worst investment everTwenty years ago, Michelle was relatively new to investing and had been a business journalist for about 10 years. She bought some shares of Quest Communications because she was covering IBM at the time. IBM had just announced a big deal with Quest. Michelle thought this would be an excellent opportunity to buy some Quest shares. She watched the shares go up until they stopped and started plummeting.Michelle went back, and I looked at the footnotes she’d collected while researching IBM. She discovered that IBM had booked the whole billion dollars for the deal with Quest upfront in year one, even though it was a 10-year deal. Michelle had missed this, so she watched Quest go all the way down.Lessons learnedIt’s a great time of year to dive into investing, as 10-K reports have been filed.Before investing, look at the risk factors and what the company says about risk.Dig deep into the company’s 10-K annual report for a clear picture of its financial performance.A 10-K report contains much more detail than a company’s annual report. It will give you enough information before you buy or sell shares in the company.For every significant position in your portfolio, ensure you’re aware of important details such as revenue recognition and inventory disclosures.Andrew’s takeawaysFinancial statements and annual reports are a treasure trove of information for analysts.Michelle’s recommendationsStart with one or two companies you know well. See what you can discover by reading essential filings like the 10k and proxy statements. Does the new information you get make a difference?No.1 goal for the next 12 monthsMichelle’s number one goal for the next 12 months is to focus a lot more on her business.Parting words “Life is a learning experience. In the end, it’s not about the money; it’s about the quality of your relationships.”Michelle Leder Connect with Michelle LederLinkedInTwitterWebsiteBookAndrew’s booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master ClassThe Become a Better Investor CommunityHow to Start Building Your Wealth Investing in the Stock MarketFinance Made Ridiculously SimpleFVMR Investing: Quantamental Investing Across the WorldBecome a Great Presenter and Increase Your InfluenceTransform Your Business with Dr. Deming’s 14 PointsAchieve Your GoalsConnect with Andrew Stotz:astotz.comLinkedInFacebookInstagramTwitterYouTubeMy Worst Investment Ever Podcast

The Silicon Valley Bank crisis started when the US government shut down its economyThe Silicon Valley Bank crisis started when the US government shut down the economy from 2020 to 2021.Let’s take a step back to January 29th, 2020, when President Donald Trump announced a White House Coronavirus Response task force with the director of the National Institute of Allergy and Infectious Diseases, Anthony Fauci, and Deborah Brix as coordinator.The decision to shut down the economy originated from this body but was ultimately implemented by President Trump, members of congress, and eventually President Joe Biden. This decision was truly the worst decision I have ever seen a government make in my lifetime.Businesses and individuals saw their income collapseDuring that time, businesses and individuals saw their revenues collapse and could not pay the costs necessary to sustain their businesses and livelihood.The US government then came up with various programs to distribute money to these struggling businesses and individuals. Unfortunately, the government did not have this money to distribute.As we all learned in political science 101, the source of any government funds, of course, comes from its citizens, but in this case, citizens and businesses were reeling from the government’s shutdown of the economy and hence had no money.The US government had to borrow moneySo the only choice the government had was to borrow money. But the US Treasury department could not borrow from the population as citizens were in dire straits. Usually, the US government would be able to borrow from foreigners; however, as other countries were suffering and for various geopolitical reasons, foreigners didn’t buy much US government debt.In fact, in 2014, foreigners owned US$6.2trn of US Treasury Department bonds; five years later, in 2019, they only held slightly more at US$6.8trn. Throughout the crisis, the US Treasury Department could only get about one trillion dollars of foreign money to buy US Treasuries.The US government needed trillions of dollarsBut the US government needed a lot more money than that. In fact, between the end of 2019 and the end of 2021, the US government borrowed US$6.4trn, causing total US government debt to rise to US$29.6trn by the end of 2021, 122% of GDP.So, the US government needed US$6.4trn and couldn’t get it from taxpayers or businesses at that time, so where did they get it? As I mentioned earlier, they got about US$1trn of it from foreign investors, which left a US$5.4trn hold.In 2020/21, the Fed stepped in and lent money to the US TreasuryThe solution was for the Federal Reserve to step in and lend the money to the US Treasury. Now the Fed is not allowed to buy bonds directly from the US Treasury, so the largest banks bought these bonds and then offloaded most of them to the Fed. The total assets of the Fed grew from US$4.6trn at the end of 2019 to US$8.8trn by the end of 2021, a US$4.2trn increase.To put this into perspective, from 2020 to 2021, the US government spent US$12trn and took in taxes of US$5.1trn.This massive injection of money raised depositsThis massive injection of money resulted in deposits of individuals and companies at US banks increasing by US$4.7trn during 2020 and 2021. The banks put about half of that money, or about US$2.2trn, into cash. About a third of those deposits, or US$1.6trn, went into securities at a time when interest rates were close to zero. In 2020 US 10-year Treasury bonds yielded about 0.9%, and it was about 1.5% in 2021.Banks receive short-term deposits and lend long-termBanks generally receive short-term deposits and lend that to companies on a long-term basis. But in 2020 and 2021, there was enough concern about the economy that banks didn’t lend much. Instead, they put that money into cash and securities.In 2020 the Fed and the Treasury Department intervened and bought bondsIt’s worth noting that during March 2020, the price of bonds, especially high-risk ones, started crashing as investors started to doubt if companies could repay those bonds given the state of the economy.The Fed and the Treasury Department devised a scheme to save the bond market by announcing that they would hire Blackrock to help them buy bonds in the market to support bond prices. This was unprecedented and could have been seen as violating the letter of the law, which generally prevents the Fed from buying bonds in the open market.The prior main Fed intervention was after the 2008 crisis when the Fed bought US Treasuries and Mortgage-backed securities through its Quantitative Easing Program.Silicon Valley Bank faced a boom and bust cycle in TechSilicon Valley Bank (SVB) appeared to be overexposed to the Tech sector and the startup community. This was not a problem when things were riding high for them. In fact, SVB took in lots of deposits from the above-described government stimulus, the IPOs, and the profitable period of 2021.But when these types of companies started to experience a slowdown, they saw their market caps collapse and their profitability weaken. This meant that these companies started to have more of a need for the funds they had deposited at SVB.The Fed started increasing interest rates, and bond values fell by 10-30%Then the Fed started increasing interest rates on February 2022, and by one year later, they had moved rates up by 4.5% sending shock waves through the economy.This rise in interest rates meant that all the bonds the banks held became worth 10-30% less than what they paid for them. The government allows a bank to avoid showing those unrealized losses by classifying those bonds as “held-to-maturity,” which the banks were likely to do with them.Silicon Valley Bank started withdrawing depositsHowever, what happened with SVB was that its customers started withdrawing deposits, which forced the bank to sell those “held-to-maturity” bonds to raise the cash needed to repay the deposits. This forced the banks to make their unrealized losses real.Very quickly, this wiped out SVB’s capital, and the bank had to be taken control of by the Federal Deposit Insurance Corporation (FDIC), which resolves such types of cases.“Strengthening public confidence in our banking system”On March 12th, the Fed announced a Joint Statement with the Treasury and the FDIC to “Protect the US economy by strengthening public confidence in our banking system.” In it, they stated that depositors at SVB in California would have access to all of their money starting Monday, March 13th, and that the taxpayer would bear no losses associated with the resolution of Silicon Valley Bank.Enter Barney Frank (you can’t make this sh*t up)Fed, the Treasury, and FDIC announced the same for Signature Bank in New York, which was also going bust. The irony is that the guy at the center of passing the well-intentioned post-2008 bank legislation, Barney Frank, was a board member of Signature since 2015.Frank was a long-time congressman from Massachusetts and, to quote from the bank’s website, “was instrumental in crafting the short-term US$550 billion rescue plan in response to the nation’s 2008-2009 financial crisis. Later, he co-sponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in July 2010.”Dodd-Frank created the too-big-to-fail storylineThat act created the Financial Stability Oversight Council and the Office of Financial Research to identify threats to the financial stability of the United States and gave the Federal Reserve new powers to regulate systemically important institutions. This codified the too-big-to-fail storyline, which helped the largest banks gain protection from the US government. The irony, in this case, is rich.President Biden repeats that no taxpayer funds will be used (spoiler alert: it’s nonsense)The Fed, the Treasury, and FDIC statement clarified that shareholders and certain unsecured debtholders would not be protected, senior management was removed, and any losses to the Deposit Insurance Fund to support uninsured depositors would be recovered by a special assessment on banks, as required by law.The announcement from this trio that was repeated by President Biden claimed that no taxpayer funds will be used. Which we all know is nonsense because all government funds ultimately come from the taxpayers. They will claim that these funds come from other banks, but we know that any bank or business must pass on increased government-regulatory costs.The Bank Term Funding Program (BTFP) to guarantee banks don’t lose on bondsFinally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks can meet the needs of all their depositors.They called this the Bank Term Funding Program (BTFP), which will offer loans of up to one year to any US federally insured depository institution pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral as long as that collateral was owned as of March 12th, 2023.The key to this measure is that these assets will be valued at par, allowing these banks to avoid offloading those securities at a loss. They announced that using the Exchange Stabilization Fund, the Department of the Treasury would provide US$25 billion as credit protection to the Federal Reserve Banks in connection with the Program.The government is worried about bank runsThis hints that the government is worried that depositors at smaller banks will attempt to withdraw their deposits and that this Program will prevent that bank from experiencing the losses that Silicon Valley Bank experienced. Another way to think of this is that if this measure had been implemented one week prior, Silicon Valley Bank would not have gone bust.This is another well-intentioned intervention by the government into the banking system. It is meant to stabilize things, and it likely will. But it also raises moral hazard in the banking sector and prevents poorly managed banks from suffering from their bad policies, which brings me to bad policies.Silicon Valley Bank had bad policiesSVB had a simple solution to the dilemma they faced of having a massive amount of short-term deposits, which they invested into long-term government bonds. They could have implemented basic risk management measures such as interest rate swaps to protect the bank against rising interest rates. But, unlike well-run banks, they didn’t do this.Government intervention is not a part of capitalismIt’s important to remember that government intervention is not a part of capitalism. Instead, it is a policy that politicians and people feel is the right thing to do when things don’t turn out the way they were planned. The problem with government intervention is that it causes unintended consequences.The economist Milton Friedman famously said: “One of the great mistakes is to judge [government] policies and programs by their intentions rather than their results.” Let’s review the US government’s policies over the past few decades.The government pushed FANNIE MAE and FREDDIE MAC to achieve extremely affordable housing goals, which substantially reduced the quality of housing loans in America and brought millions more into the housing market, leading to the 2007 peak of the housing market and the subsequent bust.The Fed lowered interest rates to near zero in 2008/9 and kept them close to that for more than a decade.The Fed started Quantitative Easing in 2008, buying assets from the banks and injecting liquidity into the market.The government bailed out the US banks and failed to prosecute any major bankers for malfeasance.In 2020 and 2021, The US government shut down the US economy, cut interest rates, and the Fed and the US Treasury injected more money than ever imagined into the economy.In 2020 the Fed and the Treasury, for the first time, bought bonds in the bond market to prevent bond prices from crashing.In 2022 the Fed went on a 12-month rampage of rising rates, bringing rates from nearly zero to close to 5%. This was the fastest rate hike seen in my lifetime, and at the time, we have repeated what is likely to break something in the economy.And something did break at SVB and in the banking sector. And now, once again, the government has intervened in the bond market by announcing that it will buy bonds of banks facing losses on those bonds to prevent them from facing massive losses and going bust.Government programs always come with unintended consequencesAs I wrap up, I want to highlight that government programs always come with unintended consequences. Political leaders meddle in the economy and with capitalism with the best of intentions but slowly and steadily march toward more dangerous places.Silicon Valley Bank and Signature Bank, interestingly both from Democrat-controlled states, depositors will get their money back, and other regional banks will survive the rush to the withdrawal of deposits and move them to the larger banks. But at what cost?There is now more risk in the banking system because of more moral hazardAs we speak, a large amount of deposits is likely moving to the largest banks, strengthening their leadership position.It’s quite possible that this will not seriously damage the banking industry and bank funds or ETFs, as many of them are concentrated in the large banks that could be gaining from this.But in the end, government intervention in the banking sector just takes it further away from capitalism and brings new risks. Andrew’s booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master ClassThe Become a Better Investor CommunityHow to Start Building Your Wealth Investing in the Stock MarketFinance Made Ridiculously SimpleFVMR Investing: Quantamental Investing Across the WorldBecome a Great Presenter and Increase Your InfluenceTransform Your Business with Dr. Deming’s 14 PointsAchieve Your GoalsConnect with Andrew Stotz:astotz.comLinkedInFacebookInstagramTwitterYouTubeMy Worst Investment Ever Podcast

BIO: Dave Collum is a professor of Organic Chemistry at Cornell University who developed an interest in markets, which, in turn, led to an interest in geopolitics.STORY: Dave talks about his 2022 Year in Review: All Roads Lead to Ukraine.LEARNING: Never trust politicians and bureaucrats. “The more the fact-checkers, the more likely the thing they’re checking is true.”Dave Collum Guest profileDave Collum is a professor of Organic Chemistry at Cornell University who developed an interest in markets, which, in turn, led to an interest in geopolitics. He enjoys the human folly of it all. He has a natural predilection for being contrarian, which makes him a “denier” on almost all hot topics.2022 Year in Review: All Roads Lead to UkraineGiven his interest in geopolitics, Dave has strong opinions about many things. For him, it’s a natural thing to go against everybody. Today, we’ll not talk about his worst investment ever but rather hear more about his 2022 Year in Review: All Roads Lead to Ukraine.Every year, Dave writes an annual survey of what is happening in the world. The reviews started as a handful of pages for friends and family on a simple website, and then it just got bigger. One year he decided to do a serious job. Now every year has gotten bigger and bolder. Dave has a friend who’s binding all the views so he can sell them all on Amazon.Every year, Dave writes about human folly. In his 2022 review, his primary focus was Ukraine. In his true controversial nature, he took the pro-Putin stance. Dave says he can easily make the case that NATO is bad.Dave argues that Putin is making incredibly rational moves and believes that NATO could have stopped the war but chose not to. He gets pretty troubled to watch people become self-righteous about Ukraine while the US is no victim. Going back in history, Dave says the US has bombed more countries than Russia over the last 20 years. The government has also killed more people with military weapons in the previous 20 years. People want to talk about the Ukraine war while ignoring that the US gave weapons to the Saudis to bomb the Yemenis into oblivion. Or the fact that last year, the US bombed Syria three times to send a message to Tehran. In Dave’s opinion, that should be a war crime.Dave predicts that the war in Ukraine will end soon. A Twitter poll he did shows that people are tired of the war and no longer support it. To end the war, the US must stop sending money and weapons to Ukraine.Go to Peak Prosperity to read Dave’s full honest review.Andrew’s takeawaysAndrew has three guiding principles:Never trust politicians.Never trust bureaucrats just like that. They’ve got to earn your trust.The majority of people follow politics blindly.Andrew believes that to really see a change in society, you’ve got to effect that change through the political system and apply that across all boards. [spp-transcript] Connect with Dave CollumLinkedInTwitterBlogAndrew’s booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master ClassThe Become a Better Investor CommunityHow to Start Building Your Wealth Investing in the Stock MarketFinance Made Ridiculously SimpleFVMR Investing: Quantamental Investing Across the WorldBecome a Great Presenter and Increase Your InfluenceTransform Your Business with Dr. Deming’s 14 PointsAchieve Your GoalsConnect with Andrew Stotz:astotz.comLinkedInFacebookInstagramTwitterYouTubeMy Worst Investment Ever Podcast