Motley Fool Hidden Gems Investing - Another Bank Seized & Sold

Episode Date: May 1, 2023

Three of the four largest bank failures in U.S. history have happened in the past two months. (00:21) Bill Barker discusses: - Regulators seizing First Republic Bank and selling it to JP Morgan Chase - CEO Jamie Dimon's comments about the state of play in banking - Norwegian Cruise Line beating low expectations in the 1st quarter - A plot point in last night's episode of "Succession" (15:16) Alison Southwick and Robert Brokamp continue their conversation with Motley Fool senior analyst Bill Mann about the "new normal" of investing in China. Investments discussed: JPM, NCLH, CCL, DIS, PG, AAPL, BABA, VTI, VWO, FRDM Host: Chris Hill Guests: Bill Barker, Alison Southwick, Robert Brokamp, Bill Mann Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. We've got another bank going under and another new normal for investors to consider. Motley Fool Money starts now. I'm Chris Hill. Joining me in studio, Motley Fool senior analyst Bill Barker. Good to see you. Thanks for being here. Thanks for having me. Once again, the news fairy showed up over the weekend. First Republic Bank was seized by regulators and then sold to JPMorgan Chase. JPMorgan Chase will assume all of First Republic's $92 billion in deposits. And there are a few different ways we can go here.

I'm going to start with something you and I talked about earlier today, which was on a call with analysts, CEO Jamie Dimon said, and I quote, there are only so many banks that were offsides this way. There may be another smaller one, but this pretty much resolves them all. This part of the crisis is over. That last part of his comment, this part of the crisis is over, that headline is being splashed everywhere. And look, Jamie Dimon is one of those, he's on the short list of people you want to hear from anytime there is any kind of large economic challenge happening, particularly if it's in banking. But I'm not pro-banking crisis. I'm very anti-banking crisis. And yet, I think

some people are reading too much into that quote. Breaking news, you are not pro-banking crisis. for the listeners out there who had been confused about that. I'm going to take the position that this is not a news ferry deliverance in the sense that the news ferry only comes by surprise. And this followed the usual script. At the end of last week, I think we saw this weekend, the regulators, the big banks are going to get together, figure out a public-private solution to this. And And there's enough time because of the weekend to do this without seeing the price of First Republic collapse even more, as it had been in the process of doing daily toward the end of last week.

So, I think that we saw something very much like this occurring by the end of last week. And, yeah, this part of the crisis is over because First Republic, that part of it is now no longer in crisis. So, they're like, how many banks do you think there are in the U.S.? I mean, it's got to be more than 11. Yeah, I Googled it, so I have the definitive information through the internet, maybe. But it's like 4,000-some, and we've lost three in the last couple of months. We've lost three in the last couple of months.

It's three of the four largest bank failures in U.S. history have happened in the last couple of months. So, again, I'm not pro-banking crisis, but I'm also not immune to the fact that, wow, three out of four have happened in the last two months. And, look, Diamond is usually the smartest person in the room, particularly when it comes to banking. So, his comments do put me somewhat at ease. But he also put out there the very real possibility that this is going to happen again. And the only solace is that it's not going to be as big a bank as First Republic. Yeah. And I think the other part of solace to take from here is that the problem, again, appears to be a little bit more nuanced than this, but they bought too many bonds that have gone

the wrong way. They're on the other side of the trade. And so, if the problems that you have were created by buying, I'll make up a number, $50 billion worth of bonds, which are now on the open market because of the direction of interest rates since you bought them, now worth $40 billion. You're in a lot of trouble, but the system is not. And if over the weekend, JP Morgan and others had to figure out what is really going on here, what is this worth? It's pretty easy to tell, oh, they bought the bonds. The bonds are obviously worth a lot less than they paid for them. That's a big problem for them because that's what they did with all the deposits they got. That was a mistake. They shouldn't have done that. But I can tell you exactly how much these bonds are worth

today. I don't have to sort through thousands of awful mortgages over the weekend, which was what was going on in the 2008 real banking crisis. So, as long as we're in the realm of You took your money, you put it into bonds, bonds have gone the wrong way, they're absolutely to the penny, we can tell what they're worth right now, what you can get for them on the open market. That's an individual banking crisis rather than a systemic one. We really seem to be well past the point of worrying about big banks being too big, because JPMorgan Chase bought a not-insignificantly-sized bank for a ham sandwich, and now JPMorgan Chase

becomes even bigger. Yeah. As we discussed earlier, I was trying to shoehorn my political philosophy learnings in college into this equation by bringing up the prisoner's dilemma, which I think is at the heart of all of these runs on banks, and not to Google it if you need, but basically, the dilemma is, you had a couple of prisoners, they've been caught, both of them don't know what the other one is going to do. And if they both confess, they seem to be getting a better deal than if they don't confess, because they don't have enough information. And this is kind of what's going on in the banking world with the runs on the banks is that everybody is presented with, this bank may go under, I may have too many

uninsured deposits there, I should just move my money to a safe place. And the safe places are the big banks, because they've been highly, highly, highly regulated, subjected to these stress tests over the last 15 years now, since 2008. And as a market, as a society, today, we seem to accept that that regulation has delivered sound banks at the top of the pyramid, the too-big-to-fail banks. They've been identified, they're scrutinized, and then you go down a layer and there's less scrutiny. Obviously, SVB, First Republic, big enough that they should have had more scrutiny than they had. But there's this separate category of the highly regulated stress test ones. And at the moment, everybody agrees that the regulators

are on top of that and not too worried about them getting bigger. So, because of all that, do you think the big banks as a group are more attractive as stocks than they were six months ago? Not necessarily relative to regional banks, because a lot of things are more attractive than regional banks at the moment. But just because of this new phase that we've entered into, for people like me, who don't own shares of any of the big banks, are these more attractive investments in your mind? Well, the competition is, although still, let's call it 4,000, most of those 4,000 are not really relevant to the business prospects for the biggest banks. Yeah, they're getting

bigger. And I think that the sort of discount rate on them, in terms of how investors look at them and what kind of return they want in the investment, is probably improved by some of the competition going away. In First Republic's case, JPMorgan has just acquired a lot of, apparently, rich people's bank accounts, and they know how to serve rich people, I think, at JPMorgan. Maybe there'll be another one. PacWest is the next domino that people are lining up to topple because of this. Not necessarily the same profile on the bonds, close enough that people are asking questions. A couple more in the list. But I think that the list is known and is being studied. The regulators are looking at it. Again, prisoner's dilemma.

If everybody who's a depositor at PacWest decides to pull their money, nothing's going to stop them. That is the end of the bank, if everybody wants their money back. It sounds like that's exactly what you're recommending. No. Unlike you, I am not aware there's a question about whether you're a pro-banking crisis or not, or was until today, if we can believe you. I've always been out there as against banking crises. It's well-documented. All right, let's move on to a completely different industry. Shares of Norwegian Cruise Line Holdings up 5% after first quarter results were better than expected.

And to be clear, while the revenue was actually higher than expected, Norwegian Cruise did not post a profit, but the loss was smaller than expected. It's all about expectations. This is one of those businesses, you look at the long-term chart, the entire public life of Norwegian Cruise line holdings, and it's not great. Well, it looks okay until COVID, and then, boy, does it take a straight line down. And it's been fighting ever since to get back there. As things opened up a little bit, people felt better. After the vaccine rollout, you saw the stock get kind of back to about half of what it had been pre-COVID. And, you know, it really just hasn't taken, it hasn't been able to get the full bookings that it needs for the business

model to work. Okay, they lost money last quarter, and that's in part a factor of seasonality. You don't have as many people cruising. You don't have as many families taking cruises as you're going to have in the summer. Spring break was kind of late because of where Easter was in the calendar. So, seasonally, they're about to enter the better part of the year and actually make some money again. We'll see. They need society to be past COVID. Some people are, some people aren't. There are enough who are booking cruises now that it looks like they're going to return to profitability. But they've got some debt that they've taken on because they and the other cruise lines, which are also up in Sympathy today, had next to no revenue.

And big, big, big boats that have to be maintained. Boats are giant holes in the water that you throw money into. So, they had to throw money at these things, keep them clean and ship shape, and that's not free. And it seems a little bit like the movie theater industry, where it's just, maybe they would be better off and therefore more profitable if there was more scarcity. If there are fewer movie theaters, the people who actually want to go to theaters, they're going to go, and you don't need as many multiplexes. And with Norwegian Cruise, Carnival Cruise, these other cruise lines, maybe the path to profitability is just to get smaller. Well, certainly, the supply increased a lot going into 2020. The boats just get bigger

and bigger and bigger. The size of them is now, I'm going to be conservative and say they're like four or five times the size of the Titanic. That's not an exaggeration. The Titanic is dwarfed by modern cruises. So, that's a lot of beds. And as you say, the supply outstripped. Demand went to zero. Supply was at an all-time high. They're still looking for people to come back. Are they helped by things like last night's episode of Succession, which somewhat belittled cruises? Okay. We had an episode on Saturday with Gillies talking with Ricky Mulvey about investing lessons from Succession. I was very clear at the beginning of that episode, like, this is your spoiler alert warning. So, if you haven't caught up, then save the episode for

later. I mean, look, it's a Jim Gillies episode. Everybody's going to listen to it later. You put it in a time capsule when it's Gillies. You're not going to say anything else about Last Night's Succession, are you? No, not really. There's sort of a glancing shot at land cruises in the episode which really has nothing to do with the actual cruise industry, and what it derisively called a land cruise is really a shot at Disney's story living concept for 55 plus retirement communities with Disney themed opportunities in it. These are aimed at people like yourself who are now over 55 and thinking about whether that's how they want to spend their remaining years. I think you and I can continue this

conversation offline. Bill Barker, always great talking to you. Thanks for being here. Thanks for having me. Apple CEO Tim Cook is trying to pull off the balancing act of moving some iPhone production out of China, while still trying to remain on good terms with political leaders in the central government. Bill Mann, Alison Southwick, and Robert Brokamp continue their conversation about new normals after the pandemic with a focus on investing in China. Welcome to part two in our series on the new normal with Bellman. Let's talk about the new normal for China.

Now, I remember when I first started The Motley Fool over a decade ago, speaking of elder statesmen. China, China, China. China, China, China. That's all anyone talked about. China was all the rage. Not only was it providing labor and goods for U.S.-based companies and their consumers, but capitalism was taking hold. Oh, it's going to be amazing. Chinese-based companies were presenting such an exciting opportunity for investors. And Bill, you wrote on Fool.com, quote, the arguments for investing in China have always been based on some form of,

it's 1.4 billion people and the economy is growing like wildfire. But the Chinese government is now openly hostile to private industry and willing to kneecap companies it views as a threat. Also, your words from more present-day Bill. What happened? Holy cow! Did I write that? That was amazing! It has always been the case in China as a command economy that the interests of the government and yours had better align if you're going to be invested there. That comes from being individual investors who have absolutely no power, all the way up to companies like Tesla and Apple. You had better make sure that your interests and the government's interests are aligned, which is why now you see so many

countries, and some of it is political, and then some of it was driven by the pandemic when China shut tight. Companies like Procter & Gamble, who have 17,000 products, had 16,000 of them that were suddenly at risk because of an ingredient that they only got from China. There is a reality there that the pandemic showed what a single point of failure of having so much of your production in one country can do to you. There is absolutely a sense of, let's near shore, let's at least duplicate what we're doing in China. And the political part, I think, is also reality. I think China is more authoritarian than it has been in the last 40 years. It is closing in on being a one-person ruled country. And that's

meaningful. It just simply means doubling down on, if you are trying to make money from China, you had best make sure that you are making money from China, and China is making money along with you. As individual investors, that's really, really, really hard. One of your articles that I read, you're actually saying billionaires are disappearing. Do you mean they're literally disappearing? I mean, not like a magic trick, but they're being, you know, they are, yeah, so Jack Ma was the primary one who is the founder of Alibaba, and he wasn't even an executive of Alibaba anymore, but he made a speech where he was suggesting that maybe perhaps in my

role as an individual citizen of this country, which I love so much that the central bank is maybe making a little bit of a mistake. And he was not seen in public for a really long time after that. So, yeah, I guess now is where I need to apologize to the Chinese, just in case I go there someday. I'm not a billionaire, but I don't want to be disappeared. Yeah, it absolutely has happened. All right. So, if China is a hostile place, how are companies responding? Because I I can tell you that Christine Lagarde's advice amidst the fractured and fragmented global economic new normal is securing resilient supply chains with allies and diversifying energy production. That's now on my to-do list for the weekend.

Sure. Was that your Christine Lagarde voice? That was amazing. Oh, no! I actually have no idea. I assume she sounds French. I assume she sounds French. I can tell you. We'd have to apologize to China and France now. Yes, but it's not as simple as snapping your fingers and moving out of China. Take Apple, again, as an example. They have so much of their manufacturing in China right now, they're looking to move some of it out to Vietnam, to India, but they're structuring it very strictly as repeating

what they have in China. If you've got so much of your production in China and you're openly like, well, we're going to move it out, what's China going to do? They're not just going to let you. They're not just going to say, oh, that sounds really good for you. Yeah. Oh, we're breaking up? I'm really happy for you and your new partner. Wish you the best. Yeah, wish you the best. Hopes and dreams. Eat, laugh, love. Whatever. That's not how they are going to do. Tim Cook was in China, I believe, within the last two weeks. He was very effusive about the partnership with China. At the same time, they are, in fact, diversifying into other geographies. I think places like Mexico and Vietnam and India are obviously going to be

big beneficiaries of a repeat lift of what they're doing in China now. And then after that happens, you might actually see some companies say, well, you know, it's not worthwhile being in China anymore. But at that point, China does not have the upper hand in those relationships. So, should individual investors be reducing their exposure to China? Because, Bro, I assume that's not super easy. It's not super easy, especially if you're investing in mutual funds and you're getting your international exposure to an international index fund. If you look at the Vanguard total stock market index, it's 9% in China. If you get the Vanguard emerging markets ETF, it's 35% in China.

So, as you're listening to this, you might be thinking, well, it doesn't really matter. I don't invest in China. But you probably do. And the question for you is, do you want to invest, which relies on capitalism, in a country that is becoming increasingly hostile to capitalism? Can I give an investment recommendation? Please do. There's a freedom-weighted equity index that's put together by a company. They call them the Life and Liberty Indexes. They have one called the Freedom Index. It's an ETF. They invest strictly in countries that obviously have a capitalist system, but then also they overlay

on top of that, the Freedom House ratings. And so, they do not invest in companies that have a lower level of democratic or freedom of capital movement. So, there's an alternative. Right. And there are ETFs now that, for example, there's an iShares ETF that's Emerging Markets X China. So, it's EMXC is the ticker, because then you can invest in all the emerging markets except China, because you may be uncomfortable with putting your capital with a country that's becoming more and more... It was always communist. I think the way you put it in one of your articles as a fig leaf of communist rule. But it's not that way anymore. No, but it's a command economy. I think that's probably the less pejorative way

of putting what it is that you're putting your money into. Are you investing less in China? I have held one company in China over the last four years. The answer is yes. It doesn't really have to do with this. I would love to love to invest in China, but I don't. I don't really see the necessary safety nets that I would want. And, you know, in all honesty, I just don't know what China's going to look like two or three years from now. I mean, it is the most highly indebted country in the world, large country. I mean, we think of them holding all of our treasuries. But there's another side of their balance sheet. No, I'm not really invested in China. I am invested in China

a lot through companies that have operations in China, but not... And that's enough for you, it sounds like. That's good. All right, Bill, what's your parting advice here for the new normal in China? In terms of advice, I consider China to be largely uninvestable for individual investors. Which is not to say that there aren't, as I said earlier, I do own one company in China, but I've chosen very, very carefully. I just hope people remember the next time around when the, hey, everybody needs to invest in China meme comes along, that you remember the nature of the beast that we're talking about here. It is not a country that is structured to allow profits to leave it very easily. And I think that that's going to remain

meaningful for a while. And I hope you don't get disappeared for saying all that. I know. I can't go anywhere now. Join us next week when we're going to tackle our final episode in our series on the new normal, talking about Silicon Valley. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.