Animal Spirits Podcast - The Panic of 2023 (EP.299)

Episode Date: March 15, 2023

On today's show we discuss Silicon Valley Bank, the psychology of bank runs, how the Fed broke stuff, FDIC insurance, why the banking industry is forever changed, tech is the new Wall Street, why the bank crisis could be bullish for the stock market and much more.   Find complete shownotes on our blogs...  Ben Carlson’s A Wealth of Common Sense  Michael Batnick’s The Irrelevant Investor  Like us on Facebook  And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.      (Wealthcast Media, an affiliate of Ritholtz Wealth Management, received compensation from the sponsor of this advertisement. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information.)  Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Animal Spirits, a show about. of markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's wealth management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritt Holt's wealth management may maintain positions in the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben before we get into it. Michael, we have to do some promotion. Next week, March 23rd. My birthday. 1 p.m. Central time. Let's do quick do your app to change that into Eastern Time. Okay, the one. 2.30 Eastern time.

March 23rd, we are doing a webinar with Y charts. It's going to be live. What are we going to talk about? Everything. There's a lot to talk about. What are we not going to talk about? So we're going to have a link in our show. notes to register for this webinar. It's going to be great. It's going to be us. It's going to be

Y charts. It should be fun. Last week at the Y charts offices, we recorded our show Tuesday morning. One of the things we talked about, I have been saying for a while, the Fed is going to break something. I'm not trying to pat myself in the back. I've just been saying it. I've been wrong. And last week, we said, why hasn't the Fed broken anything yet? It's surprising in a year rates went from basically 0% to 5%. It doesn't seem logical that nothing's broken yet. stipulated that the housing market was frozen, that there's obviously a tech recession, but like truly something, an event. And we got it 48 hours later. I would have never guessed, oh, it's going to be the financial system. It's going to be run on the banks. There's no way that that would have ever crossed

my mind that this is going to be it. To that point, before we dive deep into the S's, the Silicon Valley Bank, signature bank, and Silvergate, I want to maybe give a pat on the back to a lot of people who over the years had come off as maybe extreme in their views that low interest rates were truly distorting markets. I think I was probably mostly on the other side of that. Maybe I didn't see the harm or it didn't take seriously enough. One of the unintended consequences that I didn't see coming is that the event was going to happen as a result of a bank mismanaging their deposits. because that is the result of the Fed going from zero to $450. That just was not on my bank of card.

That caused the implosion. So I think people that have been warning about it deserve some recognition. What do you think? I think that's fair. I think the biggest problem is it's obvious now in retrospect. The Fed waited way too long to raise. But I think it was obvious. Hold on.

Hold on. Not in retrospect in real time. Yes. Okay. People were saying in real time. In February 2020, we said, why are they still buying mortgage bonds or wherever it was? inflation was already over 6% at that point or 7%.

So in real time, people were saying, what are they doing? So that's not a vision of history. The problem is, yes, there was a lot of people screaming that, and they were saying it before the pandemic too. But the problem is they compounded that mistake by raising too fast coming off of it. They gave themselves a double whammy of waiting too long and then raising too aggressively. And that's always been my thing is that... Oh, let me throw this chart in here.

If you look at the interest rate rises from 1950 to 1980, we went from 2% to 15% on the 10 year. Let me just try that it's through in here. The thing is, you have, the 1981 is the fastest one, the early 80s. So this is before. No, no, no, no, no. No, listen to me. The one from 77 to 1980 was the steepest.

But the one that we just lived through, 2022, they have never raised rates as fast as they did to this level. The thing is that back then, rates had been rising throughout the 50s, the 60s, and the 70s. and it happened very slowly. Treasuries didn't get crushed back then because rates had rose so slowly, so the rates that you were earning had a chance to catch up. That's why last year

was the biggest losses ever in Bond. So you didn't have the catch-up period. It happened so fast. Everything got annihilated. And I guess I'm surprised it took this long. And again, I didn't think this was what was going to be. Because what we thought was

people are speculating. There's risk. There's a bubble in venture. There's a bubble in, all that sort of stuff. That's where our focus was. It was on the valuation. and the crash and asset prices.

On my bingo card was not asset liability mismatch and mismanaging up deposits at a bank that would cause this. I didn't think that would happen. No. There's a clear line of demarcation. There is a before SVB and after. Banking will never be the same. How come it's always a bingo card, by the way?

Why does it always have to be a bingo card that is a forecast? It's just what it is. I don't make the rules. Okay. It is true that this felt out of left field. There's people now saying that like a lot of people were saying that they are technically insolvent, but that's kind of the way that things work if you held a maturity. So obviously, the Fed is not the only cause of the problem here. But wait, hang out,

hang out. I don't think the bank was insolvent. On a mark to market basis, we can get into some of this kind of stuff. Obviously, the Fed is not the sole problem here. There was plenty of other banks that managed their interest rate risk just fine in their loan book. In Silicon Valley Bank didn't. You can't say the whole problems of Fed. Obviously, we're going to get into it here. Yeah, I don't think if Jamie Diamond was run in the bank, that probably would not have happened, but absent a bank run, now you could say that there was a bank run, because they mismanaged, they're fine. If everybody didn't leave, we would not be having this conversation. No, and it is true. I just did a blog post where I went through a bunch of different

questions and I said, what are the unintended consequences of this? And sometimes you see those unintended consequences right away and you see like other dominals fall immediately. And sometimes this could be like five to seven years in the future. Something else happens and we look back and we go, you know why this happened? Because of the rule changes that happened from Silicon Valley Bank. On the other hand, this could be a one-off thing where the Fed stepped in, and they change some rules and they trust is back in the system. And we look back in six months and go, mo, that was crazy.

So I really don't know what the next steps are here. Let's zoom out, take a step back, as they say, for people that have not been keeping up with a story that are tuning in to really hear what happened. This is a crossover story. We always talk about civilians, people outside of the finance world asking us questions. I've been getting tons of questions from people being like, whoa, whoa, whoa, people never thought they had to worry about their bank before.

And now they think they have to worry about it. Yeah, before we get into this, I love, love, love what I do. I feel like the luckiest person in the world that we get to help people with their money and educate people like it is truly a blessing. But I also do wonder about the other side of it. Like my wife, for example, had zero stress over the weekend, her stress with about Kobe's birthday party, zero worries. Whereas I was basically at my screen the entire weekend.

And she's like, you're not the president. Like, what do you think you're going to do about it? I was feeling a lot of anxiety. On the one hand, maybe some people were overblowing the severity. But on the other hand, it was really serious. This was not a joke. I was paralyzed a little bit. You did say a few times on Slack.

You kept saying, I'm shook. You said that. The funny thing is, the same thing happened to me. If the Fed and FDIC and the Treasury did not do what they did, if they didn't act on Sunday night, they would have acted by Tuesday morning or Monday night because it would have been chaos. and not just in the stock market on Main Street. Go ahead, Ben.

The funny thing is, I had this similar thought with my wife this weekend where she, like, she never thinks about the stock market. She never thinks about any of this stuff. And on Friday night, usually I'm able to kind of unplug and do the family thing. But I was, like, checking stuff on my computer when I got home for, like, Friday night after dinner. And my wife is trying to talk to me to tell me, like, here's the plans for the soccer games this weekend and the basketball games because we have to, like, we have three kids that are busy on the weekends.

She has to, like, tell me the schedule because I don't know it. She handles that stuff and I handle the finances. When somebody says, what are you doing this weekend? I say, Robin will tell me on stuff. Saturday. But she's like, you're not listening to me at all. What is going on? And I'm like, there's stuff going on in the financial world. I'm trying to catch up and pay attention. And she's like, well, what is go? Do I have to worry about this? And I'm like, not now. Just I'll explain later. And it is hard to explain. So why do people care about a bank for

startups? All right, it's much bigger than that. We're about to explain. Silicon Valley Bank is not some fly-by-night company. It was founded. Did you realize it was as big as it is? I think so. I mean, they said it was a 16th biggest bank in the country. I wouldn't have known that list offhand. That seemed bigger to me than I would have assumed. So it was founded in 1983 to serve the tech world. And if you are a venture-backed company or a startup, there is basically a one-and-two-chancey bank with Silicon Valley Bank. They are very familiar. They do lending.

They do all sorts of things that some of the bigger banks just won't do with some of these smaller companies. So you all remember what happened during the pandemic. The economy shut down and then it reopened and rates were at zero. And boom, bubble really quickly in asset prices and certainly in venture capital funding. So venture capital funding went from call it $300 billion a year on average to like $700 billion in 2021. And the biggest beneficiary of that funding was Silicon Valley Bank. Now, the thing about a lot of these startups is they raised so much money.

You talked about like the seeds at $70 million, the Series A at 400 or whatever it was. They raised so much money that sat at the bank that didn't necessarily need to be loaned to the depositors. most banks make a lot of loans or make some sort of loans to their customers. At Silicon Valley Bank, I don't know what percentage of the money sat just in deposits, which in turn are invested. That is what a bank does. It borrow short and it lends long, bars cash and lends. And it earns a spread. So absent that, they were just investing the money in treasuries. And unfortunately,

in mortgage-backed securities at a yield of 1.6%, give or take. And so when rates rose, they had a mark-to-market loss on their balance sheet. What does mark-to-market mean? If they had to sell, they would have taken a big loss. If they were able to hold to maturity, they would have been fine. So that is like the long and the short of it. So on last Tuesday, Silvergate, which was the biggest crypto bank. That's an important point that you made about them investing in treasuries and mortgage-back. This wasn't like a subprime thing where they made some really crazy off-the-wall. They mismanaged their asset liability match, but they weren't taking insane risks. No, they were not like gambling.

They f***ed up, no doubt. The crazy thing about them, if you look at their market cap chart, they were like a $10 to $12 billion market cap company before the pandemic. And by November 2021, which is kind of when a lot of tech stuff really peaked, they were at $44 billion. So this thing wasn't trading like a bank either. This thing was trading like a tech startup. Like what's text?

So anyway, so why did this all unravel? What was the spark? while the spark was as such, they lived by the sword and they died by the sword. In 2022 and into 2003, there is zero, not zero funding, but funding has dried up dramatically. And so these monies that are just cash burning, the deposits that came in are now bleeding the other way. So in order to shore up their balance sheet, they needed to sell securities. But in order to replenish their coffers, they needed to raise equity to keep it like in balance due to regulations. When they announced that they were doing that, people ran fast. And so there's not speculation. There's

gigantic VC funds that set at the top of the food chain that warned their investors to take the money out. And so that caused just a straight up run on the bank. On Friday, $42 billion came out of the bank. They were just insolvent. If everybody takes the money to JPMorgan, guess what? Bank is insolvent. It was a straight up run on the bank. The speed of it is just, that's the most mind-blowing thing to me. And that's why this is so much different. This story's been going around. I was rereading the panic of 1907 over the weekend, which shows how great my social plans were. But J.P. Morgan, the man, not the bank, told the tellers in 1907, count the money out more slowly to like stem the tide of a bank run. You can't do that now because guess what? People aren't actually

getting $42 billion to cash out. They're hitting a button and it's gone. And you're right. I do wonder what the reverberations are going to be of the tech people that kind of abandoned their own partner here. It was in their best interest to do so, but in the same breath, that whole ecosystem is built a lot on trust too. And I don't know, I think they shot themselves in the foot here. If the biggest players would have said, everyone take it easy, calm down. It is in their best self-interest. This is the ultimate prisoner's dilemma. So the question is, and really, I don't blame anybody. Once the one started, I think you would have been foolish to say that. I really do. So I don't blame anybody once the cascade started. But the question is, why did they

take their money out anyway? Well, here's why. FDIC insurance. covers $250,000 worth of deposits. So some banks, Schwab, for example, 80% of their depositors are covered because they have less than 250. At Silicon Valley Bank, as I mentioned, these are startups that raised a ton of money. So out of the, these numbers are direction on the right. Out of the $180 billion at the bank, some $165 of it was uninsured. So it was rational.

Bloomberg has the number at 93% of the deposits were uninsured. So what does this do to banks going forward? I mean, do we just do a way with FDIC insurance and say depositor's money is good? Implicitly, they kind of did. It is. You remember in a few good men when Tom Cruise has the Rules and Regulations book and he puts it on there and he tells, Keeper's the other one. And he says, show me in the rules and regulations, but handbook where it says to find the mess hall.

And the guy says, I don't know where the mess hall is. He goes, it's not in the book. How do you know it? That's the same thing with FDIC. They've basically said, like, it's in the rule book. It's 250, but I don't see how you can think it, that if this happens, now the precedent has been set that they're ever going to let depositors lose money over 250. Now, let's be clear.

What that means is that I think a lot of people don't realize this. The way FDIC insurance works, the banks pay the money in. It's not like this isn't government bailout. We can get into the moral hazard stuff in a minute, but the banks themselves put the money in. They pay an insurance premium. So what they should be doing now, the regulator should be saying, you're paying way more into this now. You put more in.

They will. Unfortunately, that means probably lower yields for depositors than they were already getting. And then all the money goes into J.P. Morgan, Bank of America. because my checking account was with J.P. Morgan. They don't pay me anything. I have to cash manage elsewhere if I'm going to earn money on cash. I do not feel the slightest bit of worry about my money at J.P. Morgan going bad because if anything happens to them, they are getting bailed out. Right or wrong, they're going to be fine. Let's talk about two things. What happens to banks going forward? And let's talk about the backstop, not the bailout. Let's be clear, the equity went to zero,

which is the way it should be. That's capitalism. So to say that capitalism failed, no, this is capitalism. Literally, if you took risk and owning the equity of the stock, that is a donut. This is better than 2008. The equity people were wiped out, bondholders are wiped out. Depositors, and this is not just rich tech pros. There's 40,000 businesses. The depositors should be made whole. What are we even talking about here? Imagine the idea that before you open a bank account, you have to be a forensic accountant. That's insanity. I understand people's like pushback. I really do. And the moral hazard stuff, we will unpack that and we will try and put regulations in. It's not going to be perfect. We had no choice. I wasn't really into the whole

argument about is this a bailout or is this not available? Because guess what? It's in the system's best self-interest to fix problems like this when they happen so the whole system doesn't collapse and it's always going to happen. It just is. It's always going to happen. This is complex and systems are fragile. So they did what they had to do. Like I said, had they not acted on Sunday, they would have acted on Monday because there would have been a run of the banks. So going forward, why is it so important? The big banks are going to be probably the biggest beneficiary of this, unfortunately. And as I mentioned last night with Josh and Samir, regional banks are the lifeblood of the American economy. They loan to small businesses. Do you think JP Morgan is

loaned to a small business in Albuquerque? Well, maybe. I don't know. That's a bad example. I do always wonder. I see these like local, and it's not even like regional Midwest. It's like local Michigan or West Michigan community banks go up all the time. And I always think to myself, who the hell uses these things? I always assumed they're like money laundering or something. I guess it must be local businesses, but I don't think it's like that in most other countries. I think most other countries don't have thousands and thousands of banks. They have a bunch of big ones that people go to. And you're right. It is probably going to hurt small businesses and those regional banks. I mean, there has to be consolidation. Now, let me ask you this. So to that

point, okay, we know inertia is very, very powerful, especially at banks. People just don't don't move their bank account. It's a huge pain in the ass. So on the one hand, I thought, oh, man, once confidence is gone, that's it. People are just going to consolidate it, the big places. On the other hand, I think I'm leaning towards it's all good, like for the most part. It could be. I'm leaning towards whatever panic would have said in on Monday from literally just, not just a

trickle, because there will be a trickle, just a mass exodus. I think they stopped that. You could be right where it could be like, do I really want to change all my count numbers for my utilities and for this bill and for that bill and my gym, all that stuff. Do I really want to change the numbers for that? Am I going to roll the dice and just see what happens and things will probably work out fine? You could be right there. I mean, I know we just went over all of this. Anybody we want to? I thought Matt Levine's on the psychology of a bank run. Because I think the whole psychology of a bank run to me. So he said, nobody on earth is more of a herd animal than

Silicon Valley venture capitalists. And I thought that whole part of it, like the psychology behind what happened and why. Again, reading like the panic of 1907, there's no real. There's no real reason for these things to set them off. And it's funny, like, looking back, like, as you said, like, they were trying to raise money. Your initial thought would that be like, okay, great, they're shoring up their capital base. But the other people said, no, no, no. It was nothing to see here. So I thought that, just the whole psychology behind it, I thought was interesting. That's a point that we didn't really make is that, I know we made this point, but just, again, to reiterate, the depositor base was so monolithic. It was not a diversified customer base,

like, say, Bank of America. This is one of the reasons it's kind of a, maybe I'm making a stretch here for an analogy, but people kept wondering, why isn't crypto acting as this macro hedge? And my thought process the whole time was because the people who own crypto are the same people who own startups and tech companies are getting crushed. And that's why crypto is getting crushed too. It's all the same thing. And that's the same thing you mentioned that if you have all the same customer base,

there's no diversification in the client base, then they're all going to do the same thing because why would I not do what they're doing? We'll talk about crypto in a second, but just the speed at which has happened. Greg Becker, the CEO, was on stage last Tuesday, talking about what he does in his free time. They tweeted, I think on Wednesday, proud to be on Forbes' annual rank of America's Best Banks for the fifth straight year. And now there's going to be a whole political fallout, which we don't necessarily need to get into today. But it's just a really less situation. What I think one of the things we look back on this in, I don't know how long, 5, 10, 15, maybe less is how politicize the Fed's going to get.

I think the Fed has done a pretty good job of staying out of that. I think in the future, they're going to be weaponized by one or both of the parties. Elizabeth Warren is calling for Jay Powell's head. But the crazy thing about getting back to the Fed thing, there's a lot of people saying, no, the Fed, because we had inflation come in today. It's still falling. It's still too high. A lot of people are saying the Fed has to be resolute in fighting inflation because if they

don't, there's going to be a big of financial crisis down the line. And my answer to my comeback to that is, you mean like a bank run? There's going to be a bank run down the line like we just had. So they're in a really tough position of, well, we have to still fight inflation. But if we keep pushing, what if something else breaks? Then the trust really goes. And then we're screwed anyway. You can't worry about stuff down the line if stuff's breaking now.

Here's a quote from Elizabeth Warren. Fed Chair Powell's actions to allow big banks like Silicon Valley Bank to boost their profits by loading up on risk directly contribute to these bank's failures. Come on. These were not sub-prime. I mean, yes, would they careless or what's the right word that I'm looking for here? Is it negligence? It's a bad management? Yeah, it's all those things.

But this idea that they were like gambling with depositors money, come on, they were buying mortgage-back bonds. It was dumb. But they weren't buying SPACs. And I've seen a lot of people trying to blame the fact that the Fed said they were going to keep rates low for a while. And that's the reason that they did this. There's other banks that handled this just fine.

What do you think about? There's a lot of people made the point that this was the first social media-driven bank run. How do you feel? Because I feel like we saw the very best and the very worst of Twitter over the weekend. there were some great updates from people that were amazing and then there was people who were hysterical

and I think we saw the best and the worst of it and depending on which side you wanted to fall on you could say you could point to pros and cons of social media in this age. I was personally

I think the cons that way the pros but I don't know that's complicated I think is the bottom line. Yesterday here's a paradox two days ago on Sunday morning here's my statement

that's a paradox I have such faith or I had such faith in the government doing the right thing that I bought cryptocurrencies Honestly, when you told me that, I was like, I didn't go that far. And you were right. You said, this is finally the thing that sets crypto off as like the anti-system play. It seems just from the

price action, whatever, it's a few days. But it seems like that's the thought process. I'm not doing a victory right here. The thinking was twofold. One, and by the way, I think it's probably a good thing that stock features didn't trail all weekend. I was just looking at crypto to see like risk appetite. But the reason why I bought crypto is because first and foremost, I wanted like a high beta risk on trade over the weekend because I did think that the Fed and the FDIC and the Treasury knew the seriousness of what was going on. And I did think that they were going to do something about it. So that's number one. And they did. Number two was I also thought, rightly or wrongly, there's always a perceived bulk case for crypto from the bulls. This would be a legitimate

perceived bulk case from crypto that's not completely outlandish. It's starting to make more sense. It seems like every time you get one of these, though, something else sets it back. I agree. I'm just saying the idea, the idea of being able to do stuff outside the banking system, that idea got to boost this weekend. That makes sense. My general theory of life and financial crises is things generally work out most of the time, and that may sound like a very naive way to look at life. But I think it's the things that you worry about the most are rarely the things that end up hurting you. And it's the things you never think about at all that come in like wallop you. And if you're not going to be able to predict them

ahead of time anyway. What's the point of we'reing? And I think that's kind of the way that I look at this. Again, it may sound sort of naive, but I think that's the way I look at financial crises because there's a lot of people think that it's been like easy in these past, like 10 or 15 years to invest. And this is the hard stuff. But think about, I was looking at my own career and the crises in my career. So I was a sophomore in college when 9-11 happened. That was obviously a crazy thing. I come out of college for the first few years, great financial crisis, 2007, to 2009, 2010, 2011, European debt crisis. Then we had the pandemic. Then we had the highest inflation in four decades. And now whatever this bank run thing is, it's kind of crazy because in some

ways, the market is completely different from like the early 20th century. Things are so much better now and more structured and professionalized. But in other ways, and guess what? Things are very similar. The only one of these on your list, Ben, that was remotely predictable, was inflation. Yes. So I made the point to you yesterday that we spent a lot of time during peacetime, for the most part. We spend a lot of time worrying about whatever they're putting on the headlines in the newspaper, whether it's the debt ceiling or pick your topic de jour. But the true realization from this event is just a reminder that real risk, the things that you actually should be worried about, you never see them coming just by definition, because that's what risk is.

The other one thing I wanted to talk about was this has been happening for a while now, but the technology industry is the new Wall Street. They're the new finance industry that people hate on because of how successful they are. One of the reasons, obviously, the financial industry almost blew up the world. They weren't alone, but they almost blew up the world in 2008. And then the tech industry just unequivocally dominated the 2010s. They all became rich. They created these great companies. They created this great technology that helped us in so many ways. And they really helped us get through the pandemic. But the other side of that is when you get that big and you're not the biggest sector in the S&P 500, you're worth millions or billions of dollars, there's going to be

more scrutiny there and more hate. It's interesting to watch the tech industry sit back and play the victim car, being like, whoa, why does everyone hate us now? And I think that territory comes with the success and maybe some of the ego that was in that sector for the past four to five years that I think people got a little too far over their skis there. So somebody texts me, and one of the things that's going to come out over the next couple of weeks is the sales by insiders. The chief risk officer sold 75% of her stock and left the company a year ago. Well, a year ago, it's not so bad. That's pretty good market timing, actually. Greg Becker, the CEO, sold $3.57 million worth of stock, which is 12% of his total for over $2.2 million in profits just a

week before the bank failed. That will probably get some scrutiny unless that was planned. I don't know. The CFO sold a lot. The CMO sold. I don't know if they can call that back, but this is one of those times where you can't really blame them because this happened so fast. Obviously, they were negligent in how they ran the bank, but they didn't know it was going to fail. Oh, yes, they did. You think they knew it was going to fail? They're going to bank run.

They didn't know there's going to be a bank run. I'm not trying to stand up for them, but I don't think they knew it was going to happen this bad. I think that when they prepared for that announcement, you don't think in the back of their head or maybe just, you don't think they had that conversation? What if there's a bank run? What if this freaks the depositors out? You don't think that crossed their mind? How could it not? And another thing, bonuses, annual bonuses were paid on March 10th, which was, was that Friday?

Now, to be very fair. Is that true? That was 100% pre-planned. That was 100% pre-planned. That feels like a 2008 anecdote. Given that you were in the midst of a bank run, that's tough. Not a great look. True.

Let's talk about some market implications. So yields crashed. So the two-year hit 5% last Wednesday. And then on Monday, yields crashed. They fell a little bit at the end of last week. And then they went to briefly below 4%. And now this is the two-year yield. They're ripping again.

Back up to 4.3. I think the bond market is confused because we're trying to weigh a financial crisis, a run of the banks, potential the Fed to maybe cut rates, and now wait, everything's okay now, and now we have inflation. So I think the bond market is just severely confused. Economic volatility is scary shit. We know what we're getting the stock market. You don't want to see the Fed funds trading like a biotech stock, and that's really basically what's happening here. Jim Bianco had this data point. there was a two-year change and two-year yields that had only happened in 1987, 9-11, when Enron went

down, I'm sorry, when Enron, whatever, after Lehman failed and after the Tarp vote failed, and then on a three-day change, it was only in 1987. The crisis might be contained. They might have plugged it, but this was a crisis. Make no mistake, even if it was short-offstein says, this was yesterday, if the market closed now, the two-day move in the 10-year treasury futures going back to 1982 would be 99.9 percentile. That's crazy. So we also had, you've been looking at this a lot.

bespoke had this, the implied Fed funds rate was just basically crashed. So they went from projecting, let's see, this was as of yesterday. So maybe it's changed because things changed so quick. As of March 13th, the Fed funds rate, the futures were predicting a 50 basis point cut from current levels. And last week, no, no, no, not for March, not for March. This is for a future meeting. July, yeah, July. And then they were predicting a March 50 basis point raise.

That was like two weeks ago. Three weeks ago, we were like, oh, the economy is accelerating. is hot. They're going to have to do 50. What do you think they're going to do? I think this is the first meeting where we really don't know what they're going to do. 25 basis point raise, then they're done. That's what I think. I still think they're going to do 25. Is it weird to think that a banking crisis could be bullish for the stock market? Well, okay, I'm glad you mentioned that because stocks are up. It is Tuesday at 11 o'clock. Stocks are like, I don't know how much higher they are off the lowest yesterday. They're up 2% right now. Listen, this is all short-term stuff,

so we're speculating here. Don't hold us to this. But people are panicking. And so they are pricing in rate cuts. And so that's bullish for the stock market. I mean, this is the type of shit that puts your brain into a pretzel. And this is why it's so hard. Then you have other people going a step further and saying, okay, if the Fed does pause and inflation stays bad, then down the line, they're going to have to raise again. And guess what? The inverted yield curve is uninverting a little bit, maybe signaling that we are going through recession. And then if we do get consolidation at the banks, credit supply will tighten up. It just will. And so will that cause a recession? I think it depends on. Or we look back on this in a few months and say, that was just a

blip and man, that was crazy, but we plugged the whole so fast. What's the meme of the guy that slaps the thing on it? Guess what? This is a great reminder that nobody knows anything about the future. Some people are better at guessing and some people are more convincing, but we're all just guessing. In the 2023 outlooks, no one said the biggest risk this year is a bank run. No one ever said that or said that that's the biggest catalyst for being bullish. But my whole thinking is imagine that a bank run is bullish for stocks because this will get the Fed to cut. I mean, it's just, it's what? If this banking crisis did have some legs, and I think a shaken trust in the financial system is deflationary as far as I'm concerned, but it really depends on how

shaken that trust is. Is this just like a thing people are going to move on from and the next we get something else, or is this going to really stick with some people? I don't know, man. We're going to be having congressional hearings about this. I think that there is a before and after SUV. I really do. I think it could be too. Because they're going to have to address the FDIC thing. Will banks become uninvestable because their margins just get squished to basically nothing? So Matthew Klein had a piece on this, and he basically said, maybe banks should be in the business of giving loans. And if the Fed's going to do this, maybe there should be like just federal reserve checking accounts for everyone that are just implicitly backed to no end.

That's pie in the sky maybe, but his whole thing was the bank's job shouldn't be to manage these assets and liabilities in our spread. It should be to look at the creditworthiness of their borrowers and give out loans as opposed to trying to like manage interest rate risk. Can we say like things are pretty good and sometimes they go really bad and we don't need to like do a complete overhaul? Fair. Can we also say I want to do like a pros and cons of the tech industry? The tech industry is amazing at understanding that world of innovation and the finance world is probably not very good at it. But we can say that the tech industry is not very good at understanding the finance world. We know that now. And so the idea that they're going to

come in and totally change the finance industry and disrupt it and with this mentality, that's never going to happen. It's going to be regulated as a change it, not the tech industry. Anyway, I just want to thank the real professionals to Ben's point, the people that are not inciting sphere, but the people like Mark Rubenstein and Matt Levine and Matthew Klein and so many others that are like really a voice of reason and common information. And for that, I'm great. for the internet. One other thought, Matthew Klein, that the piece that he's like, I'm shut. So as of the end of last year, half of SVB's U.S. deposits, $82 billion, even paid any interest, meaning they had this money free and clear to do with anything that they would have earned on it. They could

have put their money into 50 basis point T bills back then, whenever's the time. They weren't paying anything on this cash. I guess the point of, you were saying, should you be a forensic accounting analyst if you have money at a bank? No, but should you understand cash management? We talk all the time, if you have your money at a savings account at a bank, you're making a huge mistake. I do think that banks are going to worry about Treasury bills as competition. This will be a wake-up moment for them and say, all right. We've got to pay a little bit because people are going to start leaving. One more thing that I think is really important.

Bob Elliott, who is great on Twitter. His handle is Bob E. Unlimited. He wrote, feels like fall of 08 a little, but with much less panic. These regulators have had 15 years working on this. There is a lot more expertise and experience. The stakes are better known. All that is the likely positive for how this. that's resolved, SVP depositors, and the system. So I just want to kudos. Did Powell probably do a

bad job being too late to react and overtighting? Yeah, without a doubt. But Powell and Yellen and all of the powers that be who are probably working around the clock over the weekend deserve all the credit in the world because had they not acted, I'm not overstating things. I think it would have been chaos on Monday. It could have been. Remember how the Fed said, we feel like if we make a mess, we can clean it up. It's basically what's happening a little bit. They said that. If something goes wrong, we have the ability to clean it up. And I think that's kind of what's happening. They made a mess and they're cleaning it up. I will never forget this weekend, just a wild, wild scene. For some reason, I was not nearly as worried as you. I wasn't plastered in front of my computer

screen all weekend because I was out and about. We had soccer tournaments and stuff going on. It's funny to me, though, that again, maybe this is me being naive. I just feel like when something of this happens and it's a systemic issue, the regulators and the the central banks are going to step in and fix it. Dude, I'm with you. That's why I bought risk assets on Sunday. I'm totally with you. But still, even if you're mentally like, all right, there's an 80% chance they fix it,

what if they didn't? Yes. So the implications from that panic of 1907 that I looked at, the stock market fell 50%. Industrial production crashed. The unemployment went up like from 2.5% to 8%. If it wasn't for the Great Depression, we probably look back at that one as one of the worst crises in history. That one kind of got overshadowed by the Great Depression.

Was that called the Great Depression, or am I thinking of something else? No, the funny thing is... No, no, no, listen to me. Before the Great Depression of the 30s, I believe the early 1900s... There was another period of time that was referred to as a Great Depression before the Great Depression. They didn't call them recession. Was it 1893? It was panics or depression.

They were all called that. Okay. So recession is a relatively new term. But that's the point of regulators these days. And again, I don't know what the only kind of consequences of that are. But we've taken those periods off the table where we can let some crazy thing in a financial system like basically bring the whole system down. We've taken that off the table, which I don't know what the consequences of that are, but we have done that. And some maniacs think that's like

not free market capitalism? Right. Do you want us to go back to the days of... Like let the risk takers be punished. Who are the depositors, regular people? Sorry, that's not the way that this is going to work. Never. No. I also do wonder in terms of getting back to the market, like how off-sides people are and how quickly we might see some sort of short covering rally or some sort of gamma squeeze or whatever the hell. Put options, volume hit a record on Friday. Not surprisingly. So all that has to get unwound. We can have a quick rally in a quick hurry. That made no sense. But investing has seemed backwards for the past three or four years now, but I think especially in the short term, you have to look like three steps ahead to realize this news headline versus what actually is

being priced in by the market. We could be talking next week. Something else could happen. The market could roll over and fall to bed. And that wouldn't shock me either. So we did get inflation this morning. Slightly harder than expected, but really nothing with nothing, not like a major event. I think this will give Fed room to pause, I mean, to go down to 25, or maybe pause. Really amazing to me how quickly inflation got just shoved out of the way. If not for the banking crisis. Inflation got shoved in the locker. This would have been a huge day for like inflation being the thing.

And now it's kind of like, it came in about what we expected, maybe a little hot on this thing and a little less on this thing. And egg prices came down. And yeah, right. inflation is what it is. No one cares anymore. And it could if it comes in hot. But what would have happened today if inflation came in significantly higher than expected if it was re-accelerating again? Things would have got weird. Yes. Or maybe the Fed says that happened before we almost took out one of the biggest banks in the country. I would love to hear what their internal meetings

are right now. You think they're kind of looking around going, I told you, you MFer. I told you if you're going to happen. Someone has to be saying that. There has to be someone saying, hey, Cash Carrey, I told you. Don't blame me. I dissenting. Yeah, right. There has to be someone who's saying, I told you guys, this was going to happen, and no

and listen to me. Well, you're the Federal Reserve Bank of Alaska. No one listens to you. All right. Let's see if a banking crisis can do this. So when I was in Arizona, there was all these pool cabanas set up. I'm sure this is going to be a big thing for spring break. I'm sorry.

The word Phoenician is a ridiculous word. Can we just say people from Phoenix? Oh, the Phoenician. Oh, you're right, yes. It's not called a Phoenician resort? Oh, it is. My bad. I thought they were talking about people, set of people. My bad. Okay. They had these all this place and we looked at them like, it's got a TV in it and it's, you can have your own waiter or waitress, whatever. And it's saying this is one in Arizona that they rent for $550 to $600 a day depending on the location. Another one in Miami's renting for $1,200 a day. How much is a tequila? We'll get to that. But they say that the guests renting out these cabanas spent 35 to 40 percent more on food and drink than other poolgoers. And all the people who are ready, any cabanas out are saying it's crazy. They're filling up every day and we don't have enough of them. Oh, can I say one thing on this while we're on this? We'll talk about the tequila later, but I don't know what the comments were like in terms of like my comment that $200,000 is not rich. Again, to reiterate, great income. And depending on where you are, it can be rich.

But in my opinion, at least in New York, I live in New York, $200,000 is not rich. And I don't even know mathematically what percentage of New Yorkers make more than $200,000. But let's ask this. In order to be rich, is that top 1%, like where are we drawing the line with Rich? What does Rich mean? You're in the top 1% or top 5%? Top 5 or 10, don't you think? Okay, guess what?

To be in the top 5% in New York, it's way, way, way over $200,000. I'm going to guess it's like $600,000. I'm making that up. But anyway, in Chicago, Josh and I, the next day, we had a lovely day, went for a walk, we went to the Field Museum, which was incredible. We tried to go to the Art Mutant Institute, but it was closed. By the way, I love, love, love Chicago. It's an awesome city.

It's a New York, but one, one hundredth of the population density. I was kind of bummed out the next day walking on Park Avenue, so many people. But anyway, Josh and I went to Gibson's for lunch after that. And we got an incredible burger. One of the best burgers I've ever had. Guess how much it costs? This is a top shelf steakhouse. Am I going high or low here?

I don't know. $30. $17. In New York, that's a $35 burger. So I'm sorry that I live in an expensive place. But if you think I sound crazy, I think for the most part, people were, were people with me? Yeah, people were more thinking about the tequila and anything else. These are old.

This is from 2016, so it's a little old. Top 10% in New York is 210,000. Top 1% is 713,000. Okay. Add something to that probably. So it's probably 250 now for top 10%. Something like that. Yeah.

So if you're top 10%, that's a good income. Top 10% means you're earning a really nice income. I don't know where I draw the line at rich, but I think that's like top 3%. Anyhow, where we go next, Ben. All right. Man, this seems so old. I know. I part of chart in here last week about the gray scale discount, which had gone the other way in a good way.

So it was training like a 40% discount. It shot up to negative 35, meaning the discount was getting less severe. As investors anticipated maybe that the courts would rule in their favor to convert to an ETF, again, this seems like 14 years ago that I put this in the dock. So people really think that they might win their lawsuit? Yeah. Oh, I didn't know that. I don't know what that means. I didn't read the whole article, but I saw somebody said that, like, yes, they might win the

ruling, but they still might not get the ETF. So I don't know what's going on exactly. I assume that with that. One more thing about getting back to the market thing, not thinking. A lot of people are saying this is like the 1998 thing where Russia defaulted and we had the currency crisis in some of the Asian countries. And if the Fed does back off, this is like a blowoff top thing, potentially. I thought it was. I was saying that a week and a half ago before this happened. I said to Josh, this is a blow off top of yields. No, I'm saying could this be a blowoff top in the markets where people take this a step further and if the Fed stepped back, markets take off and I don't know. It's easy to look at history. I could have a blow off top in a bare market, one thing at a time.

Okay, true. Because this is the everything bubble people. All right, Wall Street Journal, the number of renter households making 150 grand or more rose by 87% between 2016 and 2021 to burn 3 million people. This is, according to the U.S. Census Bureau, 44 million households rented median income for them was about 71,000, which is right around the median income for everyone, so that doesn't really tell you much. The whole point of this is article from the Wall Street Journal.

And I think a lot of people assume that renting must be bad. for your financial health, and there are stats that show like homeowners have higher net worth than people who rent. But I think that is kind of a correlation causation thing. I just think they interviewed a few people in here who want to buy and say they kind of can't because they're priced out of the market, a place like Austin, for example, but I don't think you have to be a homeowner to have a high net worth and to become wealthy. I think renting is just fine for people who maybe live in a big city or want to have flexibility or want to move around a little bit. And I think there is this stigma attached to that renting must be a bad thing. And you're

paying your landlord's mortgage and that kind of thing. And owning a home is not for everyone. I guess that was what I'm trying to say. I think that renting gives you a lot of freedom. It allows you to move. Guess what? If you locked in a mortgage at 3%, which is a beautiful thing, you're stuck. We're trapped. Yes. You and I are trapped in our 3% mortgages for a long time. My kids asked me the other week, are we ever going to move out of this house? And I said, not unless mortgages rates are 3% again. We're staying here until you're in high school, probably. I'm thrilled with my house.

I'm very, very happy with my house. Robin sent me a house the other day, and she's like, this is actually a pretty good price. It said, not when mortgage rates are 6.5%. True. But how many mudrooms does that house have? It was a big house. Someone in the comments last week did say,

if Michael stays in his house for 30 years, because we were talking about people staying in their houses longer, he's just going to have 12 mudrooms by the time it's all done. And that was pretty good. All right. I've been talking about this for a while. If you want to buy, I think now you should probably build if you can. Kevin Oakley tweeted this.

Traffic HomeBuilder websites hit an all-time high on March 7th, even way beyond the any time during 2020 to 2022. I really think that this is the way to go. If you want to have any sort of leverage or negotiating power and maybe get rates a little lower, I would be going to a lot of home builders right now and seeing what they have for land or inventory or whatever if I'm in the market right now.

That's where I'm negotiating. All right, let's do our survey over the week. what would you do if the bill came and you were charged $86 for a drink? We put this on our YouTube channel. Ask to speak to the manager was the highest at 46%. The next one was pay it and stew in silent rage at 23%. That was me. Some people said they'd leave a Yelp review.

Some people would complain to the server. Some people would ask to speak to the owner. Wait, what do you mean some? Hello? What? Is that a joke? This is horrible podcasting. You just said some would do this, some would do that, some would do that.

Are we going to give numbers? So I said 46% to speak to the manager and 23% would, that's the majority. and then the rest of them are 5% speak to the owner, yeah. The majority, 46% would speak to the manager, 5% would have to speak to the owner. By the way, I have to do attraction to use a sal-guburnalianism. The Hoxton Bar and the Hoxton Hotel, I believe, are separate entities. So the Hoxton Hotel is a lovely place with lovely people, great amenities. I will be going back.

The Hoxton Bar, I will never frequent again, ever. Because to reiterate, the guy was a dick. It wasn't just that it was egregious. He was really a jerk about it. I think I said this last week. He's like, it was one guy. It's not the whole place.

But here's the thing. I said the one, we have people here spending $700 all day every day. I'm like, what? What does that mean? Go ahead, Ben, what we were about to say? They did also make it right.

And they gave us a free round of drinks the next night. Well, the next night, we, what do we have duck, duck, goat? Is that we went to dinner? What a great place that was. So we went to a bar after. I said, it's a joke. Do you have class A's old? They said, yeah, yeah, we do.

I said, how much is it? You were pricing it at every restaurant we went to. $30. Now, I understand there's a premium for a hotel bar. 86. I rest my case. It was just funny to me. Every bar we went to, you were pricing it out and asking, you're like creating a little.

I mean, class as well is delicious. It's my favorite tequila, but it's just not their fault. Anyway, we got a lot of emails last week, Ben, what were you talking about with? Oh, you're talking about David Einhorn's haircut? And we got like... I don't want to like hair shame here. A lot of people said it's a piece. It could be like a hair piece or hair plugs.

I respect that. A lot of people emailed us. I would love to see you with a hairpiece. Me too. I think it would be hilarious. Just don't say anything and just show up one day with one. I would just die, burst out laughing. So Mark Davis does have the worst haircut of all time. Yes. By the way, any thoughts on the Jimmy G. signing?

I didn't can prepare for Raiders talk today. Youth sports, what's this about? I had a whole spiel on youth sports, but I can save it. Okay. We'll do it next time. All right, I'll start with recommendations. Last night, I threw on, this is just to add it on HBO, one of my favorite comedies of all time. I love you, man. I love that movie. Andy Sandberg and, is it J.K. Simmons. Is that his name?

Yeah, the dad. The Hank Mark Dukas stuff. It's just... Paul Rudd is great in that movie. You know when that movie came out? A while ago, right? March 20th, 2009. Jeez. Yeah, we don't get good comedies anymore, that's for sure. I'm so sad. We don't get him anymore. They just don't happen. Yeah, I know. And Paul Rudd's doing Marvel movies now. I said to Robin on Friday, I'm going to the movies tonight. Logan goes, what are you saying? Logan's a three-year-old. And I said, either Creed 3 or Scream 6. I just say that out loud. What is happening?

Creed 3 or Scream 6? So it's either the sixth movie in a franchise that started 35 years ago or the third film in a reboot from 45 years ago, 50 years ago. That almost sounds like a bad joke. You basically said I'm going to see Rocky 9. Yeah, seriously. But anyhow, guess what? Scream 6.

It was fun. How'd get time. entertained. No complaints. And guess what? The theater was packed. We're back. Wasn't it like the biggest one of all those screen movies as well? In terms of box office? Yeah. Did I see that or was it wrong? Oh, really? I don't know. I blame inflation. Did you watch the Last of Us finale? Yeah. I was a little underwhelmed. I'm not going to lie. Me too. I was waiting for like a big something to happen and it was good, but I thought the

show admittedly trailed off a little for as much as I loved it at the beginning. I thought it was just good at the end. Yeah. I was looking for great. I wanted something to happen that didn't happen, but it's a very good show. No complaints. It's good, but it was like, I was waiting to be blown away by an ending and it didn't happen. What do we have coming back?

There's one other show that we watch. Yellow jackets I like. Yeah, there's a lot of TV coming. Robin watches it. I mentioned this a few times. If you haven't read this and you're a student of financial history, panic of 1907 is a great book. You know who has the forward in that one?

Oh, I do. Is it Galbraith? William Bernstein. Oh, did Goldbreth write the book? No, it's Robert Bruner and Sean, car, but it's a great book, and it's definitely worth your time. I think reading on financial crises is, to understand the markets is really helpful. Am I right? Is that a shortish book? Or am I thinking of the 1932 one? The Galbraith one is short. There's only 200 pages. It's not bad.

Other one, I read on my flight to and from Chicago. I finished the book on the flight. I did some skimming because I pass over. Like, this is going to sound pretentious, but books that have wisdom about them, like, here's the takeaway. Here's what you need to do. I usually skip that stuff because I feel like it's kind of similar in most books. What do you mean? I would rather get to the meat of it and the data and the stories and then skip over, like, here's what you should do about this. Because I feel like a lot of it has kind of been there, done that. Anyway, seen it before.

What is the good life? The good life is the story of the longest scientific study of happiness. For Harvard, they started following these people in 1938, I think, and it was like 700 people. A lot of these people had just got back from war, and they followed them through their whole life, and they did a study on what makes people happy. They followed these people. They had quarterly interviews or yearly interviews, and they had surveys, and they did medical tests. It was like an extensive study in these people. They followed them from like

their teenage years to when they died. And these people checked in all the time. And the stories on the people for this study were amazing. It was like, this is a lawyer who made a ton of money. And then this is a teacher who didn't make much money. And the teacher was way happier because he had better relationships and the lawyer had no friends. And the whole point of the book was, I'm a huge fan of these happiness things. I can't get enough of it. Just because I think it's really interesting. But the whole point of the book was the biggest thing to make you happier is having good relationships in your life. That was the one takeaway. But the stories of these people from World War II and the stuff they went through and them having kids and getting married and getting

divorced and all this stuff, it's a really interesting case study and what makes people tick and what makes people happy. Very good book. Highly recommend. I also like happiness. Case I money missed it. We had a great episode on Monday. Oh, yes. We did. We talked to Dr. David Kelly from J.P. Morgan on Friday right after Silicon Valley Bank went under. That guy was very impressive. Yeah, check out our talker book for Monday. He was very good. He had a lot of really good stats, too. His one stat that listed out to me was he said we've had 23 months in a row where wage growth has been lower than inflation, meaning this is not like a wage price spiral from the 1970s. This is something else. And he was also saying at the time, the Fed kind of messed up,

which confirmation bias or not, I agreed with him. So next week, more dominoes to fall or is like are things back to normal? If you had to make a probability, You know what? I'm just going to punt. I'm just going to punt. 51-49 things are back to normal. It's aggressive. Okay. All right.

Send us an email Animal Spiritspot at g-mail.com, and we will see you next time.