David Ellison on fundamental headwinds for banks: "they aren't life-threatening"

We don’t have much credit deterioration so far. We do have rates going up and bond prices falling, and there is duration risk. That makes things even worse for the banks, as they borrow short and lend long. That model is broken, but it isn’t broken forever. 

[...]

Over the next six to nine months, banks will be working through the rate issue. So maybe margins will bottom in the next quarter, and then start to improve as asset yields start to catch up with the rise in deposit rates, or cost of funds.

[...]

I’m not sure if the stocks will go down another 30% or another 3%; maybe they have already bottomed. The banks have fundamental headwinds. However, they aren’t life-threatening headwinds. They are just earnings-threatening, to some degree, and they are valuation-threatening.

~ David Ellison, portfolio manager, Hennessy Funds, "Trouble Ahead For Financials. Where to Hide," Barron's, April 29, 2023

Judy Shelton on how the Fed's stress tests missed the Silicon Valley Bank failure

A: I will say the call for more stress tests overlooks the fact that the stress tests that became a part of the post-2008 regime were really oriented toward what will the bank do to survive if the Fed drops rates to zero again.  And it's uncanny, given that the Fed has over a trillion [dollars] in unrealized losses on its own portfolio that wasn't alert to this sort of dilemna in the valuation of bank assets.

Q: Yeah, theoretically the Federal Reserve is broke.

~ Judy Shelton, senior fellow, Independent Institute, "How Did Silicon Valley Bank Miss Its Ticking Time Bomb?," Fox Business, 1:30 mark, March 27, 2023

 

Jason Benowitz on the banking crisis: "signs that things have stabilized"

We do think that there's been some stabilization from the worst throes of this crisis earlier in March.  And so you can see that, for example, there's something called the forward rate agreement overnight index swaps spread.  It's a measure of bank funding costs, or credit costs, and it peaked in early March and it's come down to sort of its 10 year average, actually...  Similarly, when we look at the Fed's balance sheet disclosures weekly, and they disclose how much crisis borrowing there is by banks, and that number peaked about a month ago and it's been coming down weekly ever since.  So these are signs that things have stabilized.

~ Jason Benowitz, "First Republic stock plummets after revealing deposit exodus in March," Yahoo Finance, 3:30 mark, April 25, 2023

Thomas Phelps on patience and investing

To make money in the stock market you must have the vision to see them, courage to buy them and the patience to hold them.  Patience is the rarest of the three.

~ Thomas W. Phelps, 100 to 1 in the Stock Market (1972)

Thomas Phelps on investing, judgment and experience

Good judgment comes from experience and experience comes from bad judgment.  I've had a great deal of experience.

~ Thomas Phelps, 100 to 1 in the Stock Market: A Distinguished Security Analyst Tells How to Make More of Your Investment Opportunities (1972)

Charlie Munger on learning about investing through experience

Learning about investing from books is like learning about sex from romance novels.

~ Charlie Munger

Matthew McConaughey: "life is not easy"

Life is not easy.  It is not.  Don't try to make it that way.  Life's not fair.  It never was, it isn't now and it'll never be.  Do not fall into the trap, the entitlement trap, of feeling like you're a victim.  You are not.  Get over it and get on with it.  And yes, most things are more rewarding when you break a sweat to get them.

~ Matthew McConaughey, "5 Rules for the Rest of Your Life," 3:05 mark, January 18, 2023

Statista on lithium-ion battery imports to the U.S.

The United States imports hundreds of millions of lithium-ion batteries each year, with the volume ever increasing. According to data extracted from the UN Comtrade Database, China accounted for the vast majority of U.S. battery imports last year, with a total trade value of $9.3 billion. South Korea and Japan are also popular sources with batteries worth $1.3 and $1.0 billion imported to the U.S. in 2022. The total import value of lithium-ion batteries nearly tripled since 2020, reaching $13.9 billion last year.

~ Felix Richter, "Powered by China," Statista, March 10, 2023

Jim Cramer: "If you bet against NVIDIA, you're taking your life in your hands"

If you judge this one by last year's standard, NVIDIA looks like the easiest short of all time.  The stock's doubled off its lows last October and if you think the bear's coming out of hibernation, this is the one you want to short in May and go away.  But if you bet against NVIDIA, if you short it here, let me give you a little heads up: you're taking your life in your hands.  Don't forget to send me an invite to your funeral...  NVIDIA is now the definition of unstoppable.

~ Jim Cramer, CNBC's Mad Money, 4:25 mark, April 14, 2023

Gene Epstein on Adam Smith's anti-free market arguments

[Adam] Smith's book, The Wealth of Nations, includes a whole range of sustained arguments that were anti-free market and even pro-socialist.  Ignoring these arguments by Smith is not only dishonest, it's dangerous.  The more we elevate Smith to the status of the founder of free enterprise, the greater the danger that enemies of the free market will strike back by citing Smith against us.  This anti-capitalist gotcha gang that has cited Smith against us already includes the left-wing critic Noah Chomsky, theologian and progressive writer Harvey Cox, Nobel laureate economist Amartya Sen, and even an Occupy Wall Streeter who ran from a copy of The Wealth of Nations while arguing with free marketeer Peter Schiff.

~ Gene Epstein, "Is Adam Smith the Founder of Free Market Economics?," debate between Mark Skousen and Gene Epstein, The Sofo Forum, 16:30 mark, June 13, 2017

Gene Epstein on the beginning of modern economics

It did not all start with Adam [Smith].  It started with a bunch of people.  Intellectual history is not a popularity contest.  We accord it according to originality, pioneering work and merit.  We have integrity.

~ Gene Epstein, "Is Adam Smith the Founding Father of Economics?," The Soho Forum, 1:26:30 mark, June 13, 2017

H.L. Mencken on government

[Government’s] great contribution to human wisdom... is the discovery that the taxpayer has more than one pocket.

~ H.L. Mencken

Benjamin Graham on "Mr. Market"

Imagine that in some private business you own a small share that cost you a thousand dollars.  One of your partners, who's named Mr. Market, is very obliging indeed.  Every day he tells you what he thinks your interest is worth and furthermore either offers to buy you out or sell to you an additional interest on that basis.  Sometimes his idea of value seems plausible and justified by business developments and prospects, as you know them.  Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly. 

~ Benjamin Graham, The Intelligent Investor (1949)

(As quoted by Dan Ferris, "The Secret to Beating Mr. Market': A Lesson in Value Investing," Stansberry Investor Hour, 6:40 mark, April 10, 2023)

Joseph Wang: "It looks like the banking panic is largely over"

It looks like the banking panic is largely over.  The two data points that I follow, the Fed balance sheet and my money market flow data, are showing encouraging signs.  So when a bank is in trouble, they borrow from the Fed as lender of last resort.  Weekly Fed data shows that borrowing is declining.  And we also show that money is going back into prime money market funds.  Prime money market funds lend to banks and during the panic people were pulling money away...  That's all coming back.  That tells me that the banking panic is over.

[...]

I suspect, based on the aggregate data and based on what I see in the banking system, that the large banks are going to be fine.  They're going to be in good shape.  There might be some small banks that are struggling, but we have to remember that America is a very big place.  We have 4,000 banks, most of them small, and it seems like what happened over the past month is largely regional.  So I'm optimistic.

~ Joseph Wang, Fed Guy blogger, Yahoo Finance interview, April 11, 2023

Joseph Wang on banks: "they create money out of thin air"

Banks create money.  That's their thing.  It's not so much that they take deposits and lend them out, but they create money out of thin air.

~ Joseph Wang, Fed Guy blogger, Monetary Macro CIO, Yahoo Finance interview, 5:25 mark, April 11, 2023

Jim Grant on SVB's $73 billion loan portfolio

What zero percent interest rates do is bring on the phenomenon of zero gravity finance.  Imagination displaces analysis.  And if you are in the business of projecting technology out into the wonderful 10 or 20 year realm, there's nothing like zero percent rates to facilitate that exercise of imagination.  And that's what Silicon Valley Bank had going for it.  So this portfolio - $73 billion loan portfolio - I think might also have been problematic.

~ Jim Grant, CNBC interview, 1:25 mark, March 16, 2023

Jerome Powell warns about not varying the annual stress tests on banks

As financial institutions and the financial system evolve, stress testing will need to keep up. When the next episode of financial instability presents itself, it may do so in a messy and unexpected way. Banks will need to be ready not just for expected risks, but for unexpected ones. Thus, the tests will need to vary from year to year, and to explore even quite unlikely scenarios. 

If the stress tests do not evolve, they risk becoming a compliance exercise, breeding complacency from both supervisors and banks. We might also, inadvertently, encourage the development of a banking system where, over time, all banks would look much alike rather than the banking system we want and need, one with diverse institutions with different business models. We simply can't let these things happen. 

~ Federal Reserve chairman Jerome Powell, prepared remarks for stress-testing conference at the Federal Reserve Bank of Boston, July 9, 2019

(As quoted in "Fed’s Powell Says Stress Tests Must Evolve to Avoid Bank Complacency: Annual exam must explore unexpected scenarios or it might fail to prepare financial system for next downturn," The Wall Street Journal, July 9, 2019.)

Larry McDonald on the rolling credit crisis

We had the LDI [liability-driven investment strategy] scandal, or the stress in London in October.  Then it's rolled over to regional banks.  Then it's rolled over into Credit Suisse.  Deutsche Bank CDS (credit default swaps) is now elevated.  You've got MetLife.  Lincoln Financial CDS is now blowing out.  And then you've got commercial real estate loans that are impaired.  And then you're talking about Capital One CDS, which is the consumer; that's at multi-month wide.  So this is clearly a rolling credit crisis.

Larry McDonald, CNBC interview, 2:00 mark, March 28, 2023

Nouriel Roubini: rising interest rates wiped out over 80% of bank capital

Bank managers, regulators and investors forgot duration risk and market risk.  When yields are higher, the price of the bonds is lower.  Investors lost 20% last year on 10-year Treasuries...  For the overall banks, you have about $620 billion of unrealized losses on the securities out of a capital of $2.2 trillion.  And for some of the regional banks the numbers are much higher.  

But it's not just the securities that have lower value.  Many of the banks had issued loans, like mortgages at fixed rates at 30 years when interest rates were 1% while right now they're at 3 1/2% for 10-year Treasuries.  So the market value of those assets is also down.  People have estimated, therefore, the overall losses for the U.S. banking system from the rise in interest rates, both on securities and loans, are equivalent to $1.8 trillion out of a capital of $2.2 trillion.  Hundreds of the smaller banks are literally insolvent.

So that's a fundamental problem: When interest rates go higher, the value of securities and loans is lower and then we have mass liquidity and solvency problems.

~ Nouriel Roubini, Bloomberg TV interview, 0:30 mark, March 31, 2023

Tim Price on central banking

Central bank monetary planning is the glaring hole at the centre of modern economics.  We accept (or should do) that the modern economic world is highly complex, with practically infinite interactions between countries, governments, exchange rates, interest rates, stock markets, corporations, households, entrepreneurs, and consumers.  In most areas we also accept that free markets are perfectly capable of driving Adam Smith’s invisible hand to ensure that enlightened self-interest benefits the many as opposed to the few.  Despite this, the idea that one institution – the central bank- is even capable of mastering such complexity and fine-tuning the workings of a highly complex economy through the brute mechanism of dictating the price of money has rarely been brought into question.

~ Tim Price, "Regime Change is Coming," Price Value Partners, April 3, 2023

Kevin Duffy on the Trump rollback of Dodd-Frank in 2018

As fate would have it, Silicon Valley Bank CEO Greg Becker lobbied in 2018 to raise the asset bar on the annual Dodd-Frank stress tests from $50 billion to $250 billion.  On May 24, 2018, when President Donald Trump signed “the biggest rollback of bank rules since the financial crisis,” SVB’s assets footed to $54 billion.  By the end of last year, they had mushroomed to $212 billion. 

Never mind that the rollback bill was signed by 33 Democrats in the House and 17 in the Senate.  The Left had its perfect scapegoat.  “Back-to-back collapses came after deregulatory push,” claimed The New York Times, shortly after the FDIC took control of SVB and Signature Bank, the second and third largest U.S. bank failures in history. 

Would it have made any difference?  The architects of the 2010 Dodd-Frank Act put in place a set of rules to prevent another mortgage crisis, never imagining that the next crisis would change its spots.  Truth be told, subjecting SVB to a rash of annual stress tests would not have saved the day.  Bank regulators have been looking for trouble in all the wrong places. 

~ Kevin Duffy, "Would Stress Tests Have Prevented the Failure of SVB? Probably Not," Mises.org, April 3, 2023

Cheryl Mickel: "banks are in much stronger position"

What we are facing right now is more of a test of market confidence.  You are seeing a market that doesn’t want to believe that there is still some resilience to the economy and to the banking sector. 

There are some things different in this particular “crisis” than past crises in everybody’s memories.  The economy is much stronger than it was during the [2008-09] global financial crisis.  And there has been so much regulation to build resilience that, in aggregate, banks are in much stronger position.  Also, government support is earlier, practiced, better targeted, and not dealing with the capitalization issues of the past.

~ Cheryl Mickel, head of T. Rowe Price's U.S. Taxable Low Duration Group, "A Fixed-Income Pro on Where to Park Your Cash During the Banking Tumult," Barron's, April 1, 2023