Chit Chat Stocks - The Banking Industry with John Maxfield

Episode Date: February 23, 2023

The banking industry plays a crucial role in the stock market, as banks often form a significant portion of many investment portfolios. As a highly regulated industry with cyclical tendencies, banking stocks can be impacted by a wide range of factors, from economic conditions and interest rates to changes in government policies and regulations. Listen as Brett and Ryan ask questions for John to answer. Enjoy the show! ***************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of John's work? Check out his Twitter here: https://twitter.com/MaxfieldOnBanks?s=20 Contact us: [e-mail] Timestamps Banking | (2:57) Bank Analysis | (21:04) Interest Rates | (28:26) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. My name is Ryan Henderson, and I am joined by my co-host, Brett Schaefer. Today is our Thursday deep dive episode where we interview either an analyst or someone we consider to be an expert on a single stock or an industry overall. And today we have on John Maxfield to talk about the banking sector as a whole. John is, without a doubt, a true expert in banking. He has tons of historical data points that I found really fascinating that his knowledge is that deep. He has a lot of professional experience with some of the best bankers and bank CEOs in the United States as well. You can just tell he's got tons of value to provide. He goes through really everything you need to know, I think, about banks

and some of the misconceptions about banks as well. Anyway, today's episode is presented by Stratosphere. Stratosphere is our investing home screen for fundamental research. Brett and I literally use it every day. They're adding new tools all the time. I know we spoke with Braden Dennis, the founder, and I believe they just launched bar charts as well for all their company-specific KPIs. So that's another, I guess, interesting tool about the platform. They offer all companies, or not all, but tons of company-specific KPIs where you really can't get them anywhere else, at least on a single page. They also have SEC file aggregation. They have traditional financials as well. Fundamental charting tools for basically all companies.

And it's completely free is the best part. So there's plenty more at Stratosphere. Just go ahead, check it out. It's stratosphere.io. That is stratosphere.io. If you want a paid plan, use promo code CCM and you get 15% off. If you're more interested in the platform, stick around after the episode. We did a little three-minute interview with the founder, Braden Dennis. But without further ado, here's our interview with John Maxfield. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital,

and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chitchat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Okay, welcome in. Today, we are joined by John Maxfield. You may know him as Maxfield on Banks on Twitter. At least that's how I first came across you.

But John, this is our first time chatting and I mostly just kind of read your banking work and I found it really, really fascinating. So I guess maybe let's start with your background because listeners may or may not know who you are. How did you get into banking to begin with? What piqued your interest about that sector? Yeah, so sure. Great to be on here with you guys. Um, so the thing that, that piqued my interest in banking was, um, well, my family, we've invested in banks for four generations. Um, so there's just been that kind of like in our blood a little bit, but more specifically, um, I went to college, I went to law school, worked for a year for a federal judge, went

back to get some more school, realized that if I was going to avoid getting a job, that'd be a lot cheaper if I just didn't have a job, as opposed to if I paid like $20,000 in tuition a year and didn't have a job. So I stopped the LLM program halfway through, sold a bank investment that had been made on my behalf that turned out to be pretty lucrative, moved to Washington DC to read books for as long as my money would last. And I did that. And that was right around the time I was going to do geopolitics. And in fact, even started a little group. But then this is right around the time of the financial crisis, the financial crisis struck. And I thought, I don't understand why that what what just happened there so i wanted to understand what happened

um i figured that would take me like six months because i'd kind of studied different subjects all along in through my life and i'd like kind of study them and then reduce it to a simple single sentence and then pack it away and then you can pull it out at any point in time and so i'd do that uh figured banking was not one of the more complicated things i'd studied uh but 12 years later this gets just to the beginning of last year 13 years later or whatever that is uh i still still hadn't figured it out. So I was like, what's going on here? And so I gave it one last big push last year. And that brings us up to today. All right. Beautiful. We're talking banks. And I think a lot of listeners, including ourselves, get intimidated when looking at banks.

And I know there's a few things. There's a lot of metrics that you got to look at that are very different than an operating business. But starting at the beginning, what are the first things you would look at when you're evaluating a bank what metrics are you looking at and why are they important yeah zero metrics i don't look at any metrics i mean i do i look at all the metrics okay i look at all the metrics i know all the metrics and like i've done all the homework and um but the thing about banks is a bank so there's a bank in chicago uh it's called washington federal bank for savings, that everything looked fine as making good money, growing reasonably at a responsible rate, and all of a sudden it failed out of the blue. And it turns out that half its

loan book is built on entire fraud. And you can go back to the history of banking over and over and over and over and over again. And everything looks fine when you're studying a bank. Everything looks fine. You're looking at all the metrics. You think you know what you're doing. You think you know what the metrics mean, blah, blah, blah, blah. And then they'll just fall out of the sky. and that's because a bank um for the most part is gets to dictate what it's on its balance sheet um not necessarily what's on its balance sheet i mean it gets to dictate that to a certain extent within regulatory rules but the valuation that that you put on that and when you impair that and all that kind of stuff and so what you find is that like in banking like you you're looking

at the rear view mirror you're even looking at the data that's relatively recent and it just doesn't mean anything because everything is fine until it isn't and so there's this tendency among bank investors to like get stuck up on this idea of metrics and all that kind of stuff but like it just doesn't mean anything it doesn't mean anything if you really know what you're doing it doesn't mean anything so what do you have to do you have to you have to assess the people that are running these organizations um that's the only way you can get a sense for uh whether those metrics are even worth taking a look at um and if they are you know then then you know you can maybe hang your hat on a little bit of that but even then you wouldn't you wouldn't

want to rely on them too much what do you so yeah i've heard you mention that before which is like you know the most important thing is assessing management and their character what are some of the things that make you think okay this person is honest is it kind of just gut feel or is there any specific characteristics well i mean i'm in a situation where i know most of them at this point and i've spent a significant amount of time with most of them at this point um and so you know you develop uh just like anything right you develop an ability to recognize something right away um that doesn't mean you're 100 right i mean there's a lot of people who called and you would have never seen what happened to wells fargo happened at wells fargo right

i was one of them i didn't know john stump um buffett too buffett was you know saying their praise yeah that's exactly right and so like um but you know you what so you know i kind of deal in a kind of a i'll tell the story but i can't tell you what bank it is or what banker it is but um i only deal with the best banks uh and i only deal with the best thing i did because i've done all the analytical work so i know what they are public and private and um so i rarely rarely rarely deal with the banks that aren't any good and once in a while i will and there is a merger of relatively large banks that happened i can't tell too much about say much more about that or i'll be clear who i'm talking about but um i told the ceo of one of the banks that uh and he's

going to be the CEO of the combined institution that I would write about their bank. I would write about the merger, even though they weren't as good of performing banks as I typically write about, but I would write about it all on one condition that they totally open up their kimono and I get everything I want whenever I want it and et cetera, et cetera. And they agreed to those terms. And so I go in and I, it's actually really interesting because like, it's a very live story right now that a lot a lot of people know about but um so i go in and i do all my homework and i do deep deep due diligence um i mean when i go and i sit down with these ceos and i know more about what their great granddaddy did than they did you know than they do i mean a lot more i know a lot

more about what their great granddaddy did than they do i mean i spend i probably spend 10 hours a week on ancestry.com doing genealogical research on on people um and so i went in and one of the CEOs, it was interesting because the CEO is ostensibly going to be the CEO of the combined organization. We had my interview with him and we're buddies in my interview with him in their boardroom. And everything went fine as normal. And he gave me one version of story. And then later on down the road, a couple of weeks later, I had my interview with the other CEO who's ostensibly not going to be the CEO. And it was completely different version. And I went so far so far as i would go okay let's go talk about this conversation when you guys met in the office like

tell me exactly word for word you say what he say what you say what he'd say what you know what i mean like word for word let's go through the whole thing i mean it was like diametrically opposed stories and you think like that's really interesting and then you look at like maybe why he this second individual would be dishonest either to myself or the other ceo that he entered in the deal with um then it all makes sense but you know what i do is i go in and i try to assess their honesty are they you don't have to be albert einstein to run a bank okay that's important to know you in fact too much intelligence is actually a little bit dangerous in the hands of banker because you want your bankers to be really it's a it's horrible to say to somewhat lack ambition

because you just do the same thing over and over again every single year every single year every single year right you get too ambitious these people don't want to do that right um so the intelligence that's a pretty low bar for banking but it's the temperamental stuff that you want to know about. And it is the honesty and the credibility that you want to assess. And so you can assess that by looking at them, seeing how they talk, get the feeling for that. Or you can do it by getting to know them and asking them questions and giving them an opportunity to be dishonest with you. Who are successful cases? Maybe some notable ones that you look at And you say, that's what a good banker looks like.

It could be dead or alive. And maybe I heard you mention this on another interview, but was there any shared characteristics among them? Yeah, so I'll give you some names. Okay, so I'll just list off all the really good bankers is what I'll do for you. So Patrick Goggin runs, he's the president of Hingham Institution for Savings, H-I-F-S.

Now they're getting pounded right now just because of the composition of their balance sheet. uh, third name is getting found right now. But the, the thing that Patrick knows is that, um, in times like this, you just stick to your, stick to your, to your knitting and just get through it and you'll be just fine. And Patrick knows that. And he's not gonna, he's not gonna respond inappropriately. I mean, just phenomenal bank. These guys, he, these folks just, their family owns like 40% of that bank. They know how to run a bank. Guy named Aaron, uh, graft down in Dallas, Texas runs a cool bank triumph financial T I F N or T F I N triumph is this. It's just an

amazing. It's just an amazing, amazing story. And Aaron is like, he's just a one in a million. I mean, the way he thinks, the way he approaches business, the responsibility, the extent to which he accepts the duty and responsibility of being a fiduciary. And just like his creativity is just, he's just off the charts. They're basically taking, they're basically rewriting the payment system in the US trucking industry, which equates to 8% of US GDP. There's also another guy down in texas named scott deeser scott runs a bank called first financial bank shares ffin it's in abilene texas have you guys ever been to abilene texas either one of you yeah yeah yeah well i don't want to say anything disparaging about abilene texas but like you wouldn't go to abilene texas

unless like maybe like maybe you're an oil or something like that it's like this is in west texas it's hot in the summer it's dry there's rattlesnakes there's like tumbleweeds that kind of stuff you know um and but his bank trades for like consistently four times book value i mean typical bank will trade for 1.4 one and a half as book scott's bank and it's like for 15 years it's traded like that and you say like why is that and you can go through all this analysis but you know one of the one of the reasons is that i mean i the primary reason i think is that the standard deviation of its return on profitability return equity return assets is lower than any other banks standard deviation. And there's a theory in finance called variance strain

that helps explain this. But basically what it does is it makes that stock trade almost like a bond. It almost moves it down a notch in the capital stack. And so like you can trade at a higher valuation because it's more consistent. So that's a really good bank and just how Scott does it and what Scott knows. That's a really good bank. There's a good bank up in your neck of the woods, Washington Federal. We were talking about this before the show, Brett, But the CEO of that bank, Brent Beardall, just like, I love Brent Beardall. He's just like the most wonderful guy you'll ever meet. He just radiates this positivity. And like, he's just the type of guy you want leading. Like if you had a kid who was going to get a job at an organization,

you'd want him to go, you'd want Brent Beardall to be the guy leading that organization. He's just that kind of guy. And I was actually telling Brett, Ryan, before you jumped on, that Brent was just recently in a plane crash. It's a very, very serious plane crash uh in provo utah and like i mean he like he compound fractures lay out his pelvis i mean like he's in a really rough shape but like um the guy i mean he's like almost completely healed i mean he's he's this amazing amazing guy um and so it's just great to great to see him doing well uh and that bank if you rank it by if you rank all the banks in the united states by all-time total shareholder return washington federal ranks seventh so i mean this is like a really really

good bank. That's another good one. There's a bank up in Buffalo, New York called M&T Bank. So again, if you go by that ranking, all-time total shareholder return. So you go all the way back to when every bank IPO'd. And you take the total amount of shareholder value, dividends plus share price appreciation that they've created since going public. There's two that are way above the pack. There are a couple of standard deviations out from even the third or fourth ranks. That's M&T Bank up in Buffalo, MTB, and a bank up in Kalispell, Montana called Glacier Bank or GVCI. M&T up in Buffalo was run by a guy named Bob Wilmers from 1983 until he passed away in December 2017. And just full disclosure, I run a charitable thing for the Wilmers family. So I'm

very close with with all of those folks um but just a fantastic fantastic organization um created just a ton of value buffett he's good he was a good friend of buffett buffett was an investor in amity etc etc and then the other bank um in addition amity is glacier bank or in glacier is just um glacier is uh again glacier is run by a guy named mick blodnick and mick blodnick is like whenever i go into towns to visit bankers like i always start asking people on airplanes like oh, tell me about this bank, tell me about this banker and blah, blah, blah. And then I ask people throughout the town, like, tell me about this. Do you know this person related to that? And generally the banker, even if it's a really good banker, we'll get a couple of negative reviews

just because for some reason or other. Mick Blahnik, everybody loves this guy. Everybody loves this guy. I mean, he is a special, special human being. And he runs, he ran Glacier from 1998 until 2016. And so those are really the top bankers, in my opinion. In the public space, There's some really good private space, but in the public space. Right. No, that's a great list. Sounds like some companies we're going to need to be studying sometime in the near future. The question I think, so what you're getting at is that it's, yeah, everyone can look at a low book value. Everyone can look at a good return on equity.

Everyone can say, okay, net interest margin is going to expand a few quarters from now. But it's really about the management teams that can react to a tougher operating environment and get through all sorts of market cycles and come out clean the other side. is that kind of what you're looking for or someone that is not going to have that, you know, the classic one is the Lehman blow up the cloud, you know, some sort of bomb on their balance sheet. Okay. So, um, it doesn't like, uh, when people start like rattling off, like name's going to do this, name's going to do that. I'm just like, I just check out. I mean,

just like, I'm just like, okay, this stuff, so that's not the stuff that matters. I mean, like you, you, you have to be talking about the people. you just have to be talking about the people because it just nobody knows what nims first of all nobody knows nims are going to do nobody knows what nims are going to do nobody okay number one um number two by the time they do it it's too late to do anything about it okay because like you have a balance you're sitting on a bunch of assets and sitting on a bunch of liabilities and there's like that's that's that is what it is at that point and so one of the things you see in banking

is you know in fact what you want is the opposite of somebody who's going to react you want somebody He's just going to make the right decision at the right time and keep their cool. So in the 1980s, in the early 1980s, there was an oil crisis in 1973, a second oil crisis in 1979 as a result of the Iranian revolution. Oil shoots way up. Inflation shoots way up. And when inflation shoots way up, Paul Volcker comes in and he jacks up the federal funds rate at the Federal Reserve to take care of inflation. Well, when you jack up the federal funds rate, that's a short-term interest rate. what happens is that you have this thrift industry so savings and loans so what they do is they just

held mortgages on their balance sheet 30-year fixed rate mortgages on the balance sheet and their average at the time was about eight percent well paul volcker jacked up the fed fund rates like 18 percent and so that's where your your deposits will go so your deposits go up like 18 percent and they're only earning eight percent on their assets they're upside down it's an inverted yield curve so all these banks freak out and um they the legislature the congress allows them to start getting into commercial real estate getting into junk bonds and all this other stuff now so then these these guys are getting this crazy crazy stuff and then which spurs a second crisis in the 80s a commercial real estate crisis and then a whole bunch thousands of them fail but you go

back and you look and you say like who are the banks that actually did well through all this it was the banks that just continue doing what they're doing. Like Washington federal is a perfect example. So, so you had like most thrift, what most thrifts did is they went, they said, okay, let's, cause they got the right to go from fixed rate mortgages to variable rate mortgages. So then it could move with rates because they got that, that right was granted in response to the crisis. Okay. So most of them switched over to variable rate, but you look at like a Washington federal, they said, no, no, we're going to just continue doing what we're doing. And we're just going to continue writing fixed rate mortgages and keep it

portfolioing them on our balance sheet. Well, ever since then rates have come down for the past, they came down from starting in 81 or starting in 80. They've, they came down for basically 30 years. So these guys were sitting with these mortgages on their balance sheet that were yielding like 17%, 16%. And then that thing was just coming down and everybody else was switched over to variable, right? So they switched. So their rates were coming down where the

Washington federal was, I mean, I mean, it was just, it was killing it. It was killing it. And so the lesson learned is that um when there's time when a bank runs into trouble and the the the inclination is to respond in some sort of um aggressive way the what you want is the exact opposite i call it inertia buyers but inertia bias you want them to just if they're doing the right thing just hang tight and just continue doing the right thing so what do you how do you like if you mentioned that you had uh at the start of the interview mentioned that you made a lucrative bank investment when you were younger i think and what do you look at to determine beyond say you know okay they've got

a respectable management team that's honest and they do the right thing how do you know when you think okay this bank's investable okay i mean i'll tell you the analysis i go through the problem is that like you can't just take my analysis so somebody can't somebody else can't you can you take it but it wouldn't mean anything to somebody else like it means something to me because i study this so intensely, but like, well, the very first thing I do is I look and see how they performed in 08 and 09. How'd they do? Like, how did they do in the crisis? And what you're testing there is not how they did in a crisis. What you're testing there is how they do in 04, 05, and 06, when everybody was going bonkers doing stuff they shouldn't be doing. You say, did these guys

behave themselves? Right? Because that is what you need to know. Okay. Did these guys behave themselves when like times were good? Because that's the hard thing to do. And that's not, not a lot of people are able to do that. So I, that's the very first litmus test I go and look at. How are they, how are they doing the crisis? And then after I look at how they did in the crisis, I'll take their data back as far as it can go, as far as it can go. I mean, so typically I can, you can typically get it back to, you can at least get it back to 92 because the FDIC has the data going back to 92. Oftentimes you can take it back to the eighties, sometimes in the seventies. I, you want the whole picture. How, what is the culture of this organization? Is

the culture to go wild when everybody else is going wild? Or is the culture that is respected and appreciated at this organization? Is it that we are going to hang tight when the market is high because we're going to be confident that the market is going to fall because it is cyclical and it's going to continue to be cyclical? Well, there's no reason to think it's not going to be cyclical. That when it does fall, we're going to pick up and then more than make up for the lost market share we lost the market share we lost at the top um so that's you're looking at how they do through cycles because here's the thing you have to understand about banks because they're so leveraged and because they use fractional reserve lending which means that like

you know you only hold um so if you're you have a hundred million dollars in deposits at your bank you're only holding like whatever 10 million dollars in cash so all those deposits come at you what you know to withdraw at one time and you're over i mean you're illiquid and you're basically insolvent by as a result of illiquidity um and so you have got your margin for error is so so so small um that like you just you just you just have got to have people at the top who are not prone to making errors who are not prone to those of those emotional and temperamental ups and downs um with the cycle they've got to be the ones who can sit there in cold blood like analyze the facts that are before them so you mentioned that gfc is uh sort of a first litmus test how

have things changed since the gfc maybe regulatory wise like does it do you think there's a lower probability of bank failures today because of it um or do you think it'll ultimately be kind of more of the same and we'll learn the lessons again well i mean you know what we see with bank i mean yeah i mean there are bank failures come and go like if you go all the way back to the beginning back to seven basically let's go back to 1800 right you see these spikes there are these these these these financial crises every single decade huge huge spikes and failures every single decade and then you come into uh that continues to the civil war continues through the civil war through gilded age then you come up to the the uh the great depression the great depression is a

huge one of these, right? You have thousands and thousands of banks fail each year. And then there's a period after the Great Depression that lasts from like 1950, let's call it 1950 to 1973, 74, where they call it the Great Moderation, where they basically don't have any failures. We have pedestrian profitability and basically no failures. But then in 1973 is when the oil crisis strike and that sets off this whole new thing. And then you have a bunch of failures in the 80s and failures in the beginning of the 90s as a carryover from the 1980s and then you have failures in the in the financial crisis failures will always be here as long as we have banks okay they'll always be here we don't know you know they come in they tend to come in groups we don't it's

hard to predict when those are going to happen but like it's just failures it's something you just it's just always have to be in your head with banks they can always fail just you just have to assume it's like okay this is this type of investment class or security like is subject to going to zero like you just have to come to terms with that you know what i mean uh if you can't come to terms with that then like you shouldn't be investing in banks you know um and so you know yeah yeah there there will be i mean i guess back to your question like will the instance rate of failures go down i mean like well there are fewer banks so there'll be fewer failures will the percentage of banks that fail go down i i don't know but there will always

be failures and so like that's what matters um in terms of like how the the the landscape has changed more generally since the financial crisis yeah i mean there's like more regulation right dodd frank and all that kind of stuff the the cfpb and like and all those things but here's what you need to understand it's like you know you know we've all studied economics right so we know that there's a cost of capital you have to earn a certain level right to earn your keep in the markets in the public market in the capital markets right you don't earn a certain level like then that capital is going to be allocated elsewhere right well like just it all the way that it works is that like it just readjusts to a new equilibrium the new regulated regulations

come in it will readjust to that equilibrium some banks will sell out some banks will just close down some banks whatever it is like that the market will readjust so where they your good banks will earn their cost of capital um and so it's just a matter of finding those banks that are able to earn their cost of capital and then uh and then you know sticking with them over a long period of time because you're never ever going to get fast returns with the bank and you shouldn't or else you'll be in trouble what are some of the things where if you see it you go like a red flag pops up in your mind are there any characters a lot of those like you're like okay yeah this is something's going on here yeah rapid growth really really

rapid growth out of market lending out of market lending is bad news bears because you go into a new market you know you're a bank and whatever san antonio texas and you've got a whole bunch deposits you can't deploy profitably in san antonio because it's the market there's just not much going on down there so you decide to go to veil or whatever you know like when like it's white hot i mean you're going to get the worst loans because the lenders that are there know all the people who they know the people they know the property they're going to take all the good ones, you're going to get the bad ones. So out of market lending is a really, really big one. Another big one is concentration in fad type assets. So something that's like cool and

happening at the time. Yeah. So the other bank is out east called Bank Prov. And what Bank Prov was doing is they were actually lending money to these cryptocurrency mining operations. And so when the cryptocurrency prices tanked, I mean, it just got killed or CEO got kicked out. The CEO's son was running the cryptocurrency stuff and he was a total clown. So that didn't go well for them, although they did survive, which surprised me actually. So today, interest rates are rising at the fastest pace, I guess, in history or maybe recent history. How has that affected the banking sector? How do you see it affecting the banking sector? I know you talk with a lot of the executive teams?

How are they reacting to that? Like, I know it's kind of a big mystery for people outside of the industry right now of how big of an impact it's going to have. So what are your thoughts on that in general as we move forward the next, say, year or two through this? I don't want to call it weird because we are kind of going back to real interest rates

that are not zero, but just a different operating environment that we've been in. Well, I mean, everything's different, right? I mean, everything's always different and everything's always unpredictable and everything's always unforeseeable. So you have people say like,

oh, it's so unforeseeable. I was like, it's always unforeseeable. Like when was it foreseeable? You know what I mean? Tell me, I'm curious. So like, you know, I've never heard of that. So it's like, it's the same as it always has been. Um, it's just different because it's different. You know what I mean? So that I would start with that. Um, let me, let me answer it slightly different way. So if you go back to when I, the reason I got it, when I started studying banking, I was like, I'm going to study it. And I'm going to, like I said, reduce it to take six months to reduce it to a simple nugget that like captures the core essence of banking, then I'll move on to another topic. So I go through

all these different topics, and I would kind of learn them and kind of reduce them to a simple thing. And so when I got to banking, I thought like, this won't take very long. So I'd go after it for about, you know, a while, 12 years later, which is like 24 times longer than I thought it was going to take me. I still hadn't figured it out. There was a theory enough, there's a flaw in the banking, there's a flaw in the theory, is what I discovered over the past year, I did a really intense knowledge consolidation process. And, uh, and so I figured out what kind of what it was and kind of was able to simplify to this, to that, that one simple nugget. And what that one simple nugget is, is that the banking is a business of abundance. Okay. It's a business of

abundance. This is a really important thing to understand about banking. It's a critical fundamental thing to understand about banking. Every other business is a business of scarcity. scarcity is the primary constraint okay you are a bookstore your scarcity of demands you have scarcity of customers walking in your doors scarcity when the harry potters came out no bookstore could get enough harry potters there's scarcity of the product there's a scarcity of real estate there's scarcity scarcity scarcity that is the primary constraint in every other business the primary constraint in banking is abundance which doesn't seem to make sense right but the reason is it's because money is an intangible thing okay so like it's not like a

book where it's like if barnes and noble dropped the price of books to 10 cents i'd buy a lot of books okay but i wouldn't buy a million i think there's just i wouldn't even if i had the money to where i couldn't where i put them right money if the the price of money at the interest rate is low enough and the terms are easy enough you literally can walk through mathematical proof to see that you would want an infinite amount of money. And so what that means is that because the demand for money is infinite, that puts the entire onus on the banker to control, to govern their own growth. And if there's one thing we know about humans is that we are not good at governing our own growth and controlling fear, greed, and envy. And so that's why it's so hard to be a banker.

And so, when you go back through all of time, what you realize is that there's these periods of these surges in liquidity, okay? Surge of liquidity that comes in either from Europe or comes up the Federal Reserve, pulls it out of the ground or whatever it is. There's a surge in what I call novel liquidity. So, and then right after that surge of liquidity, what do you have? A surge of failures or crisis. And so, that's just how it goes. Going back to 1800, you have 1809, you have a crisis. We have a surge in liquidity in the 18, like 6, 7.

In 1809, you have a crisis. Same thing in the mid-teens, and then 18, 19, you have a crisis. Same thing in the 20s, 17, the 30s, 17, the 50s. That means just every single decade, surge of liquidity, crisis, surge of liquidity, crisis. Well, what we've seen now is that ever since the Federal Reserve came in, the amount of time between when there's a surge of liquidity and when that crisis strikes is lengthening out, okay? But it's still there. Liquidity never just like quietly excuses itself out the side door. It bangs its way out the front door.

And that's important to know. And if there's reason important to know is because everything that's going on right now is a function of one thing, which is a function of all the liquidity that was poured into the system during the COVID crisis, because everybody was afraid because you know, GDP fell by 30% on an annualized basis that first quarter, the second quarter, I think it's the second quarter of 2020. And that was worse than the Great Depression. So the Federal Reserve and the folks in charge of fiscal policy came in really, really heavy with everything. Well, they put in so much, like $8 trillion increase in deposits or something like that. Never seen that rapid of an increase in liquidity. And so what we know now is that we don't know how it's going to make its way out of the system, but we know it's going to at some point. And it's not going to be pretty. It could be five years, could be 10 years, could be 20 years. But that's the thing to keep in mind.

curious what you think about digital banks versus some of the more traditional banks i know a lot of people that's kind of a more hot topic today is some of the you know um i think i think the term is neo banks um businesses or banks that were digital first they don't have a physical footprint do you think that's an advantage in today's world is there sort of like an innovator's dilemma here where the physical footprint is is maybe baggage for some of these traditional companies or do you think it could also be an advantage for them as well so i mean i i won't mince words i think the people who run those digital banks are a bunch of clowns um by and large um they don't know what they're talking about they don't know what they're doing they focus on things that are that seem cool

right now but then like you know the chickens will come home to roost when the cycle turns the other the other way um now banking is about banking is a real is a retail business you're out gathering up money from people who have extra savings, all these people across the country, and then you're giving it to people who are trying to grow businesses. Yes, there's a time. Yes, everybody has to have a digital distribution system, right? You have to have an app. You got to have a website. You got to be able to move money over Zelle and move money over Venmo and PayPal, whatever. You've got to be able to keyed into that, tied into that. But all the banks are. all the banks are tied into that um and so these these kind of niche players i mean you could go

back to the 1990s there's a bank called net bank okay net bank was like going to take over all of banking okay you know what happened to net bank because it is the first like internet bank right it failed net bank failed okay clowns bunch of clowns like you just over and over and over and over again it's the same story and you go back in different iterations not even the internet like banking by you know like putting a hole in the side of your building and your car driving up like that didn't kill banking but some people thought that was kill banking the phone people thought the phone phone banking was going to kill banking okay phone banking didn't kill banking they thought the internet was going to kill internet didn't they thought the app was going

to app hasn't killed it like it's just you know it's just hyperbole so much hyperbole yeah just it's better to assume that you know i don't know if you guys know morgan housel but one of the thinks he talks about a lot is that like, it's better to assume that things are going to stay the same than they are going to be different. Yeah, that's a good point. And I think it comes back to, as we're kind of wrapping up this conversation, I don't know if Ryan has any other questions that internet bank, digital only bank or big, you know, legacy bank with more of a physical footprint. It's, it's the people who are running it. Are they rational? Are they going to be a hotheaded person or are they not going to be? Yeah, I agree. A hundred percent. Yep.

i think that is most of the questions we have brett unless you have any more this is this is fun john i think that's all the questions we have and it covers the industry really well i hope a lot of people got value out of this where can they uh where can they keep up with you if uh what are some places to do that well they can come to my house but i shouldn't get my dress out probably please do not do that i don't think anybody would come but uh no they can find me the easiest place to find me is on twitter my handle is maxfield on banks i don't post a lot but i i try to post i try to be selective and post good stuff here's one final one where do you where you research the industry a lot where are some

places to go to learn about banks because i think people don't even know they look up investopedia and they're like okay i got something but where did you go to learn oh you sent me a reading list yeah did i send you what did i send you that yeah you sent me their reading list maybe i'll uh let me tell you a quick story we'll end with this story i haven't i haven't told this stuff publicly this story publicly this is a good one though so brent beardall the ceo of washington federal so they they redid their offices he said why don't you come up and see it so i went up and checked it out he said i'll come check out this room i said okay let's go check it out so he opens up this room that's on the interior of the office this

is like right down on like fifth and pike okay and you guys know that because you guys from seattle right and so um he had he built a lot they built a library in there it's like like this beautiful wood paneling and like big like comfortable chair it's awesome it's awesome it's like but i was in there it's like this shelves room i said brent i mean it's not a library this is a room with shelves you know what i mean like so i'll i'll build you a library i'll curate a library for you basically i'll just cop i'll just replicate my library because i have a substantial probably one of the larger private banking libraries in the country and so uh so i said okay so um i go and I decided to just put some stuff out on Twitter, say like, you know,

Hey, does anybody know of any books that you think that I don't have? And a couple of people mentioned, so they're like, Oh yeah, you know, here's a couple of books. And I was like, okay, but no, not, not very many, but then I got a direct message from an anonymous account. And they said, basically, you know, like, Hey, that's pretty nice list. You got, I mean, I was like 250 books on it. It was 300 books. I mean, it was quite a few books, you know, he's like, it's a nice list,

but I have 300 more than you, that you don't have. And I was like, that's a lot. That's like double, you know? And he's like, And I got another list of 500. I'm not going to share with you because I don't want to compete with you. They're on my prospect list and I want to compete with you for them, which I thought was funny. But like, we have since like, yeah, there's been since the competition in the bookmark. So like, now I'm like, Oh, now I see why. But so I was like, well, you know,

I got to get to know who this guy is. So, but he wouldn't reveal who he is because he's very big and important guy in the industry. Very, very, very, very, very big, important guy in the industry, not a household name, but incredibly powerful, um more powerful than like a jamie diamond and this guy's big time and and so uh we get to going back forth and i ask a series of questions and you can ask a series of questions you get up to the very top like because i've talked to so many different folks i know somebody i know a lot of like proprietary stories and so you can like kind of climb your way up to the top and say like how

far can this person go what kind of knowledge does does this person have you know you can get it to where you can like you know story like maybe only eight people know you know what i mean like and this guy was the first person i'd ever talked to who can go all the way who could go all the top. And I thought, and I think he could probably can, he could have continued going. So I was like, Oh God, like I got to get to know who this guy is. So I said, okay, like you got to tell me who you are. And he's like, well, I said, well, listen, he's reluctant. So listen, I'm going to give you the name of three CEOs and I'm going to give you their cell phone numbers and you just call them right now and ask them about me if I can be trusted. And so I said, okay, let me hear the

names. And I said, okay, let me get the cell phone numbers. And he said, don't worry about it. I already got them. I said, okay. And so maybe two hours later, the CEO started calling me, Hey, John, like this guy's calling, what's he, what's this all about? You know what I mean? So I don't, I don't really know, but, um, but the third one called and I said, well, why don't you give me his, he called you on his cell phone. Why don't you go ahead and give me a cell phone number and I'll call him, you know? And so I called him and I said, Hey, you know, I can't say this guy's name out publicly, but, um, like, Hey, you know, like it's me, you know, it's nice to meet you, you know? And, uh, he's like, yeah, I was, I was waiting for your call. And he said, well, listen,

when I was cataloging my library for you, I found that I had eight duplicates and I was like, okay, he's like well do we do you want me to send them to you if you yeah and you donate a hundred dollars to charity my choice it's a done if you'll send them to me i don't care what i think it'd be like skip the dog i want those you know what i mean this is okay so i get my address and i agree to give money so i'm in the period i'm in this process where i'm studying banking 18 hours a day for literally like six months okay and like and just like it's crazy it's almost i'm like the fog of war just like from like six in the morning until like two in the morning i mean just like all freaking day give myself one hour off each day that's it for months and months and months so

i'm in this fog of war my wife comes up and she's holding this thing in her hand and she says so what's that she's like what do you tell me what this is i don't know i'm clear i left the house like three months you know what i mean like she said well it's mouthwash well you know like if i left the house certainly wouldn't be going to get mouthwash she's like it's prescription mouthwash and i'm like oh this is definitely not getting prescription mouthwash she said well there's a whole box downstairs for you so there's a what she said yeah there's a whole box said who's it from and she said that guy's this person's name i said no kidding okay so i go down there to look at it my own eyes sure enough there's a whole box prescription mouthwash sitting

my living room from this individual and there's eight of them remember he's gonna send me eight books and there's eight prescription mouthwashes so i'm like oh the hell is this you know what i mean the hell is this and uh so i like you know i weighed it to make sure the weight matched i don't know maybe somebody took the banking books put eight prescription mouthwash i mean like who the hell would do that i don't know but like you're just like i don't want to call this guy and be like hey like i don't know this guy you know very well so eventually i get to the point i'm like i just gotta call him maybe he's trying to send it to his mom and like he sends everything in eight because maybe he's like into chinese theology and like eight is like a lucky number

china i don't know i don't have a clue you know and so i call him i say hey you know i this is a weird weird question i don't really know you but did you send me a bunch of mouthwash you know he said no but the way he said it was clear that that uh that he had and um so eventually later on i get to know this guy quite well and he's very generous with his knowledge and everything with me and he's a wonderful guy and very much value his relationship and uh later on i eventually broached the subject with him i said hey i gotta be honest with you like that was a pretty cool thing that you did you know send me that thing you know i said but i want to hear it out of your mouth why you did that okay this is what he tells me we're sitting down like this like

really fancy restaurant i mean like really fancy okay like members only type of thing and so he says to me i hope i can swear because i'm going to he says i just wanted you to know that i never wanted to hear my fucking name come out of your fucking mouth so i just gave you a mouthwash let's give you a mouthwash all right that's pretty good huh wow that's good that's a that's a great would end it it's an elaborate yeah that's that's that's the uh you guys take care yeah yeah definitely well uh i'm gonna throw a disclosure on this as we sign off so uh for everyone listening remind you that brett and i are not financial advisors anything we say or discuss here on chitchat money is not formal advice or recommendation we are however general partners

at arch capitals clients may have positions in the securities discussed in this podcast thank you all for listening thank you john for joining us it was a pleasure and we'll see you all next time okay i am welcomed by the founder of our exclusive sponsor stratosphere.io uh brayden dennis brayden welcome i wanted to basically give listeners that are interested in Stratosphere more context around what the platform is. So let's start there. What is Stratosphere? And then why did you decide to start it? Yeah. Thanks for having me. I appreciate it. And I'm glad to be sponsoring the podcast as a

listener myself. I like the deep dives. I like the different guests, the different perspectives on some interesting companies. So I think it's a good concept for a podcast, which is kind of what led me down to making Stratosphere in the first place, which was I was making content online and frustrated with the tools that were available to me. So I started building a very scrappy version of the product just for free, just to figure out how can I overlay 10 years of financial side-by-side up to 35 years we have now, and how can i actually build out a proper database of of company kpis that are not just revenue but like if you're looking at like costco like how many warehouses do they have how many paid members

are are in like our costco members or you know if i want to do a comp against like the streaming like how many netflix subs versus uh hbo plus discovery plus no disney plus like how do i build out proper comps of those because those are the metrics that actually move the business those are the ones that actually move the needle more than any like gap financial metric you'll find and so it started off as just purely a passion project and i figured let's just make the leap into entrepreneurship and uh see where it goes and you know it brought brought us here today yeah and like you mentioned it is the stuff that you can't find anywhere else at least not in a i I mean, you could find it page by page on their financials.

Exactly. You can go through 35 PDF filings and find it. Be my guest. And that's basically what we did for a long time. So what do, I guess, maybe describe the pricing model so people know, but you're going to say it, there's a free platform. What do free users get? Yeah, good thing. Because our mission was to always build a free platform. And so we really kept true to our mission and give like an amazing platform for free, which gives you 10 years of financial statements on 40,000 global security.

So we don't list you just to US securities. It's on global stocks. We give you a watch list, the screener, comparisons on competitors, fundamental charting up to 10 years, filings, transcripts. you can look at the press releases right inside the app, news, ETFs, funds, super investors, hedge fund letters, investor holdings, and financial calendars. Those are all the features you'll get on the free tier. Now, on the middle tier, the personal tier, you're going to unlock up to 35 years of financials and just nice to have, like quality of life, like notifications being built in price targets for building models like business owner mode where you can hide prices

like kind of like just that next level for for individual investors who want to level up and then the the top tier is for like investment teams and professionals who want to unlock that kpi data and request kpi coverage as well like a firm will be like here we want these 10 names in our coverage and in your coverage and then you'll have basically our entire universe that we're looking at, which is great, right? Because like earning season comes around and we have it updated within 15 minutes when Netflix comes out with their net subscriber ads, like it's right there in one place, especially easy to handle around the peak of earning season. That matters a lot for these people. And so we have a premium tier for that as well. That's the three plans that

are available today. And now a perfect time to shameless plug our code. If you use CCM, you get 15% off any of the paid plans, but I think that covers it pretty well. Uh, if you're interested, please go ahead and check out stratosphere.io. We'll, we'll have a link in the description as well, but, uh, thank you, Braden, for joining us. Brian, keep it up. I really like what you and Brad are doing and, uh, I'll be listening along.