Is My Money Safe? | Portfolio Rescue 67

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00:00:02.160 | (upbeat music)

00:00:08.260 | - Welcome back to Portfolio Rescue.

00:00:19.620 | Each week we get questions into our inbox

00:00:21.760 | at askthecompoundshow@gmail.com.

00:00:23.400 | People reach out to us on social media.

00:00:25.400 | We get some YouTube questions.

00:00:26.640 | Sometimes people just shout at us on the street.

00:00:29.080 | And I think we hit a new all-time record

00:00:31.280 | for questions this week.

00:00:32.720 | This is unofficial.

00:00:33.560 | - There's a lot. - That's what I'm putting it in.

00:00:35.000 | And every single question touched on the exact same theme.

00:00:37.760 | Is my money safe?

00:00:38.920 | This is the kind of risk no one knew

00:00:40.920 | they needed to worry about.

00:00:42.160 | And I think that's why so many people

00:00:43.120 | are worried and freaked out

00:00:43.960 | because they thought, well, wait,

00:00:45.320 | this isn't something I ever thought I had to worry about.

00:00:47.560 | Little story here, Duncan.

00:00:49.680 | Six years ago this May, my twins were born.

00:00:52.320 | I have to admit the first three months or so

00:00:53.720 | were basically a blur,

00:00:55.040 | but I still vividly remember the day they were born.

00:00:57.120 | We had it all scheduled in advance

00:00:58.320 | 'cause my wife had a C-section

00:00:59.360 | 'cause of course there's two tiny infants in her stomach.

00:01:02.480 | So we're sitting in the hospital room beforehand

00:01:04.600 | and the anesthesiologist comes in.

00:01:06.560 | We're waiting to go on the OR

00:01:07.600 | and he has to go through his little checklist.

00:01:09.680 | I don't know if they have to tell you this or what,

00:01:11.160 | but here's your potential side effects

00:01:13.800 | from the anesthesia and the surgery, right?

00:01:16.160 | Headache, numbness, nausea, vomiting, whatever.

00:01:19.480 | Itching, it's a bunch of other stuff that's way worse.

00:01:22.480 | - I'm already passed out on the ground at this point.

00:01:24.600 | - Well, he walks us through the probabilities.

00:01:26.080 | Yeah, I'm not good in hospitals either.

00:01:27.520 | One out of every 40,000 people this happens to,

00:01:29.320 | one out of every 5,000 people this happens to,

00:01:31.560 | and he left us with a great line though.

00:01:33.920 | He said, "Listen, I know there's a ton of stuff

00:01:35.360 | "to worry about that could go wrong today,

00:01:36.960 | "but the riskiest thing you ever did

00:01:38.400 | "was drive to the hospital."

00:01:39.720 | He's like, "You guys made it through that.

00:01:40.920 | "You're far more likely to get in an accident

00:01:42.720 | "and have something go wrong in a car

00:01:45.080 | "than in the hospital."

00:01:46.480 | I almost laughed because it reminded me

00:01:48.120 | of the Lloyd Christmas "Dumb and Dumber" line

00:01:50.000 | to Mary Swanson on the way to the airport.

00:01:52.400 | You're, Mary, you're much more likely

00:01:53.760 | to get killed on the way to the airport.

00:01:56.720 | And it kind of reframed the risk for us

00:01:59.680 | of worrying about the stuff that we were worried about,

00:02:02.080 | all the possible things that could go wrong.

00:02:04.040 | I liked the Carl Richards quote he wrote once,

00:02:06.240 | "That risk is what's left over

00:02:07.480 | "after you've thought of everything."

00:02:09.000 | It kind of seems like that's what this week feels like.

00:02:11.440 | There's the old saying, "We make plans and God laughs."

00:02:14.640 | I think it's the financial version of this

00:02:16.680 | is Wall Street strategists make an annual outlook

00:02:19.720 | and God laughs because people are writing

00:02:21.720 | the "What to Expect for 2023" reports.

00:02:25.040 | No one had bank runs listed, right?

00:02:26.800 | Bank failures, bank runs, potential financial crisis

00:02:29.120 | in the finance sector.

00:02:30.760 | And of course, regular people weren't planning

00:02:32.360 | on worrying about the amount of money in their bank account.

00:02:35.120 | We had people, regular people email us in and say,

00:02:37.760 | "Listen, I was supposed to get paid on Friday,

00:02:40.760 | "but my paycheck is administered through SVB Bank, right?

00:02:44.580 | "And I didn't get paid.

00:02:46.120 | "I had to wait till Monday or Tuesday to get paid

00:02:47.620 | "until things got figured out."

00:02:49.200 | So based on the amount of questions

00:02:50.520 | that came pouring in this week,

00:02:51.340 | a lot of people are worried about the safety of their cash.

00:02:53.720 | So we're gonna go through a bunch of those today.

00:02:55.000 | So let's get into it.

00:02:56.060 | - Okay, so first up today, we have a question from Sean.

00:03:02.640 | Did VCs really cause the SVB bank run via Twitter?

00:03:06.240 | What impact does this have on trust in banks?

00:03:08.280 | And this, I threw this part in

00:03:10.020 | because this is what we were talking about.

00:03:11.460 | Is causing a bank run a criminal offense

00:03:13.300 | or is there any culpability here?

00:03:14.960 | - Okay, let's bring in some help right away on this.

00:03:19.820 | - Yeah, I really demand to be heard on this topic.

00:03:24.840 | - Wait, I do have stuff to say on this.

00:03:27.460 | Can we go back one topic though?

00:03:29.360 | I like that story that you told, Ben.

00:03:32.720 | So the doctor was like, "Listen, as risky as this is,

00:03:36.280 | "it's nothing compared to driving on the highway."

00:03:38.880 | I think that's a really...

00:03:40.520 | You know, Barry does all those slides in his presentation

00:03:43.080 | about like, you're more likely to be bit and killed

00:03:47.240 | by a mosquito than a shark.

00:03:49.080 | And like all the risks that are clear and present

00:03:52.240 | right in front of our face are not necessarily

00:03:55.000 | the risks most likely to put us away.

00:03:58.200 | I think that's a really good, it's a really good analog.

00:04:01.160 | The biggest risk I ever took

00:04:02.680 | was going to a Mexican hospital during spring break.

00:04:07.120 | And I sprained my wrist

00:04:10.480 | and the doctor was wrapping up my wrist

00:04:13.720 | and he had a lit cigarette dangling from his mouth.

00:04:16.840 | And then we went to the Mexican pharmacy

00:04:20.640 | for the pain pills.

00:04:23.480 | And that was probably the second biggest risk I ever took

00:04:26.240 | 'cause I didn't even like know what the prescription was.

00:04:28.980 | I just started taking them

00:04:30.640 | and still being out on spring break drinking.

00:04:33.160 | And probably that was a bigger risk

00:04:35.160 | than driving on the highway in Grand Rapids, Michigan.

00:04:38.280 | So like that, you know, for me, like once I got through that

00:04:41.720 | I don't worry so much about all the risks these days.

00:04:44.040 | You know what I'm saying?

00:04:45.040 | - Cheap healthcare though for you.

00:04:46.360 | Your healthcare bill is much cheaper than ours.

00:04:47.680 | - I mean, I wouldn't have known the difference.

00:04:50.340 | I was probably 18.

00:04:51.240 | I don't even know who was paying for it

00:04:52.680 | or how it got paid for.

00:04:54.080 | I just, you know, it's one of those things.

00:04:56.420 | All right, I'm really excited to be on the show today.

00:04:58.600 | Did Twitter, people on Twitter cause the bank run?

00:05:01.240 | Yes.

00:05:02.080 | - Kind of.

00:05:04.400 | - Who could argue with that?

00:05:05.960 | Of course they did.

00:05:06.880 | Who else did it?

00:05:07.720 | - Do we want to name names?

00:05:08.540 | Is there anyone particularly responsible?

00:05:09.800 | - Anyone that felt that it was necessary

00:05:12.860 | to not only tell their portfolio companies

00:05:16.240 | behind the scenes to remove capital,

00:05:18.960 | but then to broadcast that

00:05:20.680 | in some sort of reverse virtue signal.

00:05:23.800 | Yeah, you did it.

00:05:24.640 | It was you.

00:05:25.460 | You were part of it.

00:05:26.300 | - Do you think though that,

00:05:27.140 | so we've been talking about the blame game all week.

00:05:29.600 | Do you think that there's anything that they can do

00:05:31.560 | to have safeguards in place?

00:05:32.740 | Or is this just the sort of psychological event

00:05:35.120 | that you can't plan for?

00:05:36.040 | Like they have circuit breakers in the stock market.

00:05:38.620 | Do you think that would ever make sense in a bank?

00:05:40.880 | Or is that, does that kind of go against the whole idea

00:05:43.560 | of well, I need my money, it's mine.

00:05:45.240 | Could anything like that ever slow this down?

00:05:48.480 | - I don't think it,

00:05:51.240 | I don't think that absent Twitter,

00:05:54.680 | there would not have been any issue

00:05:56.680 | because there were short sellers

00:05:58.840 | who had been looking at the balance sheet

00:06:01.160 | and the income statement of this company

00:06:03.080 | for like six quarters now

00:06:05.160 | and saying something's going on here.

00:06:07.680 | Like deposits were already quietly leaving.

00:06:11.040 | That's true.

00:06:12.080 | Pre the blow up on Twitter.

00:06:14.680 | That's so, that's one thing.

00:06:16.120 | And the second thing is they were severely offsides

00:06:18.680 | in their bond portfolio.

00:06:20.120 | You can't have $90 billion in treasuries

00:06:22.920 | and no interest rate hedges,

00:06:24.740 | especially if you have that homogenous of a depositor base.

00:06:29.740 | Like everyone in the depositor base lives in the same area

00:06:35.520 | and does the same thing for a living.

00:06:37.160 | Like you can't, so there were always issues.

00:06:40.160 | I'm not saying like Twitter is at fault

00:06:42.160 | for the bank having issues.

00:06:44.280 | Twitter definitely accelerated the meme

00:06:48.160 | of pull your money out of Silicon Valley Bank.

00:06:50.440 | - The trust thing going forward I think is interesting

00:06:53.040 | because I've been hearing this from a lot of people

00:06:55.280 | who never pay attention to the financial markets

00:06:57.280 | or the banking system.

00:06:58.540 | And I really can't tell if this is something

00:07:00.680 | people pay attention to for two weeks

00:07:02.700 | and then they move on to their lives

00:07:03.640 | and worry about the next thing.

00:07:04.960 | Or if this is something that will actually seep

00:07:07.120 | into people's psyche and they will go,

00:07:09.120 | wait a minute, if I'm gonna have to think about this

00:07:10.800 | all the time, I'm gonna be more thoughtful

00:07:12.000 | about where I have my money.

00:07:14.800 | - It's such a great question.

00:07:16.560 | People learn, but they don't really learn.

00:07:18.920 | Or they learn, but they don't really change.

00:07:21.520 | In America, we have prioritized convenience

00:07:24.920 | over everything else, which is like,

00:07:27.400 | you think about like internet passwords.

00:07:29.880 | People have the same password for every website.

00:07:33.160 | 'Cause it's not realistic that you're gonna come up

00:07:35.960 | with 80 different passwords for 80 different apps.

00:07:39.560 | So it's just like, this is the system that we have.

00:07:41.820 | With banks, it's not gonna be much different.

00:07:44.660 | Like as much as we all learned from Lehman,

00:07:47.720 | MF Global was three years later.

00:07:49.720 | You can't really eliminate all risk

00:07:53.860 | from financial institutions.

00:07:56.880 | You can't really have perfect trust in the financial system.

00:08:00.540 | It's not realistic to think that that's even possible.

00:08:03.860 | And so community banks will always be slightly riskier

00:08:09.680 | than money centers, but money center banks are risky too.

00:08:13.920 | And people will eventually default

00:08:16.240 | to whatever's the most convenient and easiest solution.

00:08:20.360 | So I don't think the idea of local banking

00:08:23.460 | is gonna completely disappear.

00:08:24.980 | In fact, the events of this week might make it

00:08:27.420 | so that there's almost no advantage

00:08:29.860 | for any bank in terms of safety.

00:08:32.420 | Like we just might have seen the,

00:08:35.880 | we might have witnessed FDIC insurance becoming unlimited.

00:08:40.060 | >> Right, all right, Duncan, next question.

00:08:42.220 | >> Okay, up next we have a question from Alex.

00:08:46.100 | My wife and I have the bulk of our investments

00:08:47.920 | in two accounts.

00:08:48.940 | Is this a dumb practice?

00:08:50.260 | Should we be more diversified with our institutions?

00:08:53.120 | We've been discussing this for a while and after SBB,

00:08:55.980 | it's brought the discussion back to the kitchen table.

00:08:58.860 | I understand that the FDIC insures up to 250,000,

00:09:01.860 | but once you get north of that,

00:09:03.140 | are there any best practices for what to do?

00:09:05.700 | And the second part of this was from another listener.

00:09:09.180 | If a brokerage fails, what happens to customers' holdings?

00:09:12.940 | >> So before Ben jumps in, just real quick,

00:09:15.820 | brokerage and bank are two separate things.

00:09:18.980 | FDIC and SIPC are not the same thing.

00:09:22.180 | So there's a very important distinction there.

00:09:24.860 | And then like what I would basically just say,

00:09:29.040 | very, very, very simply,

00:09:31.180 | again, based on the events of this week,

00:09:33.860 | I don't think FDIC insurance

00:09:35.380 | is really going to matter anymore.

00:09:37.040 | Because if they were willing to bail out

00:09:39.420 | the people who had bank accounts at Signature

00:09:42.940 | and at Silicon Valley,

00:09:44.560 | how could they discriminate against the next bank

00:09:47.900 | that comes along, their depositors?

00:09:51.500 | So I almost think like it's de facto now a moot point.

00:09:55.460 | If you have money in a bank and the bank screws up,

00:09:58.300 | you're probably okay.

00:09:59.580 | Last thing,

00:10:01.540 | it's not as though Silicon Valley's bank balances

00:10:05.420 | were going to be wiped out to zero.

00:10:07.820 | This is more like,

00:10:08.980 | do they have to take a five or a 10% haircut?

00:10:12.440 | That's what we're talking about.

00:10:13.900 | This is not a bank that had a gaping black hole of losses.

00:10:17.900 | They had a treasury bond portfolio

00:10:20.380 | that if held to maturity, would have been money good.

00:10:23.520 | So this was never about like,

00:10:25.260 | oh my God, my savings were wiped out by a bank.

00:10:27.740 | >> Yeah, this was about the bank of Sam Venkman Freed.

00:10:30.460 | >> No, and so I think there's a lot of misunderstanding

00:10:34.020 | about that in the public.

00:10:35.100 | They think like, oh, the bank was insolvent,

00:10:37.520 | meaning the deposits were going to be wiped out to zero.

00:10:40.900 | None of that was ever on the table

00:10:43.780 | or was ever going to happen.

00:10:45.500 | >> So we've gotten questions like this

00:10:47.020 | on the brokerage angle before in the past.

00:10:48.580 | What if Vanguard or Charles Schwab

00:10:50.780 | or Fidelity or Robinhood go under?

00:10:52.900 | What happens to my securities?

00:10:54.580 | And people have actually asked us that in the past

00:10:56.380 | and we've got a lot of questions on it this week

00:10:58.540 | saying, you know, I'm scared here.

00:11:01.140 | And I think the people are conflating the two,

00:11:03.620 | to your point about brokerages versus banks.

00:11:05.820 | It's not like a brokerage can take your money

00:11:08.420 | and that, or take your securities

00:11:10.340 | and lend them out on your behalf and speculate.

00:11:13.380 | So that, it's kind of, they're the third party.

00:11:15.180 | >> Well, FTX did that.

00:11:16.460 | That's what FTX literally did.

00:11:18.700 | >> If you're not in the bank of Bernie Madoff

00:11:20.260 | or Sam Venkman Freed.

00:11:22.300 | >> That's right.

00:11:23.140 | >> These are third party custodians.

00:11:25.580 | The SEC has consumer protection rules in place.

00:11:28.540 | And I guess the way to think about it is

00:11:30.940 | if you own a stock or a bond or a mutual fund or an ETF,

00:11:33.880 | wherever you hold it, as long as it's not

00:11:35.580 | the bank of Madoff, those holdings are yours.

00:11:39.060 | And if something ever happened

00:11:39.900 | to the underlying financial firm,

00:11:42.220 | you still own those holdings.

00:11:43.740 | It's not like they can take them from you

00:11:45.780 | in a creditor or something if the bank went under

00:11:48.180 | or the financial firm went under.

00:11:49.020 | >> So here's something interesting.

00:11:50.780 | I don't think this is as prevalent now,

00:11:55.260 | but back in the day, there was a difference

00:11:57.300 | between holding securities in your own name

00:11:59.900 | versus holding them in street name.

00:12:02.140 | And when you hold them in your own name,

00:12:04.100 | you are deliberately, so the brokerage firm

00:12:06.940 | typically defaults to your securities.

00:12:09.740 | So let's say Ben has an account at a brokerage firm.

00:12:12.820 | And in that account, he owns shares of Meta

00:12:16.260 | and Goldman Sachs and Amgen.

00:12:19.180 | Those are his three stocks.

00:12:21.820 | The default is that the brokerage is holding

00:12:25.700 | those securities for Ben in street name,

00:12:29.580 | which means they basically have them sitting there

00:12:34.580 | in an account that short sellers could borrow

00:12:38.380 | those stock certificates to use them

00:12:40.100 | to sell it short, et cetera.

00:12:42.660 | Now, if you want to be very specific,

00:12:44.860 | you could say, put those in my name, not in street name.

00:12:48.740 | And you can literally instruct the brokerage firm

00:12:51.780 | as the custodian of your securities

00:12:53.980 | to move those into what they call the vault

00:12:56.300 | or move those into your own name or whatever.

00:12:58.620 | So like, this is the kind of thing

00:13:00.500 | that's like a little bit confusing for people.

00:13:03.020 | But what Ben said is the main point.

00:13:05.460 | They don't have the right to turn your securities

00:13:07.660 | into their securities.

00:13:09.300 | They can't use your securities as part of like

00:13:13.180 | some bigger trade or speculation they're doing.

00:13:15.980 | However, on the bank side, it is that way.

00:13:19.380 | They can literally take your cash

00:13:21.340 | and invest your cash into contracts,

00:13:25.420 | into bonds, into stocks.

00:13:28.220 | So that's a very different phenomenon.

00:13:30.900 | And that's why the sell-off in Schwab

00:13:33.260 | made absolutely no sense to me.

00:13:35.460 | Because yeah, Schwab has a bank,

00:13:37.780 | but that is a securities business.

00:13:41.020 | And people's securities portfolios were not at risk.

00:13:45.620 | - Yeah, and if all of a sudden people started showing up

00:13:47.940 | and their securities were gone for whatever,

00:13:50.500 | I mean, this is the kind of thing--

00:13:51.940 | - Jail.

00:13:52.780 | - Right, yeah, that's not gonna happen.

00:13:56.140 | - So Cliff beat me to this in the chat,

00:13:58.300 | but I was gonna ask,

00:13:59.180 | can you still get a paper certificate for stocks?

00:14:02.260 | Would that be safer?

00:14:04.660 | I just had a stack of them in my apartment.

00:14:06.620 | - You can, you have to ask for it.

00:14:08.340 | You have to request it.

00:14:09.540 | - I think you also have to put a panic room

00:14:11.020 | in your house, though, to store them.

00:14:13.060 | Otherwise--

00:14:13.900 | - I would just keep it with all my precious metals.

00:14:16.100 | - You know what you get a paper stock certificate for?

00:14:19.220 | Instagram, like you want to--

00:14:21.860 | - They are cool, they're pretty cool.

00:14:23.660 | - You ever see like five years ago,

00:14:25.700 | Kanye West bought Kim Kardashian an anniversary present.

00:14:30.260 | He bought her, she had physical stock certificates

00:14:34.340 | for Google, Disney, Apple, all these stocks,

00:14:37.700 | and she posted that to the 'Gram.

00:14:39.660 | And that was kind of cool

00:14:41.780 | because I think it encouraged young people

00:14:44.540 | to want to invest.

00:14:46.820 | So I kind of feel like that's what you would do,

00:14:48.860 | something like that.

00:14:50.620 | When I was new in the business,

00:14:52.820 | we would buy client shares of Disney

00:14:55.220 | and then have the stock certificate sent to them.

00:14:57.820 | And they would like give it to their son or daughter

00:15:00.940 | and like frame it in like a nursery or something.

00:15:03.900 | Other than that, there's no real purpose.

00:15:05.660 | - I think I mentioned last week, Duncan,

00:15:06.820 | I gave a talk to a high school recently.

00:15:09.140 | And as a thank you, they sent me like a share,

00:15:11.620 | one share of Disney in a little certificate.

00:15:14.220 | So you actually, I can't remember the name of the company,

00:15:15.940 | you can do that.

00:15:16.940 | - Yeah, I've seen that before.

00:15:18.140 | Atari has really cool ones too.

00:15:19.620 | I've seen those, you can buy them on Etsy.

00:15:21.900 | - All right, let's do another one.

00:15:23.340 | - But they're not, this is important,

00:15:24.860 | they're not like bearer bonds.

00:15:26.740 | - Right, it's not like diehard,

00:15:27.700 | you can steal them from someone.

00:15:28.860 | - Right, like if Duncan has one share of Disney

00:15:31.140 | or Ben has one share of Disney,

00:15:32.940 | I can't take that and then go turn it in for the money.

00:15:35.940 | That's not how it works.

00:15:39.340 | - So not really that useful.

00:15:40.940 | - It's not like Heat, the movie Heat, right?

00:15:43.540 | Where like you could steal a tranche of stock certificates

00:15:47.460 | and then turn them in some way.

00:15:48.300 | - I'll abandon my movement

00:15:49.140 | to bring back paper stock certificates then.

00:15:51.500 | Okay, and part of that question

00:15:53.980 | was from Handle Crispy Delicious.

00:15:56.580 | So I forgot to shut him out.

00:15:58.180 | - Yeah, it was a Twitter question, I think.

00:15:59.820 | - Okay, so up next we have a question from Matthew.

00:16:02.180 | The Federal Home Loan Bank of San Francisco

00:16:04.860 | has a lot of exposure to SVB and other similar banks

00:16:07.860 | based on public SEC filings.

00:16:09.820 | My money market fund has approximately 20% of its holdings

00:16:13.260 | in FHLB securities as of February 28th.

00:16:16.100 | Should I be concerned?

00:16:17.620 | I understand FHLB is a GSE.

00:16:20.100 | Y'all will have to explain that one.

00:16:21.180 | I don't know what that means.

00:16:22.320 | Just like Fannie and Freddie,

00:16:23.780 | who I'm sure you remember from the GFC,

00:16:26.220 | Global Financial Crisis for people watching.

00:16:29.260 | The second largest bank failure in U.S. history

00:16:31.460 | is enough of a low probability event for me.

00:16:33.580 | Just want your thoughts on if I should be concerned

00:16:35.660 | with other low probability events

00:16:37.060 | like something non-crypto breaking the buck because of SVB.

00:16:40.540 | - GSE is a government sponsored enterprise,

00:16:42.980 | something like that.

00:16:43.900 | - Okay.

00:16:44.780 | I was gonna say entity, is it enterprise?

00:16:46.780 | Yeah, it's one or the other.

00:16:48.180 | Okay.

00:16:49.020 | - The Wall Street Journal had a piece on this.

00:16:50.780 | - Wait, Ben, is FHLB is,

00:16:54.540 | so when he says securities, he owns bonds.

00:16:57.820 | - Yes, I think he's saying that,

00:16:59.740 | so the Wall Street Journal had a piece on this

00:17:01.340 | and they said that FHLB basically

00:17:06.340 | underwrote some of those bonds, I think,

00:17:08.660 | and they said that they gave them like 13 billion in bonds,

00:17:11.680 | but they had to pledge 45 billion in collateral for that.

00:17:14.700 | So the Wall Street Journal piece,

00:17:15.980 | and the FHLB of San Francisco did put out a statement on it

00:17:19.900 | and they basically said,

00:17:20.740 | "We're a AAA rated financial institution.

00:17:23.180 | "Don't worry about it."

00:17:24.660 | I think this is, it sounds like it's pretty insulated.

00:17:28.020 | This just seems pretty far down the line

00:17:29.540 | in terms of worries that,

00:17:31.060 | and it never really got to the point, I think,

00:17:33.120 | where they've had to worry about this yet.

00:17:35.340 | So I think reaching the money market,

00:17:37.100 | we got another question on money markets coming up,

00:17:38.740 | but this seems to me like another one

00:17:41.340 | of those systemic issues that,

00:17:43.300 | do you really think that the Fed

00:17:44.740 | would allow one of their regional banks

00:17:46.580 | to sort of be left holding the bag here?

00:17:49.140 | No, of course not.

00:17:49.980 | There's a debate to be had

00:17:51.820 | whether or not there should be a such thing as a GSE.

00:17:54.580 | I think like in the '30s, '40s, '50s, '60s,

00:17:58.000 | they were trying to encourage

00:18:00.420 | the suburbanization of America.

00:18:02.580 | They were actively looking to move people

00:18:04.460 | out of apartment buildings

00:18:05.780 | and move them into the suburbs and buy homes

00:18:08.460 | and buy automobiles and have kids

00:18:10.780 | and have public schools built.

00:18:12.980 | And in that environment

00:18:15.380 | where we were basically building something

00:18:16.900 | that didn't exist, you really needed Fannie, Freddie.

00:18:20.740 | Now they back the entire mortgage market.

00:18:23.220 | There's not even an alternative to Fannie and Freddie.

00:18:26.020 | So I think these things are less risky,

00:18:29.320 | if that makes sense to you,

00:18:30.580 | rather than more risky in a crisis especially.

00:18:35.340 | This is the type of paper that people are clamoring for

00:18:39.180 | to own in what feels like a private market crisis.

00:18:44.180 | The government is not gonna let their own agencies go under.

00:18:46.660 | No.

00:18:47.540 | By the way, fun fact,

00:18:49.740 | do you know why the government was so intent in the 1950s

00:18:54.340 | on moving people out into the suburbs from the cities?

00:18:58.620 | McDonald's?

00:18:59.500 | I don't know. No, communism.

00:19:00.960 | This is true.

00:19:03.000 | There was this red scare

00:19:05.860 | and the politicians were terrified

00:19:07.900 | that we were gonna get these communist uprisings

00:19:10.100 | like they had all over Europe.

00:19:11.600 | Europe basically didn't have suburbs.

00:19:15.120 | They had farms and cities.

00:19:17.020 | So the idea was if people own property,

00:19:19.700 | they're less likely to become communists.

00:19:22.300 | This is a true story.

00:19:24.920 | No one's driving to a protest.

00:19:26.660 | You know what I mean?

00:19:27.980 | Literally.

00:19:28.820 | If you rent in an apartment building,

00:19:32.340 | you're more likely to be persuaded,

00:19:34.540 | but not modern,

00:19:36.900 | to be persuaded by these socialist uprisings

00:19:40.460 | versus if you own land, right?

00:19:43.420 | You own a car, own a dishwasher.

00:19:45.900 | You're not running off to join a communist mob.

00:19:48.140 | I'm putting the pieces together here

00:19:49.620 | about why everyone says that Millennials and Gen Z

00:19:52.140 | are communists because the last time they built--

00:19:54.140 | 'Cause they live in the city.

00:19:55.500 | No, the last time they built a bunch of homes

00:19:57.140 | was the 1950s.

00:19:58.020 | So maybe the Millennials are trying to get the government

00:20:00.420 | to build more affordable housing.

00:20:03.420 | If you want to keep the status, right,

00:20:05.380 | if the boomers want to keep the status quo

00:20:07.340 | for the next 20 years until they're all gone,

00:20:09.780 | the smartest thing to do is help turn the Millennials

00:20:12.580 | into homeowners as quickly as possible.

00:20:15.060 | Otherwise, full-blown AOC-style collective farms.

00:20:20.060 | We're gonna revolt.

00:20:22.980 | Yeah, Duncan's gonna be leading the charge.

00:20:24.540 | This isn't live, right?

00:20:25.640 | We could edit this?

00:20:26.900 | Yeah, we'll edit this after.

00:20:28.860 | All right, let's do another one.

00:20:31.020 | Okay, up next, we have a question from Travis.

00:20:34.700 | I'm considering keeping our emergency fund

00:20:36.680 | in a money market fund.

00:20:38.300 | Is this too risky without it having FDIC insurance?

00:20:41.500 | I hope you guys can help me understand this

00:20:43.060 | because I still don't understand the point

00:20:44.740 | of a money market fund, really, what purpose it serves.

00:20:48.600 | So this is another one there.

00:20:51.060 | I feel like a lot of these questions come down to

00:20:52.940 | we have the rules and regulations in place

00:20:54.860 | that are written down on the books,

00:20:56.460 | and then we have the unspoken ones

00:20:57.980 | that you have to kind of use common sense for,

00:20:59.940 | and we can't make any guarantees or promises.

00:21:02.180 | But with stuff like this,

00:21:03.020 | if you think about the Prime Fund broke the buck in 2008

00:21:05.460 | 'cause Lehman failed,

00:21:06.860 | and that caused a run on money markets.

00:21:09.100 | They have done, they have put new rules

00:21:11.420 | and regulations in place.

00:21:12.380 | They actually did.

00:21:13.360 | There's some sort of, they try to keep the NAV,

00:21:16.300 | but some of them can float now.

00:21:18.020 | But also, they allow some of these monies

00:21:19.780 | to put gates on 'em, right?

00:21:20.740 | I think 2016, they put some new regulations in place

00:21:23.220 | that would allow these funds to be gated

00:21:25.860 | if there was a run.

00:21:27.020 | So they did change the rules on these a little bit.

00:21:30.220 | - We should talk about why the money market fund,

00:21:34.780 | the Prime Fund, which was one of the most prominent,

00:21:37.420 | most widely used money market funds broke the buck.

00:21:43.060 | And there was like a good reason.

00:21:45.380 | They were jammed with commercial paper.

00:21:48.260 | And commercial paper is like seven day debt.

00:21:52.020 | The way to think about it is like the grease

00:21:54.360 | that allows commerce to take place.

00:21:56.740 | It's like how money moves around very quickly

00:21:59.600 | between corporations.

00:22:00.440 | - These repo things and yeah.

00:22:02.140 | - Yeah, it's not right.

00:22:03.220 | It's not like a long-term bond.

00:22:04.660 | It's like, look, for seven days,

00:22:05.980 | I need you to float this much capital.

00:22:08.100 | And so there's a trading market for this kind of paper.

00:22:11.620 | And the commercial debt market froze up.

00:22:14.700 | One of the major warning signs

00:22:16.460 | that the Fed should have been paying more attention to

00:22:19.020 | in '06 and '07 and wasn't.

00:22:21.500 | Well, you better believe they pay a ton of attention

00:22:24.460 | to the overnight repo markets,

00:22:26.180 | the seven day funding markets, commercial paper.

00:22:30.300 | So again, this is like the,

00:22:31.620 | it's less likely we'll be a victim

00:22:35.220 | of whatever the problem was from the last war.

00:22:38.040 | And all generals fight the last war.

00:22:40.640 | So I wouldn't worry tremendously about money market funds.

00:22:44.580 | But yeah, anything that you're doing

00:22:46.900 | to get a quote, better rate of return than somebody else,

00:22:50.900 | or then what is standard,

00:22:52.820 | obviously is gonna carry a little bit more risk.

00:22:56.260 | So you always wanna say like,

00:22:57.660 | what is the risk worth taking?

00:22:59.600 | If it's for two extra basis points,

00:23:01.980 | probably not worth the risk.

00:23:04.220 | If it's for 20 extra basis points,

00:23:06.800 | I don't know how much money is at stake.

00:23:08.500 | There's a conversation to be had there.

00:23:10.540 | - I looked this up and the Investment Company Institute

00:23:12.700 | says there's $5 trillion in these funds.

00:23:14.580 | It's a lot of money.

00:23:15.560 | They broke them up into like government

00:23:17.040 | and institutional and retail,

00:23:18.140 | and like 2 trillion is in retail.

00:23:20.220 | I mean, excuse me, there's a ton of options.

00:23:22.580 | You have online savings accounts.

00:23:24.300 | You can put your money in T-bills.

00:23:25.340 | I mean, if you want the safest savings account,

00:23:27.460 | there is a T-bill is pretty close.

00:23:29.140 | Maybe not as liquid as like an overnight savings account.

00:23:31.220 | IBON, CDs, there's all these things you can put it in.

00:23:33.740 | The good news is,

00:23:34.860 | I hate to like denigrate anyone

00:23:36.180 | who's worried about this stuff,

00:23:37.020 | but it almost feels like people who make $50,000 a year

00:23:39.940 | worried about billionaires getting taxed too much, right?

00:23:42.820 | Because how many of us actually have 250K sitting in cash?

00:23:47.000 | Not many.

00:23:47.840 | I know it's businesses do.

00:23:49.100 | That's the good thing you have to think about.

00:23:50.540 | Obviously, you don't wanna keep all your money

00:23:52.060 | just sitting in a checking account,

00:23:53.620 | but there are so many different ways,

00:23:55.300 | easy ways that you can manage your cash these days.

00:23:58.600 | The good news is,

00:23:59.780 | outside of the actual rules and regulations,

00:24:01.900 | it's pretty easy for people to keep their cash safe

00:24:04.060 | if that's really a huge worry.

00:24:05.700 | - Can I say one other thing,

00:24:06.820 | just as like a capper to this whole conversation?

00:24:10.820 | I totally understand why people are worried about this stuff

00:24:15.060 | because it's a nightmare scenario.

00:24:17.340 | You trade years of your time, maybe decades of your time,

00:24:20.960 | try to save money.

00:24:22.000 | It's so hard to do with the cost of everything,

00:24:24.820 | especially you have kids, you have real estate.

00:24:28.040 | It's so hard to save money.

00:24:29.540 | You manage to, and then there's like this nightmare

00:24:32.100 | that like some force beyond your control

00:24:34.700 | can take it all away.

00:24:36.220 | I want people to understand that

00:24:37.420 | that doesn't actually happen.

00:24:39.620 | Like the history of the modern history of the United States

00:24:43.100 | is not one in which people wake up one day

00:24:46.060 | and some asshole banker ruined their lives.

00:24:49.260 | We just don't have this as part of our system.

00:24:53.620 | So yeah, of course, it's understandable

00:24:56.420 | why people should worry,

00:24:58.060 | but don't fixate on this to the point where

00:25:00.660 | like you need Xanax so you can't sleep at night.

00:25:03.140 | It's not actually gonna happen to you.

00:25:05.300 | - Yeah, the weird thing is that faith and trust

00:25:07.340 | are so much a bigger part of this whole financial system

00:25:10.220 | that if the regulators and the government

00:25:12.160 | ever allowed that faith to be truly broken

00:25:14.720 | by people having their assets--

00:25:15.560 | - It's a civil war.

00:25:16.380 | - Seized somehow.

00:25:17.220 | Yeah, the whole system would cease to work.

00:25:19.300 | It would all seize up and it wouldn't,

00:25:21.560 | it really wouldn't work anymore.

00:25:23.780 | - Yeah, I think people should understand like,

00:25:27.980 | imagine that happened to you and not your neighbor

00:25:30.220 | because you banked at two different banks.

00:25:32.980 | What the hell is that?

00:25:34.680 | - Right, how fair to them, yeah.

00:25:37.060 | - Come on, that's not,

00:25:38.640 | Matt Levine made a really good point.

00:25:40.540 | Somebody was saying, maybe Cliff was talking about

00:25:44.700 | like the more, I'm not on Twitter, I don't even know.

00:25:46.620 | Somebody was saying the moral hazard like

00:25:48.900 | of bailing out the depositors at one bank,

00:25:52.460 | you're sending the wrong message that,

00:25:54.380 | you know what, banks are one of these things

00:25:57.100 | that are just supposed to work.

00:25:59.300 | It's not like an investment in a mutual fund.

00:26:01.220 | You're not supposed to have to read the fine print

00:26:04.380 | in a federally chartered or a state chartered bank.

00:26:07.960 | It's just supposed to work.

00:26:09.600 | And by work, I don't mean you get the highest rate.

00:26:11.580 | I mean, your fucking money is there

00:26:13.860 | when you need your money.

00:26:14.980 | Like that's how it's supposed to work.

00:26:17.580 | So I don't think there's any moral hazard

00:26:19.620 | in making sure that that works.

00:26:21.420 | I just, I don't see it in this case.

00:26:23.440 | - There've been quite a few comments

00:26:25.260 | on our videos recently about Silicon Valley Bank

00:26:29.340 | of people kind of indicating that

00:26:31.460 | this was a bailout for the rich

00:26:33.180 | and that this is gonna somehow hurt the average person.

00:26:35.980 | Is there any truth to that?

00:26:37.620 | Or is that just a misunderstanding?

00:26:38.460 | - The first part is true, the second part is not.

00:26:41.000 | - Okay. - Right.

00:26:42.140 | - And that's because this is not tax-backed.

00:26:45.040 | - People probably have more protection now

00:26:46.380 | than they did before this happened.

00:26:48.140 | I think, so-

00:26:50.580 | - This is why we have to stop playing this class,

00:26:53.220 | this classism, this game.

00:26:54.900 | It doesn't, in the end, it doesn't work for,

00:26:57.100 | yes, it's true that most of the signatories

00:27:00.020 | for the bank accounts at Silicon Valley Bank

00:27:02.520 | are on the wealthier end of the spectrum, of course.

00:27:05.840 | If you have millions of dollars in a bank

00:27:07.980 | for your corporation,

00:27:09.400 | and you are the head of the corporation,

00:27:11.980 | obviously you are, quote-unquote, the rich.

00:27:15.300 | However, if that deposit is lost,

00:27:18.980 | you're probably closing your corporation,

00:27:21.280 | you're probably retaining some money,

00:27:23.460 | the people you're firing get nothing out of the deal.

00:27:26.480 | So we really have to stop playing this game.

00:27:28.860 | It really doesn't, it doesn't work for anyone

00:27:31.980 | if we start blowing up bank accounts.

00:27:34.740 | - Right, like I said- - Peeling it at the story.

00:27:35.780 | - We heard from a few people who said,

00:27:37.060 | I did not get my paycheck on Friday.

00:27:38.860 | I was supposed to get paid,

00:27:40.140 | and I was supposed to run through SVB,

00:27:42.080 | and I had to worry all weekend about getting my paycheck,

00:27:44.620 | and this isn't some executive at a bank.

00:27:46.180 | This is a regular person who just needed their money,

00:27:48.980 | and was sweating out all weekend getting their paycheck.

00:27:52.380 | - Seth in the chat says,

00:27:54.420 | why would a deposit make interest if there's no risk?

00:27:57.200 | Is that a fair point?

00:27:59.060 | What would you say to that?

00:27:59.900 | - Well, I mean, how many checking accounts

00:28:01.660 | actually pay interest, right?

00:28:03.100 | - They barely do.

00:28:04.900 | - And so the things that you do get paid for,

00:28:07.220 | and yeah, T-bills are taking a risk,

00:28:09.300 | 'cause that's interest rate risk or inflation risk.

00:28:11.100 | So yeah, anything, anything that you put your money into

00:28:13.580 | is taking a little risk,

00:28:14.500 | but putting your money in a checking account

00:28:16.660 | is you're not actually taking any risk there, right?

00:28:19.360 | You're not expecting to earn any reward at least.

00:28:23.560 | - Right.

00:28:24.400 | - All right, I think we got one more.

00:28:25.220 | - Okay, last but not least, we have a question from Tim.

00:28:27.780 | This banking crisis has to make it more likely

00:28:29.700 | that we see a recession, right?

00:28:31.260 | - My initial read on this whole thing was that-

00:28:34.220 | - Wait, say it again.

00:28:35.220 | Say it one more, you guys flashed that too fast for me.

00:28:38.400 | I don't process at that speed.

00:28:40.220 | The banking crisis has to make it more likely.

00:28:42.540 | Yes, more likely, definitely.

00:28:44.980 | Ben, do you agree?

00:28:46.300 | - Yeah, no, I think that any time you,

00:28:48.940 | if credit is gonna contract in any way,

00:28:51.540 | or if people just, their lack of trust in risk-taking

00:28:54.720 | goes down, that's deflationary to me.

00:28:57.380 | And I think that has to-

00:28:59.120 | Yeah, recession is much higher likelihood

00:29:01.340 | than it was 10 days ago, I think.

00:29:03.460 | - Yeah, it doesn't mean it seals our fate,

00:29:05.860 | but it's a disinflationary shock.

00:29:08.380 | It 100% changes people's sentiment,

00:29:11.940 | probably changes some people's behavior.

00:29:14.300 | It's like a wake-up call for people

00:29:17.280 | that haven't worried about this ever in their life.

00:29:20.060 | All of a sudden, it makes it more likely.

00:29:24.100 | Statistically, I don't think either of us

00:29:26.080 | really have a strong view.

00:29:27.580 | Is it 5% more likely, 50?

00:29:29.980 | I don't know.

00:29:30.820 | - I went from 38 to 40.

00:29:32.340 | - More.

00:29:33.180 | - Why is the stock market up today, Ben, though?

00:29:34.740 | If people think the recession's more likely than-

00:29:37.500 | - The stock market priced in a recession last year.

00:29:39.580 | I don't know if you've been-

00:29:40.700 | I don't know if anybody remembers 2022 anymore.

00:29:43.340 | - I mean, my portfolio didn't,

00:29:44.300 | but I know for a lot of people it did.

00:29:46.060 | - The last three years is the perfect example

00:29:48.100 | of why the stock market is not the economy.

00:29:49.780 | It's completely backwards some ways.

00:29:51.980 | Sometimes it goes with it, sometimes it goes against it.

00:29:55.220 | The stock market thinks it's like eight steps

00:29:58.180 | ahead of the economy.

00:29:59.220 | Sometimes it is, sometimes it isn't.

00:30:00.980 | I don't think you can use the stock market

00:30:02.260 | as a barometer of, are we going into a recession or not?

00:30:04.740 | 'Cause to Josh's point, what if we already priced it in

00:30:07.300 | and it's just waiting for it to happen?

00:30:09.780 | If we see a recession, the stock market's gonna take off.

00:30:12.500 | I mean, that's the kind of thing

00:30:13.900 | where you can't use the stock market as a signal.

00:30:15.140 | - Listen, I wish there were a way

00:30:16.740 | I could just invest directly into GDP.

00:30:18.940 | Then all these experts on the economy

00:30:20.880 | would have like a vehicle they can,

00:30:22.820 | like, maybe Calshi does that, I don't know.

00:30:25.500 | Like, can I just buy a share of GDP

00:30:28.640 | and stop worrying whether or not

00:30:29.900 | the stock market is pricing it in or not?

00:30:31.940 | - We should put together a pitch deck.

00:30:34.460 | That sounds like a company.

00:30:36.240 | - Yeah, we'll get Silicon Valley Bank to back us.

00:30:38.820 | - Oh, God.

00:30:40.140 | But I mean, this is also a great reminder

00:30:42.460 | that 14 days ago, we were worried

00:30:45.020 | that the economy was too strong and inflation was too hot.

00:30:48.300 | And then this thing, just the Molotov cocktail

00:30:50.580 | gets thrown in through the window

00:30:52.260 | and all of a sudden we're worried about disinflation

00:30:54.500 | and a financial crisis and potential deflation.

00:30:57.540 | And those competing ideas, I think,

00:31:00.300 | this is one of those things where I don't know

00:31:02.060 | which one is gonna win out here.

00:31:03.660 | - This guy on one of my shows last week

00:31:06.100 | was like, "This is the Fed getting what it wants."

00:31:08.900 | No.

00:31:09.860 | - Yeah, they did not-

00:31:10.700 | - I don't think so.

00:31:12.580 | - No, they did not want a-

00:31:13.940 | - I don't think so, sir.

00:31:15.500 | - Yes, they don't want trust in the financial system

00:31:17.900 | to all of a sudden go,

00:31:19.480 | that's not how they want inflation to come down.

00:31:22.480 | Right, they were hoping higher interest rates

00:31:24.420 | would make some CEOs fire a few people.

00:31:27.760 | They were not hoping that, like,

00:31:29.020 | they'd be dealing with bank failures

00:31:30.700 | and being brought in front of Congress

00:31:33.300 | to explain why they didn't see this coming.

00:31:35.420 | - Right, exactly.

00:31:36.980 | I don't think so.

00:31:38.100 | Hey, this has been so much fun.

00:31:40.500 | Thank you guys for letting me join in today.

00:31:43.340 | I'm a big fan. - We appreciate it.

00:31:44.540 | - I watch.

00:31:45.380 | - You're the first one who's ever come on here

00:31:46.660 | with a suit and tie,

00:31:47.500 | so you gave this show a lot of respectability today.

00:31:49.980 | - This is serious business.

00:31:51.340 | - It's true.

00:31:52.500 | New "Compound" and "Friends" tomorrow, right?

00:31:54.500 | - Hell yeah. - Sure.

00:31:55.380 | - Yep.

00:31:56.220 | YouTube, anywhere you get your podcasts.

00:31:58.980 | Remember, if you have a question for us,

00:32:00.420 | askthecompoundshow@gmail.com.

00:32:02.740 | If you're listening in podcast form, leave us a review.

00:32:04.900 | Hit the like button.

00:32:05.740 | How many subscribers are we up to, Duncan?

00:32:07.860 | - 118,000. - 120,000?

00:32:10.900 | - We're approaching 120.

00:32:12.460 | - Let's do it.

00:32:13.380 | All right. - Let's do it.

00:32:14.380 | - Any "Compound" merch, idontshop.com.

00:32:16.420 | Keep those comments and questions coming.

00:32:17.700 | Thanks to everyone who tuned in live.

00:32:19.380 | We'll see you next time.

00:32:20.580 | - Thanks, everyone.

00:32:21.580 | (upbeat music)

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00:32:30.480 | (upbeat music)

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00:32:43.480 | [BLANK_AUDIO]

Is My Money Safe? | Portfolio Rescue 67

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