The 2024 Real Estate & Bank Crisis has Begun

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Episode Transcript

Speaker 1 (00:00):
Twenty twenty four is shaping up to be the year
in which many, many more banks begin to fail. This
will result in consolidation of the banking system among just
a few very large banks, resulting in ever more concentration
of power and more central control over the banking in
the financial system, less choice for you. Now, this has

(00:21):
happened many many times before in the past. There are patterns.
We can see these patterns, which is how we can
know they're happening again. Despite what they try and tell
you every time, this time is not different. While the
overall pattern is the same, the catalyst that triggers it
is usually different. Like last time it was mortgage backed securities.

(00:41):
This time is the commercial real estate collapse. So to
understand what is going on right now and how it
will play out, let's take a trip back through time
and see how this pattern unfolds throughout history. The very
first banks were simply gold storage companies. So somebody would
have some gold coins. They didn't want to carry them
around with them for fear of getting robbed, or they
wanted a safe place to store them, so they gave

(01:03):
them to a goldsmith. Usually those were the original banks
and just said hey, we'll pay you keep this safe
for me, and at some point I'll come back and
get my goal. A person would be issued a little
receipt that said, hey, you can come back at any
time and get your one ounce or five ounces or
ten ounces of goal. When the person wanted to make
a purchase, they would go get their gold make the purchase,

(01:24):
and eventually these things grew into popularity and more and
more people started storing their money there After a while,
this meant that people were no longer going to retrieve
their gold to make the purchase. They were just using
their little slips of paper, their receipts that gave them
the claim on that gold to make the purchase. Because
if I can go use this piece of paper to
get an ounce of gold, I can just give you

(01:44):
the piece of paper as payment, and then if you
want to go get the gold, you can do that.
This system worked out great for a long time, but
eventually the banks realized they didn't even have to charge
people to store their gold because they had another way
to make money. They would simply take the gold that
people had entrusted to them and loan it out. Even
this arrangement worked out great for a while, but you
started to notice a pattern of banks taking on too

(02:06):
much leverage, making too many loans or too risky of loans,
and then the depositors would get wind of this realized, hey,
the bank might have trouble getting my gold back, so
everybody would go line up to get their goal. There
would be a bank run and the bank would collapse.
So this is the pattern that we see all throughout history. Deposits,
loans over leverage, bank run, collapse. A fantastic book detailing

(02:29):
this for the last eight hundred years is called This
Time Is Different by Carmen Reinhart and Kenneth Rogoff. I
highly suggest this book. Now, about three hundred years ago,
in order to try and stop this problem, we had
the invention of the central bank. This would be a
bank four banks, so that if one bank was too risky,
made too many loans and started to see a bank run,
there would be a bank that could draw from all

(02:50):
the other banks in the system to bail that individual
bank out. The only problem this solved was individual bank risk,
but it actually scaled up the risk of the entire
system and you started to have systemic ins to as
a result of central banks. This is why Again, in
nineteen thirteen, when the Federal Reserve was established in the
United States, our central bank, you had the first Great
depression start. Just seven years later as a result of

(03:11):
the same pattern, banks took the deposits, made too many loans,
too risky of loans, leverage built up in the system,
there are bank runs, and the system collapsed. If you
want a great resource on that, I suggest reading The
Forgotten Depression by James Grant, another fantastic book on this topic.
But the US and the Fed did not learn their lesson,
because just nine years after that they repeated their mistakes,

(03:32):
banks across the United States making too many loans, too
risky of loans, leverage built up in the system, bank
runs happened, and the whole system collapsed again. Now there
was a period of calm for a few decades after this,
simply because the rest of the world started using the
Federal Reserve as their own central bank. So we had
a global central bank now with the Federal Reserve for

(03:52):
the first time. But the same exact patterns started to
repeat itself. All of those deposits, the central banks started
to make too many loans and too many claims on
the amount of money the goal that they actually had
in storage, so leverage built up in the system. The
depositors realized their money wasn't actually there, so they started
to go and get their gold, and in nineteen seventy one,

(04:13):
the United States was about two weeks away from completely
running out of all of its gold. There was a
bank run going on. It was just a global bank
run this time, and that's when Nixon decided to default
on its obligation as the Bank for the World closed
the gold window and just said, no, we're not giving
you your money back. You can keep the paper instead.
But it was the same pattern as it's always been.
The deposits were made, too many loans in leverage built

(04:36):
up in the system, a bank runt started, and then
there was the collapse. The savings and loan crisis that
happened in nineteen eighty was again the exact same pattern.
And fast forward to about fifteen years ago during the
Great Financial Crisis, the same pattern. Again. Banks took the deposits,
made too many and two risky loans, this time in
the form of mortgage backed securities. There were bank runs.

(04:56):
There was not enough liquidity. The collapse started to happen.
If we take a look at the chart of bank
failures that happen every single year, we can notice a
couple of things that give us some insights onto the
pattern unfolding before us right now. Usually, prior to a
period of instability and collapse, there is about two years
of calm calm before the storm. This happened in two

(05:17):
thousand and five and in two thousand and six. In
two thousand and eight, we can see that total assets
lost were massive three hundred and seventy three billion dollars
to be exact. However, the total number of bank failures
was actually very small, at only twenty five banks. The
subsequent years resulted in smaller and smaller number of assets lost,

(05:40):
even though there were higher and higher numbers of total
bank failures happening. Essentially, the big boys with the most
assets get wiped out at the beginning, and following that
you have the carnage spread to the rest of the
banking system, with smaller and smaller banks feeling and they're
smaller banks, so there's less assets, but there's still more
bank failures. As a result of the years following the

(06:01):
Great Financial Crisis, we saw massive consolidation in the banking
system as the larger banks absorbed all of the assets
and liabilities from the rest of the banking system, resulting
in fewer banks, more concentration, more control over the financial system.
Twenty twenty one and twenty twenty two were years that
mirror two thousand and five and two thousand and six

(06:22):
as a calm before a storm with zero failures. However,
twenty twenty three is a mirror of two thousand and
eight with a massive record breaking number of assets lost
five hundred and forty eight billion dollars with only five
bank failures. As the trouble hits the rest of the
financial system much more slowly, twenty twenty four and the
subsequent years will likely be years in which more and

(06:44):
more small banks will fail, even though it's a smaller
number of assets, and then all of those assets and
liabilities will get absorbed by the rest of the banking system,
meaning more consolidation, fewer banks, easier central control over the
entire financial system. So that's the pattern that we see
unfolding throughout history. Is there any evidence, though, of things
happening with banks today that would give us reason to

(07:06):
think that more small banks are at risk of failure
and the large banks will absorb them. Well, if we
take a look at this data from EPB Research, we
can see that large commercial banks only have about seven
percent of their loans exposed to commercial real estate, whereas
small commercial banks have about thirty percent of their loans
in commercial real estate. Beyond that, large commercial banks have

(07:29):
been decreasing their exposure to loans as a percent of
their assets for years now, which means that small commercial
banks have been picking up the slack as loans have
been making a larger and larger percentage of their bounce sheets. Okay,
so small banks have more exposure to commercial real estate loans,
but does that actually mean they're at more risk. Today,
more and more people are waking up to the fact

(07:49):
that commercial real estate is facing what some are calling
an existential crisis. Billionaire Barry stern Light, who founded Starwood Capital,
said the commercial property market is facing a generational change
and that it's going to be very, very ugly. We
can also take a look at what these small banks
are doing compared to the S and P five hundred.

(08:11):
The top blue line here is the S and P
five hundred year to date, which is up about six
percent The best performing of these small banks on this
list is KeyCorp, which is down about five percent. The
rest of the banks on this list ranged from being
down anywhere between five percent all the way to the
worst defender in New York Community Bank, which is down
fifty three percent year to date. But it's not just

(08:34):
the commercial real estate companies and investors that are worried,
and it's not just the market that is worried about
the bank's performance. As a result, we also see regulators
have been talking about this more and more. Recently, Janet
Yellen herself said that she expects bank stress due to
the losses from commercial real estate. She also said that

(08:55):
commercial property is a worry, but regulators.

Speaker 2 (08:58):
Are on it.

Speaker 1 (08:58):
That sounds eerily similar or to something another former chairman
of the Federal Reserve said about another real estate crisis.
At this juncture, however, the impact on the broader economy
and financial markets of the problems in the subprime market
seems likely to be contained. In addition to that, Jerome Powell,
the current Chairman of the Federal Reserve, was recently interviewed

(09:19):
on Sixty Minutes, and he was asked specifically about the
current crisis unfolding with commercial real estate impacting small banks.
Here's what he said.

Speaker 2 (09:28):
There's some smaller and regional banks that have concentrated exposures
in these areas that are challenged, and you know we're
working with them.

Speaker 1 (09:36):
You believe it's a manageable problem.

Speaker 2 (09:38):
I think it's going to see bank failures across the
country as we did in two thousand and eight. I
don't think there's much risk of a repeat of two
thousand and eight. Certainly there will be some banks that
have to be closed or merged out of existence because
of this. That'll be smaller banks. I suspect for the
most part.

Speaker 1 (09:53):
Do you get that. Certainly there will be smaller banks
that will close and will have to be merged as
a result, and they will be smaller banks. It's the
same pattern unfolding as it has many times throughout history.
Banks take deposits, they make loans, either too many loans
or two risky loans. Either way, too much leverage, losses
pile up, depositors go to withdraw their funds, and the

(10:16):
banks collapse. The result is fewer banks left existing as
the assets and liabilities are absorbed by the larger banks,
less choices for individuals and more central control over the
entire banking and the entire financial system and the Federal
Reserves behind the scenes bank bailout facility called the Bank
Term Funding Program that they opened up last year when

(10:39):
Silicon Valley Bank failed, has recently been experiencing a spike
in usage, and in just about one month, this facility
is scheduled to close, and the Federal Reserve has said
it will close according to schedule, which means less liquidity
and harder times for those smaller banks that are relying
on it. Now, the reality is the biggest problems are

(10:59):
allways paired with the biggest opportunities. People can make money
in bull markets, but they make fortunes in bear markets
as long as you're paying attention and you're prepared. So
here's exactly how to play this. Number one. Don't keep
your money in small banks. Keep your cash in high
yield savings accounts, in money market funds, in T bills,
and in big banks, because if you are over the

(11:21):
FDIIC limit, your money will not be bailed out. It
will be bailed in, which means you lose it with
the bank. Now, not all of these banks will fail,
some of them will survive and they'll have a huge
rebound as a result, which is why, as the original
bankster said Baron Rothschild, buy when there's blood in the streets.
I never recommend getting out of the market, but I

(11:43):
do usually recommend staying hedged, especially when risks go up
and the market is not pricing in those risks. So
you can use very small bets to play the bailout,
or even play the lack of the bailout. Simple strategies
like a debit spread where you buy either a call
or a put, and then you sell either a call
or a put that is further away from that strike
price further out of the money, will give you a

(12:05):
cost effective way to bet on a large move. With
these strategies, the most you can lose is the amount
you spend on the trade, and if you pick the
right strike prices and the right expiration dates, many of
these trades on these banks right now have between a
two and a ten x upside. And finally, if you
need help learning any of these strategies, that's exactly what
members of Heresy Financial University get. A moment ago, we

(12:25):
were talking about how to manage your cash. I teach
you the most effective way to be able to maintain
your liquidity while also getting a return that beats inflation
on your cash, while also decreasing your risk, because ultimately
that's what you want with your savings. You want an
interest rate that beats inflation. You want to maintain that
liquidity so you can use it at any time. You
don't want it locked up, but you also don't want
to be exposed to any risk where you might lose it,

(12:47):
because after all, that's the point of savings. You can
have it when you need it. Members also get access
to advanced training material to learn options strategies like debit
spreads that we talked about. These are strategies that professionals
use because the average retail investor can only make money
if the stock they buy goes up, and they lose
money if the stock goes down. And in reality, with
financial education, you learn how to make money in any market,

(13:09):
whether the market goes up, down, doesn't move, or moves
in either direction. On top of that, you get access
to the Haresey Financial community, monthly group coaching calls, and
much much more. So at this point, the only question
you should be asking yourself is how much money are
you losing every single month by not knowing how to
take advantage of these moves, So sign up with the
link below to get started today. As always, thank you

(13:29):
so much for watching. Have a great day.