Weekly Market Recap: Bank Run! What Fallout Will Silicon Valley Bank’s Failure Have?

Draft Transcript:

Adam Taggart 0:04
Welcome to Wealthion, I’m Wealthion founder Adam Taggart welcoming you back for another weekly market recap with my good friend Portfolio Manager, Lance Roberts, Lance. What a difference a week makes.

Lance Roberts 0:18
What are you talking about? I mean, what happened. Anything?

Adam Taggart 0:24
Not much, but actually an awful lot. So we’re gonna be talking about that pretty much the whole day here. Alright, look. So stocks have dropped pretty hard the past few days. Obviously, that the the trigger for that has been the failure of Silicon Valley Bank and some other weakness going on in the banking system. Lots potentially cascading out of that, I know that you guys have put in some, some sale orders in your portfolio. We’ll get to the specifics of that when we talk about your trades later on in the video here.

I really want to talk about this real quickly though, before we get into all the gory details, I want to just do a couple of quick things. First is to congratulate and thank our viewers, Wealthion on did hit it’s 250,000 subscriber milestone. And that is entirely due to the support of the viewers of this channel. I just wanted to give a personal thanks to everybody who’s been making this journey possible. Secondly, I owe related to that we’d had a betting pool for when we were going to hit it. I promised that I would give the the person who made the closest prediction, a public shout out on this channel. And that goes to Victor Nelson for nailing it within an hour, Lance. Guys predicted this two weeks in advance. He predicted noon pacific time on March 8, we hit it at 11am Pacific time, so we’d beat him by an hour, but pretty prodigious predicting chops and he gets bragging rights to that going forward. Also real quick, just want to remind folks, we’ve got the Wealthion conference coming up in just a week now. So if you haven’t signed up for that, no more procrastinating, go register for it now at wealthion.com/conference. And if you do that before midnight on Sunday, you’ll get our last chance to save price.

Okay, now getting into the gory details here. So Silicon Valley Bank, which was a bank that did an awful lot of banking in Silicon Valley, no surprise, basically, well, it imploded. I mean, it’s gotten, it got taken over today by regulators a few hours ago. So technically, now, a failed bank. It’s definitely gonna have a ton of shockwaves throughout Silicon Valley itself. And we’ll talk in a moment, just how in meshed so many of the startups, larger tech companies and actual tech executives were exposed to this bank. But it also is raising some questions about just the integrity of the banking system. Right now, there have been some other banks that have been stumbling this week. This doesn’t help the situation. But let me let me hand the baton to you here, Lance to talk about, you know, your read on what has happened, what’s important and what impact it is having in real time on the markets right now?

Lance Roberts 3:14
Well, I mean, obviously, you know, so everybody immediately is going back to Oh, my gosh, it’s just 2008 all over again. Right. So that’s kind of been the first initial blush. As soon as the FDIC stepped in, you know, this really sent the markets lower down. And now again, one thing to remember is that the selling actually started following the Senate testimony from Jerome Powell, of course, earlier this week, he said, Hey, look, we’ve got to, we’ve got to keep hiking rates. We’re not we don’t have inflation under control, and the market started selling off for that. And then just very quickly, all of a sudden, we had this issue with SPB, Silicon Valley Bank show up and that just really kind of sent the sellers in overdrive. And again, as we talked about before, bonds have been a very good shelter here because of that risk mentality. And this is one thing we’ve talked about several times is that you know, when there becomes a moment of risk, everybody will want risk free assets, which are bonds. And you know, I bought we had added to our TLT exposure earlier, I went bought more calls on TLT for the rest of this year. Those are doing very well right now, obviously, because of what’s going on.

Adam Taggart 4:28
You did that before the Silicon Valley Bank failure.

Lance Roberts 4:31
Yeah, I did we actually I bought. We added to TLT, I believe on Tuesday, if I’m not mistaken. I had at the Fed and head of the Fed meeting. I have to check them I can check my dates. We did quite a few trades this week. So forgive me if my dates are a day where the other but you know, so yeah, we added the TLT because we started getting buy signals because of what the Feds doing. We’re starting to see a slowdown in the economy. And we started getting your buy signal on TLT and I bought more long dated calls for January of next year, I bought them before sold half at basically 100% profit. And then I’ve doubled that position size here over the over the last couple of days.

Yeah, well, you know, sometimes you’re just lucky, nobody, nobody knew Silicon Valley Bank was going to happen, right. So there were some concerns about banks, but nobody knew this was going to happen as quickly. I think the real interesting thing is that if you go back to 2008, as a good example, we had banks failing back then, in fact, you know, back in 2008, if you were around the markets didn’t at all, Mike and I were actually talking about this today, we used to pull up the list of banks every day that were basically on the verge of filing for receivership with FDIC, and it was a very long list, and we just see who’s getting added to that list on a daily basis. You know, so so this was reminiscent of that. Now the difference was, and what was kind of surprising is how fast the FDIC for Silicon Valley Bank into receivership. Normally, that process again, going back to 2008, that process would take several months, not days. And this was a very, very fast turn for the FDIC to force them into receivership. And now that has implications because you know, when you’re talking about, you know, 5% interest rates, that extracts capital from the banks. Now, first of all, I don’t want to get real deep into this, because it gets complicated really quick. But the bottom line is, is that we work on what’s called fractional reserve banking. And so this is the way it works. I used to, I used to manage the CV deposits per bank when I first started.

And so this just led to a very quick collapse in the bank. And the FDIC had to step in. Remember, the Federal depository Insurance Corporation, what they offer, what they provide is, is that deposit insurance on your deposits. So you know, if you have $250,000 in the bank, you’re insured by FDIC, they insure you even if there’s not money in the bank, FDIC will make you whole right up to that insured amount, but not any more than that. So this so when everybody starts demanding their money, FDIC came in very quickly. And, you know, I don’t know exactly why they moved so quickly is, you know, was there such a big deficit in capital, that it was going to be a big hit to FDIC, or was there still enough value in the SPB assets that they can liquidate those assets and not take a big hit to the balance sheet of FDIC? I don’t know the answer to that. And we’ll probably find that out in the next month or so. Okay, yeah, from from what I’ve read, and I’m still reading up on this too, but this is the vast majority of their deposits were uninsured. So the FDIC protection is going to go only going to cover a small fraction of what was on deposit with the bank.

So just a quick side note on that because that’s this is why I encourage people, instead of putting your money into a savings account at a bank, put you’re savings put your savings money into a brokerage account and do your savings there. And the reason is, is not only do you have SIPC insurance up to 100,000 in cash and 40,000 in equities, but you also get these brokerage firms like Fidelity Schwab, others, provide you excess account coverage, up to $100 million or more. So your your deposits are insured far above that 250 $1,000 limit why people save money in bank? I have no idea. But yeah, don’t do that.

Adam Taggart 10:35
Okay, actually talk about that just for one second. So I’ve heard about the SIPC which is the 250,000 per account 100 million

Lance Roberts 10:44
So so it’s okay. So, like banks, right. So banks have FDIC insurance. There is another Insurance Corporation for brokerage firms. SIPC, they provide account cover so if your account, so if if fidelity would fail tomorrow, so fidelity? And by the way, let me be very clear, I’m not saying fidelity is about to fail. Using an example I just don’t wait anybody to run, Lance said fidelity is gonna fail. No, I’mnot saying that at all. I’m just saying if in the event, that fidelity would fail, SIP will SIPC will cover your account up to $500,000. That’s 100,000 in cash 400,000 in equities. So for instance, if you have 500,000 cash in your investment account, keep 100,000 in cash, but 400,000 into BIL as an example, one to three month treasuries. And the reason is, is that 40,000 is now an equity and it’s now covered under insurance. But look, Fidelity, Schwab, think about this for a moment, Fidelity, Schwab, all these other brokerage firms, Goldman Sachs, etc. They don’t want depositors with $100,000, or 500,000. That’s not what they’re after they want the guys with 50 million, they want the Elon Musk right with $500 million in their bank, that’s what they want, because they make money off those assets. So in order that if I’m if I’m, you know, Elon Musk, a wish, but if I was, and I had a couple billion bucks, I wouldn’t put it into fidelity, if they weren’t offering me insurance, above $500,000, all I do is have 500,000 there where I’m insured, and I will put some more money somewhere else. So in order to attract these bigger depositors, these big brokers firms go out to you know, Lloyd’s of London Chubb other big insurance companies, and they take in private insurance policies that will guarantee your account above those SIPC limits. And some of them are, you know, 100 million dollars or more, because they want those bigger deposits. So they provide that insurance to make depositors feel comfortable, that their money is all at Fidelity and something goes horribly wrong, they’ll get their money back. Okay, and you get that additional private insurance automatically.

Adam Taggart 13:04
Okay, all right. The other thing I was gonna say, too, is this also a good argument for if you’ve got excess cash in the bank, putting it in Treasury direct, you know, using Treasury direct to buy T bills, notes, bonds, whatever, because that sweeps the money out of your account at your bank, it’s with the Treasury, while it’s invested in the bills or the notes or whatever, keep it there for as long as long as you want it to. And then when you want the Treasury to send it back to you, it goes back in your account, but you’re basically holding your funds with the technically safest institution on the planet. Right?

Lance Roberts 13:40
Well, again, you know, so you know, think about it this way. And again, there’s nothing wrong with what you just said, By the way, that’s completely fine. But if you buy Treasury direct, and you want to sell the bill, you got to have it transferred somewhere to sell it, you can do the same thing, open a fidelity account, buy treasuries, and then sell them directly out of your account anytime you’re ready. And you’ve got the excess coverage. So, you know, you kind of add an extra step with treasure dragon again, nothing wrong with it. It’s just you’re adding an extra extra weight.

Adam Taggart 14:05
I guess it’s whatever you feel more comfortable with you want private insurance, or do you want the insurance of the printing press of the United States?

Well, those are guaranteed the that doesn’t matter. Right. Because the treasuries the Treasury, so you know, if something and this is also something about a brokerage account versus a bank account.

Lance Roberts 14:59
Last, so all those account asset accounts would just simply trade the next day just move over. Yeah, you’d be a Schwab customer, but all your assets would be just fine. So, you know, again, I don’t don’t take any, we’re just, again, we kind of got off the path here for a second. I don’t want anybody to freak out or panic or anything. You know, there’s a lot of protection within the security investment system. If you do it the right way. You don’t go put accounts with somebody that write a check to somebody. I don’t write a check to Adam Taggart. Right? It better be to Fidelity right, though. You’re welcome to write a check to me. Right? Right. Well, that’s how Bernie Madoff scam so many people, right. He had the brokerage firm, he had the he had the advisory firm, he had the accounting firm, and people wrote a check directly to Bernie Madoff, basically, and he ran it through a system. Never do that. If anybody ever says write a check to me, and I’ll invest it for you. I don’t do that. Nobody does that. So you know, that are legitimate that your your deposit should always be with a major custodian, fidelity Schwab, e trade, you know, Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America, Wells Fargo, make sure that you get that SIPC insurance. And if you have that, you’ll you’ll be fine.

Adam Taggart 14:59
Okay. All right, I’m going to wrestled back to what’s going on. Sorry. So we’re talking, we’re talking mostly here about Silicon Valley Bank, right. And I’ve got some some stuff. I want to pull in on that in just a second. But the concerns about the banking system have been been about more than just Silicon Valley Bank over the past couple of weeks. silvergate has been in the news a lot, right. And that’s a bank that went big on crypto, believe it was very involved in the FTX. fiasco, that bank is struggling pretty hard, another another Silicon Valley Bank, and that’s Silicon Valley Bank. But another bank in Silicon Valley, called First Republic bank, is also had been sort of weakening going into these past couple of days, I don’t have an update on them to say, you know, if they’re as exposed as Silicon Valley Bank was, as far as I know, right now, they’re still a publicly traded company. And the bank stores are still open and all that type of stuff, but But it’s seeing some of the same issues that Silicon Valley Bank had been seeing. And then you had a big bet you JP Morgan, that was kind of wrapped up in this this Epstein related scandal.

So you know, you’ve just had, you’ve had this increasing, you know, worry about what’s going on in the banking system. So one of the issues that’s been going on with banks that I believe really hit Silicon Valley Bank hard is, you know, they have it back in the global financial crisis, that banks were reprieved of having to mark their assets to market. Because if they did, they all looked totally insolvent. Right. And so they were, they were basically told, okay, you don’t have to do that mark to market accounting was was basically done away with. And, and that’s okay, you can get away with that. As long as there isn’t the sort of run on the bank that you were talking about Lance, right. And so what’s happened with a lot of these banks now is they bought a lot of debt that they’ve been holding on to. And as interest rates have shot, the moon, the market value of that short term debt, you know, has gone down. And again, that’s fine if you can ride it out, right. But what was happening at Silicon Valley Bank is people were coming in and saying, hey, I want to take my deposits out of here, right. And so they were having to liquidate those assets, to try to, you know, give the money to the people that were taking their deposits out. And so they were taking real losses on these assets, which then, of course, got people more freaked out. And then more people wanted to go get their deposits out of there. And it became this vicious cycle.

Lance Roberts 18:57
That’s that’s called a run on the bank.

Adam Taggart 18:59
Yeah, yeah. Yeah. But it’s not just taking the money. It was it was forcing these losses that they just would have loved to have had a little more time to get, right.

No, no, no, this this is. So this has been my Big Beef since 2008. So in order to keep the banks capitalized, right? We, we passed this rule, we repealed rule 157, which was mark to market accounting. We’ve never put it back. We have not required banks to mark to market their assets since 2008. So when you ever see these financial stress tests from avez Oh, our banks are well capitalized, you don’t know. Because all those assets are market. Let me put it this way. There are still houses on the books of banks that have been basically in default for years, right? They are not at market value. And so but that asset is still marked at 100 cents of value. So when you start talking about oh, banks are well capitalized, but you don’t know. Because we still don’t mark to market everything is just Oh Got a crappy loan that’s worth 20 cents on the dollar? Well, in my books, it’s 100 cents on the dollar, that loan is just fine until something happens like this. And then all those roaches come out of the kitchen. And that’s the big thing here. So, you know, when you take a look, right now, there’s there’s a lot of banks around the country of these regional banks. Let’s take a look at the KR e ETF which is the regional bank index, it has been getting decimated over the last few days. And this is that, you know, Silicon Valley Bank is the roach in the kitchen. Right? Is that was a if you see one row, so there’s always more The question is where are they? Right? You know, so we’ve been talking about for a while that you look, hiking rates this aggressively is going to break something at some point, we just didn’t know what it was or where it was going to be. And this may not be it may be Silicon Valley Bank is just one Roche. And that was maybe maybe that’s the case. But there’s a lot of other banks like Zion and others that these regional banks have a problem that JP Morgan does a good example. On Friday, the bank is where all the regional banks were getting killed. JP Morgan was positive during the day.

Lance Roberts 21:14
So why what is the difference between JP Morgan and say, Zions Bank? Well, the difference is, is that a lot of these regional banks don’t have access to capital markets. In other words, they’re not doing investment banking, they’re not doing portfolio trading, they’re not doing investment asset management, which all generate revenues and feeds. So I have that revenue stream coming in. So if I’ve got a loss on the consumer banking side of the business, because higher rates, people aren’t taking out as many mortgages, I don’t have as much loan demand because people don’t want to pay, you know, seven or 8% for a business long, whatever it is. So that side of the business gets hurt. But if I’ve got this in vain, but investment banking, financial side of my business, those revenues can offset that decline and consumer and commercial banking, the problem for lobbies, regional banks, they don’t have that. diversification. Yeah, exactly. Their whole book is what commercial loans for commercial office buildings, which basically nobody’s using anymore, residential real estate, mortgage financing. That’s their right, so their rent, so interest rates go up, it’s just sucking capital out of the bank. And this is, and that’s why, you know, while Silvana Silicon Valley Bank may be the first casualty, there may be more coming down the road and these regional banks, I’m not I’m not saying that’s the case, I’m just saying this is the risk we need to be paying attention to. We saw this back, you’re too young, but I remember I was in it. The savings and loan crisis back in the early 80s. This is very reminiscent of what we saw back then, in terms of the same loans, different situation. But this all comes down to interest rates and capital requirements. And what the Fed is doing is putting a lot of pressure on those regional banks that we may see more failures come out of this.

Adam Taggart 23:06
Yeah. And I think that’s that’s the important thing to note here. Right, which is Silicon Valley Bank, I want to say I think it was like the 19th or 18th largest bank in the US. So big bank, but it’s not like a It’s not like a Lehman, right like this, this isn’t something necessarily that’s going to cause this cascade because Silicon Valley Bank itself failed. Right. But the trend that is causing Silicon Valley Bank to fail, it was overexposed to the trend, but the trend that’s causing it is one that is is a lot of other banks are exposed to so to your point here is the trend may start causing potentially some sort of, you know, I don’t want to use the word cascade yet. But I mean, we could see a lot of failures for the same reason, especially amongst these regional banks.

Lance Roberts 23:51
Yeah, well, Silicon Valley was exposed to a lot of venture capital loans and and look at there’s a real risk that over the next 12 to 24 months. Now let’s let’s it’s a little bit different issue. But let’s step back for just a second 2020 2021, massive run of IPOs. And what what these things were called specs, which were the special purpose acquisition companies, when a company wasn’t even good enough to go IPO, we found a way to get them made public by doing a backdoor trick and putting them into a publicly traded shell and taking them public that way. A lot of these companies don’t make money, they still don’t make money, and they’re still requiring additional venture capital to stay alive. Right. And so even some of the big companies out there that are trading are still going back for other rounds to venture capital companies going, Hey, I need more money. So you’ll see headlines where a company ABC just got another $30 million from you know, Sequoia finance or whatever, right? So you’ll see those headlines and that’s because these companies are still not profitable, and they’re requiring more and more venture capital just to keep and the goal was is okay, we feed them. And eventually they become profitably come the next big Uber, whatever. And we’ll make millions of dollars. And that’s what the venture capitalists were betting on. Now all of a sudden, because interest rates are now at 5%, the cost of capital has gone way up. And the profitability, these companies, a lot of these companies have no path, really to prosperity, venture capital companies are going out. And Silicon Valley Bank is going to accelerate that process now. So one of the big kind of parts, and I know, you’re just chomping at the bit here, give you a second.

But over the course of the next 1224 months, part of the financial fallout of this is not is going to be a lot of these companies that were dependent on venture capital, they will be going out of business.

Adam Taggart 25:47
So you’re gonna, you’re gonna exactly want to, although this is again, a vicious cycle. So the reason why companies were pulling their money out of Silicon Valley Bank creating this issue, right where they were, they were being forced to sell their securities at a loss, right. And it just, you know, started compounding is because there is a, what’s been called a mass extinction event going on now in the startup world, because they’re not getting that VC funding anymore, right. So they are drawing down their balances, their burn rate is just sucking all this capital out of Silicon Valley Bank, because they’re just trying to stay alive and they’re not adding to it right. So that’s what started this now, then we can Silicon Valley, to the point where there was the run in the bank, everybody freaked out. Now the bank is in receivership. And then the knock on effects of what you’re talking about are going to happen in terms of further decimating this ecosystem. And if you don’t mind, let me just read this. This account. This is from Brad Hargreaves. Just explaining how enmeshed Silicon Valley Bank was with Silicon Valley, and the massive impact this was going to have in the tech ecosystem. Silicon Valley Bank was not just a dominant player in tech, but it was highly integrated in some non traditional ways. A few things that we’re going to see in the coming days and weeks. One Silicon Valley Bank was incredibly integrated into the lives of many founders, not just their startups, bank and lender but also provided personal mortgages and other financial services. So there’s going to be a whole mess for FDIC and the eventual buyer of Silicon Valley Bank to unwind here to any insured balances that Silicon Valley Bank, those above $250,000 are in jeopardy.

Lance Roberts 28:01
Now, because it’s even the CEO yesterday said don’t worry about it, we’re gonna be just fine. 24 hours ago,

Adam Taggart 28:07
24 hours ago, which is the way the script always plays out right. Now, they may not be able to make payroll next week, unpaid, unpaid wages, pierce the corporate veil. So boards are incredibly sensitive to employing workers they may not be able to pay. So expect mass layoffs later today. Monday at the latest. Right? So to your point like this is creating this vicious cycle that’s just going to drag all of funny money tech down.

Lance Roberts 28:34
And then now, yes, that and then layer on top of this massive amount of commercial real estate loans that people aren’t using, right? People aren’t going to the office, you know, they’re still working from home, blah. But there is a tremendous amount of unused office space that is going to continue to weigh on bank balance sheets, there’s the rent now more again, mortgage rates are up. So the further the further fed hikes rates, the more mortgage rates go up, the more credit card rates go up, defaults are going to start rising. And that again, when you take a look at the default rate for credit cards of major banks, it’s pretty low. But you’re starting to see it come up in these regional banks that loan out credit card debt where they are much more sensitive in their bottom line about defaults and those type of things. So again, it’s not just a function again, Silicon Valley Bank is a casualty. And let’s go back to why they are a casualty of what the Fed is doing. All this is fine at zero interest rates. Back in 2008, the Fed was able to step in and bail out banks and do those types of things because inflation was basically not when there was no inflation. So inflation was running at 2%. You had a recession, they could step in and can cut interest rates to zero they’d have to worry about inflationary pressures. That’s not the case today. Now you’ve got the Fed really in a box saying, Okay, I’ve got potential real risk over here, this now developing in the financial system and what have you. And I’ve been saying now for the last year we’ve been doing this is that the risk is an eventual financial or private related crisis, right? That’s, you know, just in and of itself, everything is fine. There’s no, there’s no just the Fed hiking rates. That’s not a big deal, inverted yield curves, no big deal until they cause a financial, economic or credit related crisis. Well, here’s Putin analysts saying this is it. Okay. This is potentially the tip of that iceberg. We don’t know what’s below the surface. But this is all a function of the Fed overly aggressively tightening interest rates, they should have raised it two and a half 3% paused, waited, let it work through the system, and then added more rates. So we’ve been talking about for a while they’ve been moving too far too fast. And this potentially that first result of that.

Adam Taggart 30:57
All right, well, you’re taking this exactly where I wanted to go, right, which is, let me just the last line of Brad Hargreaves is screed here says Jerome Powell just got his effing debt crisis. And we had we had yesterday before all this went down today, we had, you know, big investors like Bill Ackman starting to suggest bailouts. Right. And and now there’s, that’s that, but that’s the problem. How was the How was the Fed going to bail out anybody without sending inflation through the moon? Well, that’s what I’m saying here, which is all of a sudden, there are now calls for you know, the Fed pivot, right, the Fed rescue here, right, like in the probability of a 50 basis point rate hike, which is which had spiked over the past couple of days since Jerome Powell is talk earlier this week, which we haven’t even gotten to yet. That’s that’s quickly coming down again, now, because people are actually beginning to talk about weight. And then there shouldn’t be a rate hike, there should be a rate cut, going forward from here, right. So it’s so it, we’re at a really interesting time here with a pressure is really beginning to ramp up on the Fed to say, hey, we need you to do your normal job here of coming in and saving the system. And I think the Fed could resist a lot, it could resist a correcting housing market, it could resist a correcting stock market, it can’t resist a failing banking system. Now, we’re not saying the banking system is failing yet, but people are beginning to get worried. Right. So it’s getting really, really interesting.

Lance Roberts 32:32
Yeah. And that’s also by the way, that’s all good. Banks don’t get in this situation. Overnight. This has been coming up for a while. But, you know, as a bank, right, you have to know that the CEO of Silicon Valley Bank got a call from the FDIC saying, Hey, tell me what’s going on. I need to know how bad is it? Don’t you think for a minute that Jerome Powell didn’t call the FDIC and say, hey, you need to get on this right now. And again, like I said, this, this forcing into receivership of SBB was very fast. It was very fast compared to what we saw previously. So again, maybe it’s nothing, maybe this is a one off effect. Or maybe this is the Fed stepping in and saying, Hey, we’ve got to coordinate on this, I cannot have this spreading right now. Because I cannot cut rates because if I do, I’m gonna have inflation at 10%.

Adam Taggart 33:27
Yeah, and that wouldn’t surprise me if that happened. And it’s important to underscore here too, that like, we do have a system for dealing with failed banks, right, that banks fail all the time. So what’s happening here with Silicon Valley Bank isn’t necessarily putting the system at risk. And again, I don’t know enough about how enmeshed it was with the rest of the other banking system. And, you know, how much counterparty risk that there may be here, but it’s a relatively regional bank? And we’ll see. Right? It may hopefully be inconvenience to the national banking system, I can tell you, it’s going to be a nuclear event to the Bay Area for all the reasons I was just talking about earlier. But but, you know, look, theoretically, the system should work here, right? They should dismantle the bank, they should be able to restructure the portfolio, they should be able to make as many people as close to hole as they can. The right people should take the losses and the system should just move on. Unless there’s contagion. We’re yet unaware of what’s going to happen from here. But to your point there Lance, though, is the Fed, you know, is I’m sure it’s doing everything it can to put up a firewall between what’s happening there and the rest of the banking system because they do not want to have to be forced to pivot yet.

Lance Roberts 34:37
Yeah, and let’s be really clear about something too. SPB was a very specific bank. And they were involved in a very specific type of lending activity for you know, venture capital funds and these type of things, private equity, etc. That is not the normal backdrop of say, and again, I’m using Zions Bank just because I’m familiar with them. I’m not don’t Don’t go. If you own Zions Bank, it’s a fine bank, don’t run out that don’t make Landsat Zions is going out of business. I’m just like I said JP Morgan earlier, just please, just using it real life examples of regional banks. You know, that’s not Zion banks business, right. They’re not in, they may do some of this business, but primarily, most of their stuff is, you know, business, retail, commercial lending, those type of things. Right. So, you know, again, you know, while SVP is very kind of focused in one particular area, Silicon Valley, there is a there is risk to these regional banks elsewhere in the country that simply, as I said earlier, don’t have access to this other investment banking activity, that like a JP Morgan does. And so these impacts of higher rates on their lending for business loans, consumer loans, those type of things. That is that those higher rates are extracting capital from their banks. And again, I’m not saying they’re gonna have a run on the business at all. But that’s, that’s part of where this, you know, financial event, this credit event can show up, it may be this time, within the regional banking system, as I said, much more akin to what we saw in the savings and loan crisis back in the 80s. Not making the same comparison, just saying that there’s there’s a risk because of what’s happening with commercial real estate, residential mortgages. If we start seeing defaults and payments, etc, go up. That’s really where it’s going to be concentrated.

Adam Taggart 36:35
that’s exactly right. It’s sort of the the trend we were talking about earlier. And again, what the bullet that took Silicon Valley Bank down is they were just hyper concentrated in this industry that was going through its mass extinction event. So we hope that these smaller regional banks aren’t as hyper concentrated in something that’s that vulnerable, but we just don’t yet know, right? And you gotta imagine that that the Fed knows this, and that they’ve probably been play booking with these regional banks to, you know, say, Hey, we’re gonna continue raising interest rates. So make sure we figure out a way that we all don’t die on me here, right. But we don’t know for sure. Okay. So I do want to actually get to Powell and the pressure that’s placed is on him. He also spoke earlier this week, as I mentioned, briefly want to get your thoughts on that. But before we do that, I still want to talk about the dominoes that are falling here. So the market has started to sell off. And the reason why this is perhaps relevant now, which is that the s&p is now decidedly below the support of the battle zone of control that we’ve been talking about. And I know, you know, you don’t put a ton of stock in the particular number for the height in the floor. I

Lance Roberts 37:44
They’re, they’re, they’re very important. I do put a lot of weight on this.

Adam Taggart 37:48
Okay. Okay, good. I’m glad you corrected me. But anyways, here, okay. So I’m going to ask you, is the fact that it looks like we’ve we’ve punched below the floor, where a week ago, it looked like we were bouncing off of it, we’re talking about how the bush indicators were, you know, showing green skies ahead, all of a sudden reversed thing, you know, punctured through the floor. And then a smart guy, you know, put this tweet out, recently said regional and major banks took a hit yesterday, pulling the s&p down with it, it will be tough to have a bull market without financials giving, given their size in the index waiting. So that was you, obviously, who said that tweet. So, you know, elaborate, right, you know, how big of a how big of a blow is this to the bowl argument that we were saying last week, it looked like they were getting the upper hand.

Lance Roberts 38:41
So you know, two things. First of all, you know, again, now, we took action today, and we had put on a very, very small s&p 500 trading position in our account earlier this week, because what we were looking for is, you know, this kind of retest of support, which is where we were bouncing off that 200 day moving average bouncing off the rising trend line. We put on a very small trading position in advance of the employment report on Friday, expecting that we’d see some weakness in the numbers, which we did, right, we saw hoursWorked decline. We saw the unemployment rate rise, and we also saw the I’ve drawn a blank for the third one. There were three couple healthy, oh, wages, sorry, wages actually came down as well. So hours work, the wages declined, not and they weren’t as strong as expected. And also the unemployment rate rose that was all actually very bullish. And in fact, the markets kind of ticked up on that news early this morning. So when we were in good shape, the unfortunately this situation with Silicon Valley Bank just overrode all that so we broke through support at that rising trend line, we took the opportunity moving average, that was our stop level. So we got stopped out at the issue that happens sometimes. We also closed out all of our financial positions for now, until we figure this out, right? And so just I’m not willing to and going into the weekend. The stuff that happens bad in markets happens on Saturday or Sunday. So if there’s going to be other bank failures, it’ll happen over the weekend. I don’t want to hold on, right. It all gets announced Monday morning, right? Yeah, exactly. Or Sunday afternoon, you’ll see a headline in the newspaper, you know, so and so bank goes under gets bailed out. So I’m just not willing to hold financials over the weekend. So we just took that risk off our books right now. If all this turns turns out to be fine, then we’ll just put those positions back on the books. So it’s just it is what it is. These were all small positions anyway. So that very, very, we were majorly underweight financials for a variety of reasons. You know, we had a very small trading position and spy we just took that off the off the boat, so But technically, everything is still okay. And the reason I say that is is that when you break support, the we’ve talked about this before, what we need is now confirmation that break is actually valid because this is where technicals get a little bit iffy. Acting on a break. Now, we acted on a break today, because we just didn’t want to hold exposure over the weekend, too much risk. But in a normal environment, when you get this break, what you want to see is is that maybe a retest of that break and then a failure that confirms that that previous trend is now broken. We haven’t done that yet if next Friday, we route and this all turns out fine over the weekend. It turns out that sdb was a one off situation, everything else seems to be okay. This market could rally right back up next week because we are oversold short term rally right back next week, get back above the moving averages and that break or that violation is not valid. So we need we need to wait through next week really, to try to confirm this break is really a valid break. But again, because of what’s happening, I think we need to really be focused on our risk management right now.

Adam Taggart 42:05
Got it. Alright, so you’re not going bearish. But you’re stepping to the sideline with the part of the portfolio going to wait and see. And a really key next step here is going to see do we have a retest of that, that line the floor punch through? And does it does it become a seal?

Lance Roberts 42:22
Yeah, exactly. Look, let’s be clear, I’m not bearish or bullish ever. Right. It’s just, I am what it is. And that’s just

Adam Taggart 42:30
legal. You’re just trading the market that it is. Yeah.

Lance Roberts 42:33
I mean, you just trade what you got. And you know, the problems. We’ve said before, if you’re bullish or bearish, you get stuck onto that side of the coin, right. So I only look out for bullish stuff or bearish stuff, like, ah, the bank failed, the wall is coming to an end, I’m selling everything and I’m shorting and then the next week you get hammered, right. So you know, just that. So it just is what it is. And if things change next week, and we’ll put positions back on our books, or if things get worse, we’ll take more positions off our books. You know, there’s just it is and again, this is but we were buying bonds earlier this week, because we’re getting bullish bicycles. So that worked out very well bonds really shielded our portfolio on Friday, and took off a lot of the risk out of the markets because bonds were doing their job of, you know, handling that risk off action.

Adam Taggart 43:20
Yeah, and if I can just note a few other stats, it really does seem like you know, we’ve just learned to risk off really fast. Not only is the s&p down, but we saw the biggest two day drop in the yield for two year US Treasuries since 2008. Actually, since the Lehman moment, right. Which, which is a sign of sort of freakout, right a little bit like similarly, the VIX has spiked I think like I think it closed for it looks like it’s Friday looks like it closed somewhere around up 20% Gold was up over 30 bucks an ounce, right? So sort of all like the freakout indicators are you know, we can have I can dig here right? So we get it we get it we get to see where it’s how it’s all going to unfold and whatnot and whether this is just a short term scare if it’s something bigger, but but this is I just want to give you a chance to comment on this like is it notable that the market suddenly lurched from somewhat complacent to Holy crap?

Lance Roberts 44:21
Well, again, you know this you know, over the weekend, everybody’s gonna sit back they’re gonna reevaluate everything Don’t be surprised you know, after the sell off today, a lot of people are gonna get home from work and they’re gonna go oh my god, right? They’re gonna read a lot a lot of people on Saturday watching this this video we’re gonna go oh my gosh, I didn’t even know that happened. Right? Because they’re not reading financial news. They’re not doing anything like this. And so Monday morning, so Sunday night, they’re all loaded up their trades.

So don’t be surprised if we get a sell off on Monday. Just from kind of panic selling but That’s where we will start to define whether or not this is something more, or if kind of sanity begins to prevail and say, Okay, that’s a one off event and we start seeing, you know, money come back into the markets again, because again, despite all this, there’s still very much a bullish bias to the markets. October from the October lows till now, there is a clear bullish bias in the markets, money flows have been positive, you know, those type of things. So again, he’s one off events can certainly shake you a bit. But it’s important to kind of wait to see and let the markets develop. So give this a couple of days. We’ll know by Tuesday, Wednesday, next week, if this is the beginning of another sell off in the markets, and which would say, okay, see that rally from from December, January, February, another bear market rally and see, there we go selling off again, may be the case, or this market may stabilize, and start driving. And I will tell you, though, look, you know, you go back to think about last year, just for a second. And think about some of the days we have the markets when you know, CPI came in hotter than expected market was off three, three and a half percent in the day. Yeah, the markets down, we’ve had a financial failure, and really the market was down about one and a half percent on, you know, the markets really taking this well, which tell and again, again, if markets are declining, that’s okay. But as markets decline, there’s still buyers. Remember, for every seller, there has to be a buyer. So there are people in here buying this market all the way down this week on Friday. Now, I’m not saying that smart or anything else. I’m just saying under remember how markets work. So for everybody dumping stocks today, me included. Somebody was willing to take my spider trade today somebody was willing to take my T Rowe trade today somebody was wanting to take my ex elf trade today, somebody who’s on the other side buying this saying don’t buy it, right. somebody’s willing to make that bet. Now somebody’s gonna be right or wrong. I’m hoping Ryan’s right. Yeah, I’m hoping they’re wrong. But you know, that’s the way markets work. So again, we may very well see buyers show up Monday, Tuesday, next week, and we’re going to be an average week. Well, what the hell just happened? The markets up, you know, 3% in two days, I’m not saying that’s gonna happen. I’m just saying it. Can you’re saying could Yeah, given the good, because the markets really, as bad as this news was over the last couple of days that were only down two or 3% from where this came out is really quite surprising.

Adam Taggart 47:30
Okay. All right. Well, look, the key thing here is going to be seeing what develops over the next couple of days, weeks. You know, everybody will be tracking that for you every week on this program. Every weekly market recap here together with you, man. Okay. All right. All right. So, so pal. All right. So he talked earlier this week. Feel free to say anything you want to but what he actually said but you know, he was, as Jim Bianco said he was either going to be J dove or he was going to be hockey macaque face, and he came out as hockey macaque face. And I, you know, is we just talked about a few minutes ago, though, you know, like, if you start worrying about the banking system, that that is one of the things that really could get in his, it can force him to pivot and whether we’re at that stage yet or not, I don’t think we are, but what do I know? Clearly, the pressure is beginning to mount. And if things get worse, it’s only going to get more and more intense for him. I don’t know what we when you look at all this. There’s a quote I had to pull today got from Michael Hartnett. It said, the market stops panicking when central banks start panicking, right? So the market wants to see a bailout wants to see, you know, a rate cut whatever, right? Again, we’re not markets not melting down yet. But it just is the fact that we’re seeing all this kind of chatter, Bill Ackman all that stuff, right. It just shows that like, okay, you know, everybody’s cool until they start losing real money. And then the pressure really comes on Jerome Powell, do you think that this is going to matter much? Or do you think he’s going to, he’s going to ignore this for, you know, a good while,

Lance Roberts 49:15
No, clearly matters. I mean, you know, the Fed is very aware of the risk in the financial sector. And despite all of these stress tests that they run, they know what’s going on with the major banks. They’re not that they’re not as well capitalized as everybody pretends them to be. There’s also the risk that, you know, you’ve got a tremendous amount of leverage working through these banks as well. So look, the Feds very aware of all this reverse repo, you know, we’ve talked about those instances where banks are just, you know, tap and reverse repo windows. You know, there’s points back in 2019. We’re talking about the fact that, you know, overnight lending rates are hitting eight 9% Nobody wants to loan money, right. So, you know, there’s clearly even though even though the strike This test like, oh, the bangs are fine. Well, why is all this other crap going on behind the scenes that stands but that stuff is clearly there. So there’s clearly issues with the banking system that you know that the the Federal Reserve and the government don’t want you to know. And hopefully you’re not smart enough to go figure this out. But there’s clear issues that are there. From a risk standpoint, Jerome Powell is very clear about this. Now, the problem, as I said, for Jerome Powell, is he’s he’s now in a very, as I say, the old rock and a hard place, he is in a very tough position. Now, the rock is inflation, a Hard Place is a financial event. And which one are you going to do because again, whichever one you go to solve, you’re going to exacerbate the other one. If you’re going to keep hiking rates to fight inflation, you’re going to keep making the financial system weaker and weaker, weaker, until you get a rash of bankruptcies, defaults, etc. Because higher interest rate, who pays the interest rates, it’s consumers, it’s businesses, right? The higher those go, the greater the risk of defaults. We talked about 8% of s&p, Russell 2000, small caps, zombie companies, they can’t refinance that debt. That’s a huge problem for these regional banks, which were the financers of a lot of that debt for those small to mid cap companies.

Adam Taggart 51:20
Right. And don’t forget that on top of all that, it also increases the debt service payments for the federal government itself, which are jumping from like, I think, 800 billion this year to like maybe 1.3.

Lance Roberts 51:32
We just proposed a six and a half trillion dollar budget, you know, a couple of 100 billion in interest that it’s a rounding error when you’re talking six and a half trillion dollar spending budget for a year.

Adam Taggart 51:45
Yeah, well, first, the debt ceiling has to get raised. It’s I mean, the point is, is you eating into other stuff that you can do, of course, but my point is, is you can’t keep hiking it forever, because not only do you have the the economic issues you’re talking about, you have a sovereign financing issue to

Lance Roberts 52:05
Absolutely. And look the you know, the debt service is universal, right? It’s all across the board. And so you know, again, brought rock and hard place, I keep hiking these rates, I’m going to exacerbate that financial event of whatever it is. Or I’m Jerome Powell said, Okay, I’ve got to abandon the the inflation run, and I’ve got to go bail out the banks, they knew that all of a sudden, the Fed now loses all credibility with inflation through the roof, because now everybody’s gonna rebrand it back out doing stuff that they should do, because now interest rates are lower. So everybody’s sitting around going, man, if interest rates come down, I’m gonna buy a house. There you go. Right.

Adam Taggart 52:45
Let me ask you a question on that, because Bill Fleckenstein said something like a year ago that is stuck with me where he said if the Fed does pivot too soon, especially if it’s demonstrably too soon, like it will probably would be now. Right? He said, that’s when it’s going to lose the confidence of the bond market and the bond market is going to conclude, you’re never going to be able to get inflation under control. And in theory, then then No, yields will not come down, they will go up, especially in the long end of the curve. I disagree with that. And here, that’s what I wanted to give you a chance to respond.

Lance Roberts 53:18
Right. And look, what happened on look, if you want to know the answer to that, what happened on Friday? Right. So on Friday, we have a financial event, and everybody goes where? Right safety?

Adam Taggart 53:32
Yeah, for sure. In the short term, everyone’s going to do that no matter what happens.

Lance Roberts 53:36
Yeah, exactly. So but so whatever, they choose that initial response. Yes. And I don’t disagree with you that, you know, if, if the Fed makes a rotation to bail out the financial markets and abandons the inflation fight, yes, there’s a potential risk that, you know, interest rates would rise, because if inflation does research, interest rates, or if interest rates, forget the short end, right, forget everything in five years, forget that. That’s all the Fed, that we’re forgetting it, folks, because the Fed can control that directly. Correct. So let’s just talk about the long end, 10 years, 20 years, 30 years, that’s inflation, wages and economic growth. So that’s what drives that. So if, but here’s the thing about it. Let’s assume that the Fed says, Hey, I’m ditching the inflation fight, and I’m gonna go bail out the markets, okay, inflation starts to spike back up. But now all of a sudden, remember, as inflation goes up, I can’t afford to pay bills already, right? because interest rates are up and and even though those are starting to come down, I can’t make ends meet and now I’m laid off because of the crisis is going on in the market. You know, I’ve lost my income. So now you’re heading that that inflation push is going to push everything into the to a recession bracket, and that’s gonna be dragging down wages and economic economics, which is going to bring down inflation. So you may get a little spike initially, but the recession will be so bad Then it’ll drag everything down. So yields will basically fall. So you might get a spike in inflation rates short term, but longer term because it’s because it’s economics, inflation and wages, those are all going to get decimated into a recession.

Adam Taggart 55:12
Got it? Got it. All right. Well, look. So again, we’re just going to have to wait and see here. But you know, what’s interesting is so pal, you know, that, hey, I’m committed to higher for longer, in fact, it might be higher or for longer. Right? Exactly. Putting putting the concerns about the banking system aside for a second. We had the Fed payroll numbers, the February payroll numbers just come out today. And they came in hot record 10th beat in a row, they came in at 100. Sorry, 311,000. And so everything looks hot and robust. Partner good.

Lance Roberts 55:52
Not really. I mean, if you actually take, like I said earlier, number was high, right, 311. But the important thing is the unemployment rate, the wages and the hours work, which are allcoming down,

Adam Taggart 56:05
right, not precipitously, though, precipitously. So yeah, we’re seeing and look, you and I have been calling the fact that those things should be coming down should have been coming down a long time ago probably are and it’s not being reflected today. All that stuff. But you look at this data, and it’s still screams, strong jobs numbers. Right. So so, you know, for Powell seeing data like this, again, forgetting about the banking news for a second. Again, that just makes him say, Yeah, okay, I gotta keep going higher, right, that I’ve been trying to kill demand. It’s not being reflected in the jobs market at all right? I think I mentioned, kind of put a tweet out, I’ll try to find it. But it was a quote from August of last year, where the Fed is basically saying, hey, you know, we’re putting all our efforts into bringing the number of openings, you know, per job applicant down. And then it was a quote, or data from last month, that basically just showed that like, oh, it’s gotten nowhere, right. The feds been out there for the better part of a year trying to kill demand, specifically, in many ways to cool off the jobs market, and so far, nothing. Right.

Lance Roberts 57:19
And again, look, I got all kinds of problems with that data, fixing the job openings. Yep. There, buddy. Yeah, no, there’s there’s just a ton of issues. There was actually a good article, I always say, I’ll have to go back and see if I can find that was actually good article about how that’s captured. And, you know, kind of what works, what works around that, and that there’s a big reporting error on it. But the important thing here, though, is that from Jerome Powell standpoint, look, Mike and I discussed this on our radio show on Thursday, talking about the Fed and the meeting, you know, the Senate Banking Committee, the House Financial Services Committee, I was very disappointed that Pocahontas didn’t come out and give me some really good sound bites to work with, but but I was pretty disappointed. She didn’t. But the issue is, is that, you know, I don’t think the Fed should go 50 basis points, it was mine. I think at this point, you just keep doing 25 basis points at each meeting until you get to where you want to be. I think the worst thing they could do now is trying to go 50 basis points, particularly after today. And you really shocked the financial market because of that big jump, you know, you do 25 basis points, let that run to the next six weeks, no, 25. Maybe you do five hikes a quarter basis, point each until you get to where you want to be. But I think the Fed needs to just kind of start to slow their pace, and begin to really evaluate that lag effect that is now going to show up Silicon Valley Bank is the lag effect of interest rates.

Adam Taggart 58:47
What so great, okay, I mean, we’ve been saying this forever. I’ve got another tweet I put out there relatively recently, that basically said, I think the lag effect is perhaps the single most impactful element that’s going to drive the action for the rest of this year that the market is completely oblivious of. And it may now finally be able to wake up to it with what you’re saying, which is really that’s that’s what is happening. Right. That is a casualty of the lag effect. Yeah.

Lance Roberts 59:14
I think Larry Summers, I may be wrong on this on. Larry Summers. So if Larry Summers didn’t tweet this or say this, then I apologize to Larry Summers, personally, but I think it was him. He said there is no lag effect. Yes, there’s a lag effect. And yes, Silicon Valley Bank is the impact of that lag effect.

Adam Taggart 59:35
Yeah. So to your point, though, like, I mean, to me, I’m almost sort of like I think you and I both think that the Fed should probably be pausing now. Right and waiting to see, look, holding rates out at four and three quarters or wherever we are right for a prolonged period of time. That is very depressive of economic growth, right. That’s going to create a lot of issues in and of itself. And we still have to wait for the lag effect of have all those hundreds of basis points that are coming this way? Right? So we think he should probably wait and see they can always dial it back up later on if they feel they have to. Right. But I’m always kind of like 25 basis points, 50 basis points, it doesn’t really matter, because we’re not going to see the impact of that probably for another night. Right? Because we still haven’t seen much of the impact of the multiple 75 basis point hikes that they’ve made. So I almost felt like it’s kind of immaterial in the near term, what they do.

Lance Roberts 1:00:27
It is and that’s what I said earlier is that if I if I was Fed chairman, right, first of all, I would have been hiking rates in 2020 2021, when I’m doing 120 billion a month in QE, right. So you got all that liquidity to support markets, got stimulus payments coming in hike rates, then Right? So there’s plenty of opportunity, you should have been well off of zero back in 2020 2021. Yeah, but I’m now I’m now Okay, fine. So now I’m Fed chairman. And, you know, I would have done two and a half percent, and then waited, you know, and then see how that affected it. And if inflation wasn’t coming down, you know, wait three months, wait four months, let some of that start to impact the economy, then hike another 50 basis points or so and then wait. But you know, the risk in by not waiting by not pausing along the way and letting some of this stuff come through, you really start to exacerbate that risk that you broke something six months ago? And we’re not even we don’t know, right? It just, it’s gonna take time for that to show up. You know, banks are under stress, whoever it is, is under stress. But they can they can, you know, they can kind of hobble along here for six months, nine months, a year before they go, screw it. I’m done. Got I can’t I can’t do it. But it takes time for that to happen. I think that’s the mistake that we’re going to look back and go, they should have stopped, you know, in October of last year.

Adam Taggart 1:01:51
Right. And the problem with that is, and again, this is why I want to harp on this because I want people to get mentally prepared for the potential of this right is the Fed waved its its arms. Right? And, you know, in many cases, nine months, 12 months ago, whatever, right? And not much happened in the economy, right? So you get this sort of understandable complacency over time that like, oh, the Fed, it didn’t really didn’t really do all that much, right? There isn’t going to be an impact from all that stuff. Because it’s now nine months, 12 months later, right? And then all of a sudden bang, like a two by four, black night, you know, you get hit upside the head and you’re like, Wow, really? What was that? Right? Well, that’s the right hike from 910 12 months ago, right? And we’ve got a ton of those parked up in the system. Right? So like, if indeed, Silicon Valley Bank is a good example of it, the question is, is like, the second, we think we’ve recovered from that, you know, we’re going to get the next one. And it’s just going to be this parade of kind of out of the blue, we didn’t see it coming injuries like this going forward. And so the question is, is, is that going to be enough to magically bring things down to this nice soft landing? Or are we going to realize that whoa, this was way more intense than we need. But Christ, we’ve got a ton of these still coming in the pipeline, we can’t stop, right. And they’re just gonna keep slamming into us and slamming into so that is the big risk that we face here.

Lance Roberts 1:03:14
Absolutely. You know, and this is kind of, you know, going back to kind of rehashing the same thing now, but, you know, that’s the thing that we’ve that you and I particularly have been discussing. And as I wrote about, it’s actually in this weekend’s newsletter, at real investment, vice.com, which is talking about the amount of money supply that’s still in the economy, if you take a look at m two as a percentage of GDP. It’s still very elevated. And so a lot of these rate hikes the Fed has been doing has been against this whole backdrop of all this liquidity still sloshing around in the economy. And yeah, you know, the people that got the stimulus checks, they’ve spent it, but the people that they spend it with, still have that money, right, and they’re still spending it. And so it takes time for that money supply to get diluted within the economy. So you still have this really elevated money supply running around the economy, this delaying the impact of these higher rates, yes, rates are going up. But I’m okay because we’ve still got money and income coming in, and everything’s okay right now. But it’s getting worse. Take a look at CFO confidence, take a look at business competence, NFIB indexes, their alternative substantially lower, and it’s going to be a little bit longer, but eventually that’s all going to cease. And then that’s where all those rate hikes really become a problem,

Adam Taggart 1:04:33
sort of to make an analogy that this this excess liquidity in the system is a buffer, right, that’s been shielding us from the full effects of these impacts to date, or at least slowing their arrival. Right. It’s not necessarily dissipating them, it’s just slowing their arrival. As that buffer shrinks and shrinks. The intensity and the speed at which we get hit by those shock waves just continue to increase right. So Alright folks, so we’ll we’ll move on from this but but There’s a lot that Lance and I have been talking about for months quarters even that I think is finally actually materializing. Now, that’s the point we’re trying to underscore here. Because we’ve been talking about it for so long, I understand that people are like, it’s just more talk right now, we’re now beginning to actually see it manifest.

Lance Roberts 1:05:18
By the way, this is the problem. You know, as I’ve talked about with you before, this is the problem with, you know, either being really bullish about stuff like tomley, super bullish, right. And then there’s other guys that are super bearish in the problem when it comes to investing is if that outcome doesn’t occur immediately, then you’re wrong. Right? So then everybody just and this is the problem. If, you know, if you’re always bearish, eventually you just go by guys always bearish, right? So he’s been wrong for so long, you’ll never be right. Well, eventually, he’s be right. Right. You always hear the you know, it’s always interesting, because they will bears right twice a day. They’re like a broken clock. Well, guess what bowls are two, you can only have only one side can be right at a time. And the problem of being always bullish, or always bearish is that you’ll be right twice, but you’re gonna miss a lot and kind of along the way. And so, you know, this is why, you know, yes, we’re rehashing stuff that we talked about a long time ago. Because, you know, this stuff takes a lot of time to develop. And so yeah, we were talking about this, you know, six months ago, now, it’s showing up, but people forgot that six months ago, we were saying exactly what happened immediately. Right. So Oh, clearly he was wrong, because it didn’t happen.

Adam Taggart 1:06:30
Right. And you know, the tough part about what we’re doing is a lot of this stuff is so hyper multifactorial and distorted by all this, you, we have imperfect information that, you know, we’re just doing the best we can with with the imperfect data we have. All right, well, moving

Lance Roberts 1:06:46
on Sorry, just which is why we rely so much on technicals in the short term. Great managing money. These these multifactorial, you know, thesis is are great. But in the short term, that’s why we rely so much on technicals so we can make money or waiting for these things to happen.

Adam Taggart 1:07:03
Great point. All right. So I do just want to note, since we’re talking about the jobs numbers, there’s some other really interesting charts that came out recently. I just want to repeat here really quickly, I mentioned them the other day on this channel. The private data from challenger gray and Christmas came out around job cuts. And for February, this February job cuts were over 410% higher than they were February of last year. Right. It actually was the highest February for job cuts. Since 2009, right, which when we were in the depths of the global financial crisis. So if you combine January and February together, it gets even worse. January and February of this year, are 427% higher than January and February last year, again, also the highest January February period since 2009. Now you compare that to the you compare these job cut announcements from from challenger to the initial jobless claims. And you just see this massive divergence, right. jobless claims are still I mean, if you look at the trend for the past year and a half, it’s been down. There’s a slight, almost imperceptible hiccup that they just took in the most recent month. But of course, jobless claims have been just shooting the moon over that same period. Right. And so these are two things that really don’t seem to jive real well. They’re obviously going to have to that data gap is going to have to be corrected here. But I just think let’s this is just, you know, continued evidence of the difference that we’re seeing between private data and government data when it comes to jobs. And the reason why this is so important is because the Fed is making decisions based upon the government jobs data. And you and I’ve talked about the fact that a they’re very lagging to begin with, but be they are increasingly suspect and the charts I just showed give renewed reason why we should view them with suspicion.

Lance Roberts 1:09:05
Yeah, no, absolutely great. Absolutely. Great.

Adam Taggart 1:09:08
Okay. All right. So as we begin to wrap up here, we’ve got the conference coming up, as I mentioned, I was just talking with Nick Gerli around his presentation for the conference. Nick Gerli is our is a housing expert. He had a great chart I’m just going to put up here, which shows that the debt to income ratio for housing is above 40%. This is higher than it was during the housing bubble, leading up to the global financial crisis. Right. So, yes, we have a lot of people that are potentially sitting on low percent mortgages, right. But the prices they paid to lock in those mortgages were so stupid like stupidly high that we’ve got the highest debt to income ratio that we have have been in the data series for the past several decades here, right. And I had a guy kind of pick a fight with me on Twitter the other day saying that, Oh, you know, we’re never going to see mortgage defaults. Because, you know, the vast majority of homes in the US are owned by people who have 3% or less mortgages, and it’s like, hey, just because you’ve got a low mortgage percent doesn’t mean that you can’t default on it, if you’ve got a high mortgage payment, and you get into trouble, you know, pretty easy to default, right? If you can’t make that mortgage payment, right. And so I just want to really underscore both where we are historically with this, this debt to income ratio, because I mean, honestly, that’s what housing should be valued off of right is your ability to service your mortgage, we are at pretty much the most.

Lance Roberts 1:10:50
Your ability to service your mortgage, credit card, I just, I’m laughing because I just did a whole segment on our podcast earlier this week talking about why if you wanted to, if you want to solve the housing price problem, bring back a 20% down payment, and your house prices will come down, right? Because, again, you know, we’ve been since 2000. We’ve been manufacturing all these ways to finance a mortgage cheap. And, you know, to get around a 20% downpayment. And, you know, we’ve had, you know, you know, adjustable rate mortgages and Ninja loans and, and now we got Fannie Mae, three and a half percent loans. Well, if you want to solve this whole financial problem, that you’ve gotten the housing market, bring back a 20% down payment, and you’ll solve that problem.

Adam Taggart 1:11:37
So is the reason why you’re saying that, because we’ve had the government step in with these FHA loans, and just these these programs that let people get into a mortgage with sometimes as low as like, 3%. Down

Lance Roberts 1:11:51
or less. Yeah, I mean, back during the financial crisis, there was no money down loans. Right. Okay. Here’s the thing, right? So here’s the thing about it, and like, I don’t want to go, we’re gonna have a talk next week, I’m gonna tell you, I can take a look. I’ve told you before the show that we’ve actually robot to buy house, I’m gonna pull a 4.4% loan to buy my house next week, we can talk about how I did that.

Adam Taggart 1:12:14
Yeah, okay. I’m sure a ton of people are going to be super interested in that. So okay, so you won’t have your your stink bids that you were putting out there got accepted?

Lance Roberts 1:12:23
It did. So we’re not closed yet. So stuff can still happen. But if by but we’re supposed to close on the 17th. So maybe by next week, I’ll we’ll have an update for you.

Adam Taggart 1:12:35
Think of that as a teaser to lock in a mortgage that low in this environment. I know a lot of folks would love to figure it out.

Lance Roberts 1:12:40
Absolutely. And it’s an interesting way. But here’s the thing about, you know, we made that we came up with all these ways. And this, and maybe we just have a whole talk about this next week, and why we should have a 20% down payment is you know, but we’ve forced, you know, we have 50% of all mortgages, currently in the market today, were originated in 2020 2021. So, the problem with that is, that’s when all these people were getting checks from the government and running out to buy a house, these millennials were buying houses sight unseen, they could do it for 3% down. And now 86% of homeowners that bought houses in 2020 2021, are disillusioned with their home purchase, because nobody told them about homeowners insurance, application dues, maintenance, upkeep all the other shit that goes property taxes, property school taxes, you know, nobody told me about that. Well, now they can’t afford it. Right. So, you know, if you didn’t provide that, you know, what drives home prices up supply and demand. You can only have so look, if we put a house on every square meter of available land in the country, there is a finite supply of houses that are out there. Right. So if you have everybody going out to demand houses, you’re going to drive the prices to the moon. So what you have to do is restrict the demand Have you restricted demand, make it to where a 20% downpayment. Why is that important? Because if you can afford to save the 20%, I got so many emails when I had this podcast, I got so many emails. Well, you know, it’s impossible today to save 20% down. Me there’s the problem, right? Your financial cash flow, because if you can save the 20% down, yes, it may take you a few years to do it. But if you can do that, guess what? You can also afford the payment plus the homeowners association dues, the insurance, the taxes, the school taxes, blah, blah, blah, blah, blah. It’s a function of math, but you’ll bring that demand down and guess what happens with housing, it comes back to where it was previous to 2000, which is where it tracked the rate of inflation about 3% a year.

Adam Taggart 1:14:50
Yep, yep. No. Hallelujah. I’m totally on board with that. And what’s, what’s sad about this is it’s I mean, we saw this in the previous housing bubble And we’ve seen it in the education system where we make it, we basically bring down the requirements to try to let a lot more people get a college education or let a lot more people get into a home. But what we’re doing is, is we’re basically putting people into these instruments where they’re going to be financially unable to, to fund them, right. And so you get these people that are graduating with these massive college loans that they’re never going to be able to pay off. And you get people stuck in homes right there. Oh, great, I got a home. But then they very quickly realized, Oh, crap, it’s a lot more expensive than I thought and oh, the economy slowing down and my hours are getting cut, or I just lost my job. Right. So talking to Nick earlier, he was saying that, we’re seeing a dramatic increase in the default rates in mortgage defaults amongst the FHA crowd, right? The the part with these with these 3% Stop mortgages. And that’s where you would expect to see it because those are the most challenged lender borrowers be. And that’s the only way they were able to get into a house because they were so challenged, they had to be given a really low bar to step over like a 3% mortgage. Right. So we think from a policy wise standpoint, we’re helping but we’re actually just creating a much bigger problem.

Lance Roberts 1:16:14
Same thing with student loans, right prior to 2008. Prior to the Democrats taking over control of Congress in the presidency, student loans were run through banks, if you wanted to student loan, you had to go to the bank, you had to qualify cats what you have to qualify for a student loan, if you couldn’t qualify, you couldn’t get it. And so when did we have a student loan crisis bubble? It started in 2008, when the government took over all the loans, the student loans from the banks and said, Guess what, can you fog a mirror, you can have a student loan, and people were taking out loans not to go to school, but to go take a trip to Cabo or, you know, for a variety of other reasons, because it was easy money to get whether or not they went to college or not. And so now we have this student loan problem.

Adam Taggart 1:16:57
Yep. And we’ve read about that in the past. And I’m not even going to put up my government poster this time, because it didn’t so much recently, the one about, you know, the problems being worse than the solutions, or the solutions started being worse than the problems. Alright, well, look, we got to wrap things up here. timewise. You mentioned you guys did do a lot of trades this week. So give us the highlights.

Lance Roberts 1:17:17
So as I said earlier, we you know, we put on a spider, a trade and spy very small, we were looking to maybe build a position in an s&p index from a trading position, we had a very close stop at the 200 day moving average, we put that trade on on Thursday ahead of the employment report, expecting a little bit weaker number, which we got. And we would have had a really good rally in the market had that occurred under the expectations that the Fed will Oh, this means the Fed is going to pause because employments weakening, that would have been good for asset prices. Well, what we didn’t count on was Silicon Valley Bank. And so that kind of screwed that whole trade. So we sold that. We also liquidated all of our financial positions we added to TLT brought that up to model weight of 10%. And then starting rates ran a little bit too fast too far this week. So on a pullback next week, we’re going to shift some of our we have a lot of exposure and Big Oil, which is a one to three months Treasury ETF, we’re beginning to shift that and a one to three year treasuries and then seven to 10 year treasuries. So we’re slowly starting to lengthen that duration of the bond portfolios on a pullback and rates, which we think will happen next week, we’ll begin to shift more and more of that bond money into longer duration.

Adam Taggart 1:18:34
Okay, and you’re doing that, again, because you think the Fed is nearer to the end of its rate hiking campaign, and that that it may bring rates down at some point in the future, and therefore the high end of the curve is going to appreciate does,

Lance Roberts 1:18:48
and that’s not exactly right. Okay, you’re close, you’re almost there. Our reasoning is, you’re right, the Fed is going to cut rates, again, the Fed only controls the short end, right? Our expectation of shifting to long duration is that all these rate hikes, you’re gonna mess something up in the economy, and you’re gonna have a contraction of economic growth that will lead to lower yields. So that’s what so when that occurs, remember, long end yields are controlled by economy, inflation and wages. If we get into all these things that we’re talking about, ultimately, because rates are high, which is exactly what the Fed is trying to do is slow economic growth that brings yields down long. And so I want to be exposed to long in duration because that’s where I get the most bang for my buck.

Adam Taggart 1:19:29
Got it. And I think I skipped over a piece of my logic, which is the Fed would be pivoting or beginning to cut rates again, at some point in the future because it had broken something. And as part of that breakage, money is going to flow into the long end of the Treasury curve for safety. Right. And so my question is, is you had your thesis before Silicon Valley Bank was taken over? Does these do any of these recent developments around the banking system make you even a little bit more confident that like, hey, all right, we’re seeing some cracks here. Something very well may break here and make the long end of the curve a really attractive place to be.

Lance Roberts 1:20:07
I am never confident ever. I just I trade things for what they are. And yes, you know, we’re all making bets. That’s what we do in the investment market. So I’m hoping I’m hopeful that, you know, things are developing the way that we kind of planned out. But again, as we said, our key word this year is audible, so things change will change. But right now, our thesis that we’ve had really, about last half of last year, first part of this year is taking longer to develop than we thought we thought that those rate hikes would have caught up a little bit sooner. But again, what I missed there was that massive amount of money supplied is still within the economy. And so when I started doing research on that, it really kind of shifted my focus a bit, and made me realize that it may take longer for us to reach our thesis than we thought. So it might be a little bit later on this year before it really comes to fruition.

Adam Taggart 1:20:58
Okay, I remember showing a chart on this channel three or four months ago, showing the calculation of when they think the excess savings, at least in sort of consumer bank accounts. retail bank accounts would be fully drained from all of the pandemic stuff. And I think that timeline on it was, like June of this year. I’m just curious, because it sounds like you’ve recently researched this this situation more. Is that still seems sort of like the right time.

Lance Roberts 1:21:34
I think I think June’s too soon, I think it’ll really be probably more fourth quarter ish. Okay. I think that think about it this way. You’ve seen those fountains outside of like hotels and restaurants where there’s a fountain at the top, and then it goes into one bucket. And then it goes down to a bunch of buckets, and it goes down. And that’s really kind of what’s happening is that. And so if I dumped a gallon of water at the top, and the one in the one bucket, that’s the stimulus, well, then it goes into four buckets. So each bucket now has a quarter gallon, and then it goes into eight buckets. So now each bucket only has a 16th of a gallon. So it’s getting diluted in the system. But it just takes a lot longer for it to get through that process. And so that’s the working theory, it’s really hard to put a timeline on it, because we don’t know how fast that money’s moving with certainty through the economy. And if something buckles like SBB or something else, we could see a contraction of spinning all together, which would exacerbate that downturn in monetary velocity. So, you know, again, it’s really hard to say on October the 10th. Oh, absolutely. Yeah. But I do think it’s longer than June. I think June may be a little bit too soon.

Adam Taggart 1:22:43
Okay. All right. All right. Well, look, well, in wrapping things up here. Just want to share a couple of things. First, I want to share an article that was written this week, about Wealthion. In Business Insider, it was a profile on the success of this channel, and how quickly viewership and views have grown. And just sort of the story of what we’re doing here with trying to give people financially nutritious content, you know, not not just the quick soundbite that really doesn’t deliver anything of substance or actionable intelligence that that so often gets seen, certainly on TV, or in quick, you know, 32nd, you know, clips online or whatnot. And how you know, people exactly like you, our viewers, are going online, to self educate, and to try to take greater control over your financial destiny. So I just wanted to flag this because it really shows that the the world is beginning to wake up to what we’re creating here. And again, what we’re creating here is 1,000%, due to you all the viewers, and showing up and watching, obviously, but in your communication and telling us the topics you want to see us cover the experts you want to see on this channel. And all the feedback you give us that help us keep just sort of iterating to deliver the product that you guys say you want. So I just wanted to give you your kudos there.

Lance Roberts 1:24:03
I want you to know you’re really lucky too, because William Edward who works for Business Insider, he’s the guy that wrote the article for you actually call me wanting, wanting a quote from me. And you’re just fortunate that I happened to be out of the office that day. So

Adam Taggart 1:24:17
I noticed there was not a quote from you in the article.

Lance Roberts 1:24:20
So trust me, I had a whole bunch more.

Adam Taggart 1:24:25
All right, well, I’ll show in wrapping up, folks. Just a reminder, the conference is now a week away. No time left to procrastinate anymore. So if you haven’t moved on that yet, move on it right now, especially before the last chance to save discount expires on midnight on Sunday. Just go to wealthion.com/conference and then a reminder as we do every week, especially because things are really beginning to get real. This these are really difficult time for you know, an average investor to navigate all on their own, especially if you have a real life. Right now we’re seeing how events can move faster than people can react to them. Certainly, Silicon Valley Bank just folded faster than anybody in Silicon Valley, you know, had a chance to really take any real action based on it. So, highly recommend you work with a professional financial advisor who’s taking into account all of their macro issues and risks that Lance and I’ve talked about here, putting a bespoke plan together for you based on that and then executing on it for you. If you’ve got a good one, it does that great. Stick with them. But if you don’t, or if you’d like a second opinion from one who does, perhaps even from Lance and his team at real investment advice, schedule a free consultation through Wealthion to talk to one of the financial advisors that we endorse him to do that, just go to wealthion.com Fill out the short form there only takes a few seconds, doesn’t cost you anything, no commitment to work with these guys just a public service that Lance and his team and our other advisors offer. And let’s see Lance, I will give you the final word before we wrap up. What parting bits of advice would you have for folks?

Lance Roberts 1:25:59
Just don’t panic at all freak out right just let’s just get through this until next week. We’ll sort this stuff out next week. We’ll see what happens and then we’ll calmly and professionally exit the building if necessary.

Adam Taggart 1:26:15
Okay, great. And guys, if you enjoy these weekly market recaps as much as Lance and I do, please do us a favor, support this channel by hitting the like button, then clicking on the subscribe button below as well as that little bell icon right next to it, Lance. It’s always wonderful with your buddy. We will be here next week making sense of the latest developments for everybody, everybody else. Thanks so much for watching.

Transcribed by https://otter.ai