March 17, 2023 • 27 mins
In this episode of the Wisdom for Business and Life podcast, Levi Brackman delves into the recent turbulence in the economy and the banking sector. With the sudden shutdown of Silicon Valley Bank and Signature Bank and Swiss government support for Credit Suisse and the infusion of cash by other banks into First Republic Bank, Levi explains the underlying reasons for these events and their potential implications for the economy at large and what you should do about it.
The discussion covers value creation, the role of money, the impact of low interest rates, the consequences of the Covid-19 pandemic and the belief in Modern Monetary Theory on the economy. As the Federal Reserve attempts to stabilize inflation by raising interest rates this episode offers valuable insights and wisdom on navigating these uncertain times and the importance of anticipating change in the financial world.
Levi Brackman is a rabbi, Ph.D. in psychology, best-selling author of Jewish Wisdom for Business Success, and founder of Invown, a platform for real estate fundraising and investing.
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Episode Transcript
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starter (00:00):
Welcome this is La Brackman with the Wisdom for
Business and Life podcast.
Thank you so much for joiningtoday.
I'm gonna go solo again, and I'mtalking about the economy.
Over the last week, it's been anup and down wild ride in the
economy.
(00:20):
Last Friday, Silicon Valley Bankwas shut.
And then on Sunday, signaturebank was shut down throughout
the week.
Credit Suisse, which is anothermassive European bank, had to be
bailed out by the Swissgovernment to the tune of 50
billion.
And then just yesterday, firstRepublic Bank had to be bailed
(00:41):
out by other banks for the tuneof 30 billion.
So what's been going on?
Why?
is the economy and the bankingsector in such turmoil and what
does this mean for us?
And is this just a isolatedthing that is taking place in
the banking sector or does thismean something more ominous for
(01:05):
the economy in general?
So in this podcast, I havespoken about certain axioms and
certain kind of fundamentals.
About how things work in theeconomy.
And we've spoken a lot aboutvalue creation and the
importance of value creation andwhat money is and what money
isn't.
And really money is a fiction.
(01:26):
It's something that as long aspeople have trust in then it's
valuable.
Both the second people stoptrusting it and, people don't
think it has value, then itloses value.
And when money loses value, realthings start costing more of
that money, and that's calledinflation.
So I want to talk about all ofthis but let's get back to what
actually happened last Fridaywhen Silicon Valley Bank shut
(01:49):
down.
So what had occurred was thatSilicon Valley Bank had
purchased long-term bonds.
Bonds, which matured in thefuture.
These are bonds which paid outan interest rate.
Over time and then at some timein the future they mature and
the government gives all themoney back.
So these were government bondsand they matured in the future.
(02:12):
Matured means that the moneywould be given back, and that
were repaid in the future or farout into the future, whereas the
interest rate was paid out over.
Now the government constantlyissues new bonds because it's
constantly borrowing money andpeople can buy those bonds.
Now as interest rates go up, youbuy bonds with higher interest
(02:34):
rates.
Interest rates, a number ofyears ago, even a year and a
half ago or a year ago, were alot less.
So Silicon Valley Bank hadpurchased bonds, long-term bonds
with low interest rates, andthen their depositors came along
and said, I want my money back.
And if you want your money, Andyou've bought bonds with those,
(02:55):
with that money, then you willneed to sell those bonds in
order to be able to give yourdeposits their money back.
The way banks work is thatpeople put money in the bank and
whenever the person wants themoney back, they just say, Hey,
gimme the money bank, and, andthe bank then has to give the
money bank.
Now, if the bank doesn't havethat money available because it
(03:15):
bought bonds with it, then toobad the bank has to sell those
bonds.
Now normally, that's no problem.
you can sell the bonds more orless for the same price you
bought them, but if you boughtlower interest rate bonds and on
the open market, people can buyfor the same price, higher
interest rate bonds than to sellthose lower interest rate bonds.
(03:35):
You're gonna have to sell themat the discount because, Why
would someone buy a low interestrate bond for you?
For the same price they couldbuy high interest rate bonds.
Of course, they wouldn't dothat.
So the only way they would buyit is if they would get a
discount.
So Silicon Valley Bank had a lotof depositors asking for their
money back.
They were forced to sell thesebonds, and now they had to sell
(03:57):
them at a loss, and now they hada hole in their balance sheet,
so they had to fill that hole intheir balance sheet and they
were gonna raise money.
people who had deposits with thebank got a whiff of the fact
that, wow, the bank has to raisemoney, which means that they
don't have enough money to coverall their deposits.
Therefore, I should take mymoney out as quickly as possible
so that I am not the last personwith deposits in the bank that
(04:21):
the bank can't cover.
And what ended up happening,therefore, was a run on the
bank.
People said, okay, gimme my, mymoney back.
Gimme my money back.
Everyone said, gimme my moneyback at the same time.
And of course, no bank has.
S in their safe, all the moneyof all the depositors because
they lend that money out.
They buy other things with it inorder to be able to generate
more income.
That's how banks work.
(04:41):
So of course, they didn't haveenough, money.
And at the end of the day, onThursday, they were actually
negative, close to a billiondollars.
And Friday the regulators camein and shut the bank down.
And the same thing happened withSignature Bank on Sunday.
Dead deposits came in, mostlyreal estate people in, in real
Silicon Valley Bank, it wasmostly tech people, but in real
(05:04):
estate, the real estate peopledid the same thing and they
asked for all their depositsback, and the bank obviously
didn't have the ability to dothat.
The government stepped in as weknow, and said, look, we're
shutting these banks down, butwe'll make good on everyone's
deposits and don't worry aboutit.
And the reason why they did thatwas because they didn't want
further runs on other banks, andthat would be contagious.
(05:25):
And before you know it, multiplebanks have failed and, the whole
economy's in really, bigtrouble.
So the governments stepped inand basically said, don't worry,
banks are safe.
We'll backstop all the deposits,which.
Arguably it's the right thing todo or the wrong thing to do.
I don't know.
I think it was actually the onlything they could have done.
But that's what happened.
(05:47):
Now, what is going on hereunderlying all of this, is that
people thought that they couldbuy long-term bonds at low
interest rates, and that thatwould be a good and safe thing
for them to do.
That meant that they didn't takeinto consideration the fact that
(06:07):
interest rates would risesignificantly.
Now, in hindsight, that seems tobe a stupid.
idiotic thing to assume.
We've seen interest rates havegone up, but I can tell you a
lot of people thought thatinterest rates would stay low.
I recall, back when I firststarted getting, you know,
(06:28):
seriously into real estate and Iwanted to really understand real
estate in every possible way.
I got myself a mortgage andoriginator's license.
And there was one individual Iwas trying to tell him that he
should refinance, not onadjustable rate, but on a fixed
rate because he could get 2.5%mortgage and he should refinance
at that time.
(06:49):
And I told him that I don'tthink we're gonna see 2.5%
mortgage rates, for very long.
And historically it's never beenthis slow.
And therefore the chances arethat from now on it just goes
up, not.
but Bank of America who he had,banked with, they came in and
they offered him an even lowerrate, but it was an adjustable
(07:09):
rate mortgage, and he thoughtthat that adjustable rate
mortgage would stay low forforever.
So he went with the adjustablerate mortgage.
but what he didn't realize wasthat interest rates were gonna
go up.
Now he's stuck with, inadjustable rate mortgage with
interest rates going up.
This guy is an executive at abig company, very smart guy.
And he thought that rates weregonna remain low and so did a
(07:33):
lot of people, they didn'trealize that rates would go up
and.
This is, we've spoken about onthis podcast before that people
think because things have beenthis way for a while, therefore
things will continue to be thisway.
It's a kind of bias that humanshave, which is simply not true.
We have to overcome this bias.
Just because things have been acertain way in the past doesn't
mean that they're gonna be thatway in the future.
(07:53):
Both for good and for bad thingshave been bad in the reason
past.
Doesn't mean they're gonnaremain bad.
Things have been good in therecent past, doesn't mean
they're gonna remain goodforever.
Things change and humans have toget their head around.
The fact that things do change.
They do not stay the same.
That's just a fact the way itis, and you have to be
anticipating change.
But this particular change wasreally, really obvious.
(08:18):
if you've been watching this fora while in 2008, let's go all
the way back to 2008 with thefinancial crisis, which was when
we started having really lowinterest rates.
So in order to be able to pumpmore liquidity into the, into
the market and into the economy.
Because what happened was in2008 was that, you know, banks
started to fail and the creditmarkets froze up and people
(08:39):
weren't lending.
and the therefore people aren'tlending and banks aren't
lending, there's no money in theeconomy.
There's no money therefore to dobusiness.
There's no money to innovate,there's no money to create, and
this value creation stops.
And then, you know, the economycan grind to a halt.
You can get into real bigtrouble.
So you have to have some kind ofan ability to lend.
And when banks are very afraidof lending and, and they're not
(09:02):
financing things, then you havea situation where things aren't
getting done.
There's no value.
It can be really, really, Reallydifficult for the economy.
So what happened?
They, well, the Federal Reservecame in and they lowered
interest rates really low.
They started buying up MortgageMax securities and started
buying up bonds and this andthat and the other, and
(09:22):
therefore they pumped a hugeamount of liquidity, in other
words, money into the market.
What they did was theybasically, printed a huge amount
of money, put it into the marketout there, and therefore they
said, go create, use this moneyand create.
And that is what happened.
And for a while, they kept doingthat more and more and more
(09:42):
money.
They called it quantitativeeasing, whatever the hell that
means.
So they kept doing that for awhile.
So you got all this money comingto the economy until it becomes
money becomes easy.
It's easy to make money, easy toget money.
It's easy to borrow money.
Borrow money is cheap, and atthat point, as money becomes
cheap.
Things start to become moreexpensive because money is the
(10:05):
value people perceive it to be,like I said earlier, and as soon
as money becomes easy to make,therefore it doesn't represent
the underlying value.
All that money is chasing moreand more goods because people
can buy things at a cheaper rateand this, so everyone's buying
it.
And obviously if everyone'sbuying it up, therefore there's
more demand for it because a lotof people have money, less
(10:27):
supply of it.
Things go up in value.
That is the way things work.
Now, this would've perhaps beenfine, perhaps been fine, had
covid not happened, but what co,what happened with Covid was
that the economy basically shutdown because of the pandemic.
And as the economy shut down,the government had a terrible
(10:50):
choice to make.
It was either going to allow asthe economy shut down to be for
mass unemployment to happen andpeople to lose their homes, cuz
all of a sudden they don't haveany income if they don't have
any income.
They can't pay their mortgages,they can't pay their rent.
They would be mass evictions ofpeople who rent mass
(11:12):
foreclosures of people who owntheir homes cause they couldn't
pay their mortgage.
Plus at the same time whenpeople would be dying at, you
know, big numbers because of thepandemic.
So the government had a choice.
Either it was going to allow forpeople to be dying, plus a huge
recession where everyone wouldbe hurting and losing their
(11:34):
homes and losing their jobs, orthey would just have the
situation where people would bedying.
Which is a terrible thing cuz ofthe pandemic.
But they would backstop theeconomy, allow people not to pay
their mortgages, allow peoplenot to pay their rent, give very
generous unemployment so that atleast the economy doesn't
(11:55):
completely tank.
And they chose to do that.
Buy again, printing huge amountsof money.
So by printing all this.
Pumping trillions of dollars ofliquidity into the marketplace,
lowering interest rates evenfurther to 0%.
They fueled this crazy economyof 2020, late 2020 and 2021,
(12:16):
where money was really, reallyeasy.
To come by.
People were government wasgiving out these huge hands
handouts and, it was, you know,to businesses, to individuals,
to everybody.
And, interest rates really low.
So anyone could buy a house ifthey wanted to.
Even expensive homes.
So the real estate market wentoff like crazy.
(12:36):
Everyone could afford to rent.
And those who, who, who, whoweren't paying their rent, no
problem.
They didn't have to moveanywhere.
So, rent growth.
Went through the roof and every,everyone was making money.
Now that obviously couldn'tcontinue because money's so
easy.
Everyone's buying things whichthey couldn't afford before, and
(12:57):
therefore you, plus on top ofthat, you end up with a, a
supply chain issue because ofthe pandemic and everything
becomes much, much moreexpensive.
people can buy whatever theywant because they have the
money.
Therefore, there's a huge amountof demand.
There's that, demand, soaks upall the supply.
Therefore things become moreexpensive and at the same time,
you end up with a war, inUkraine and all that together
(13:20):
ends up, driving up inflation.
Now this was all predictablebecause, you make money really
easy for a very long time byhaving interest rates low by the
government, just giving ithandouts, all of this.
ends up in a situation where youhave more money, more easy
money, and as you have more easymoney.
Money loses value because moneyshould be hard to make because
(13:42):
value creation is hard.
And if the money is easy to behad and that money is buying
things which are hard to makebecause of the value creation,
creating value is hard.
Therefore, those things aregoing to come, into pardy with
each.
Eventually the money is justgoing to be worthless.
Therefore, things are gonna bemore expensive.
(14:03):
It's just the way it works.
It's like gravity.
These are just facts.
It's the way it is.
At some point it catches up withone, and right now it's caught
up.
Therefore, the Federal Reserve,what it has to do in order to be
able to make money valuableagain, it has to suck it out of
the economy, make it moreexpensive, and the way it makes
money more expensive is.
(14:25):
By raising interest rates, byraising interest rates am
expiring more expensive.
And it's been doing that, slowlyover the last year or so, and
therefore now interest rates arehigher.
Now, there were a lot of peoplewho thought the government would
never do it.
Now, why would those peoplethink the government would never
do it?
And here, I think, is, is partof what happened.
There was this thing calledmodern monetary.
(14:48):
Which people, a lot of peoplereally believed in modern
monetary theory basically saidthat the government can continue
printing money cuz it owns themoney.
It's, i, it's in charge of themoney as much as it likes with
impunity, it can just continueprinting money without it
causing a big problem.
The only problem that couldhappen because of it is perhaps
inflation.
Perhaps inflation might happen.
(15:09):
But the way to deal withinflation is by raising taxes.
So if inflation happens, don'tworry.
You raise taxe.
That causes, money to be pulledunder the economy, because
people are not paying highertaxes and therefore that deals
with inflation.
By raising, taxes, that money,goes back to the government,
which has printed it.
So it's a circular movement, noproblem there.
(15:30):
And therefore you can have lowinterest rates and the
government printing money withimpunity and no problem.
The only kind of flying argumentof all of that is that no
government or no democraticgovernment is just gonna raise
taxes because if they do, that'sbasically political suicide.
You're never gonna get reelectedin the next, the next, election.
So no government's gonna justraise taxes.
(15:52):
Instead, they paw that off tothe Federal Reserve.
Was it the Federal Reserve to,well, they don't have the
ability to raise taxes becausethat's not what central banks
can do.
Central banks can raise interestrates, which is a similar way
similar to raising taxes, butagain, raising interest rates
that hurts the economy in anentirely different way.
(16:13):
And all those people who thoughtfor some reason that interest
rates would remain low forforever, those were the people
who believed.
This thing called modernmonetary theory.
They somehow believe thatinterest rates and easy money
can go on forever.
Again, a lot of people believethis, so let's not call them
idiots, let's not call themstupid.
But a lot of people thought thatthis was new paradigm they
(16:35):
thought was that low interestrates would go on forever and
therefore they could buy theselow interest rate bonds and that
would be a fine long-terminvestment, although they were
insured in the future.
They didn't realize thatinterest rates would go up and
therefore people would then pulltheir money out of bank
accounts.
First of all, it's harder tomake money, therefore money goes
(16:57):
out naturally because, moremoney is going out than going in
because it's harder to make themoney and therefore, it's
costing more to make money.
Therefore, there's more outflowsof their bank accounts than
going into their bank accounts,therefore, less deposits.
They also didn't realize thatpeople would pull their money
out of bank accounts becausefrankly, bank accounts in the
high interest rate environmentis not a great place to store
(17:19):
your money because.
Banks give low interest rate andthere are other places where you
could get high interest rates.
So people pulling out theirbanks for that way and they
didn't realize that, well,didn't account for that, sorry.
Now they have to sell theirlong-term bonds at a loss.
But it's all a symptom of thisfact that people didn't think
that interest rates were gonnago up.
(17:40):
They didn't understand thisfundamentals of the economy,
that free money can't go on forforever without there being a
really big.
Hike in inflation.
And the only real D way to dealwith inflation is by raising
interest rates, unless you wantinflation going on for forever.
And then if you have highinflation, that causes a whole
(18:03):
other host of problems.
If you have high inflation, thenpeople's earning power goes down
and what cost,$10 this week isnow costing$15, now costing$20.
And that puts the whole economyout of whack and causes other
very large systemic problems.
So in order to make sure thatdoesn't happen, you don't end up
with runaway inflation.
(18:24):
They have to do something aboutit.
There's no choice.
They have to do something aboutit.
Now, What's really interestinghere is I want to talk, I'm
going on rather long here, butthere, there are a couple of
things that we should thinkabout here.
Number one, there are stillpeople, and I see this in the
markets, oh, this happened.
That means because of all thisbank issues, that means the
(18:47):
Federal Reserve will, you know,put a break on raising interest
rates.
That's wishful thinking.
Of course, they're not going todo that.
because if they do that, theninflation will continue being
high.
8% inflation is way too high.
And you know, if you saypercent, inflation's 8% is
probably much higher than 8%,currently.
(19:08):
So, and, and interest rates needto hit higher than the rates of
inflation in order to get thingsunder control.
So the, just to be clear, here,it see it is to me, Total
wishful thinking to think thatthe Federal Reserve is going to
stop hiking interest rates.
It cannot do that unless it isnot serious about taking, the
(19:29):
steps needed to get inflationunder control.
And the head of the FederalReserve has made it very clear
that he is going to do whateverit takes in order to gain
inflation under control.
He has to, that's his mandate.
So the fact that interest ratesare gonna continue to be
increased, is a foregoneconclusion.
So people should not invest ordo anything based on the fact
(19:53):
that they think the interestrates are going to stop going
up.
Now in the long term, will theycome back down again?
Yes, probably.
Will they come back down tozero?
Look, no one's got a crystalball, but I think that's
unlikely.
So interest rates are going tocontinue to go up, in my view.
That's number one.
Number two, what other stacks ofthe economy have been seriously
(20:13):
impacted by this idea of lowinterest rates?
Well, almost every single one ofthem.
Let's go through them.
First of all, peop somethingthat everyone can really relate
to, and that is homeowners,homeowner.
They have bought, homes at lowinterest rates, so they've got
mortgages.
I have mortgages in the threes.
No one can get a mortgage todayin the threes.
(20:35):
I'm refinancing a property rightnow.
I'm getting in the sevens, andthat's considered to be cheap
today.
So getting in the threes, that'sreally unlikely.
How likely is it for people togive up a mortgage, which is in
the threes, to buy a house wherethey're gonna get a mortgage in
the sevens?
Unlikely people.
Why would you do that?
You'd rather stay in a home witha low mortgage because you've
(20:55):
got a low payment, your mortgageis your biggest payment, where
you'd buy another house and nowyou're having to pay a thousand,
1500,$2,000 more for yourmortgage.
Why would you do that?
So people wouldn't do that.
A lot of people are not doingthat.
So therefore, people locked inwith low interest rates, just
like the bank locked in.
SVB Bank locked in with the lowinterest rate for a long term,
(21:16):
people locked in for lowinterest rates for their homes.
Now that's a good thing for themin many ways, but also, It means
that you can have fewer homes onthe market.
You can have fewer homes on themarket.
There's a knock on effect ofthat, which means that there's,
there's less supply and thedemand is still there from new
people wanting to wanting tobuy, which means that can end up
(21:38):
with a really skewed and strangehousing market.
That's just what we can see forthe foreseeable future.
It's gonna be less supply anddemand is still going to be
there, but perhaps less demandas well because, interest rates
are high, but still people needto buy homes.
So there's gonna be a demand andless supply because fewer people
(22:00):
are gonna want to sell.
So that's something to look at.
So I don't think we're gonna seea precipitous.
Drop in home values across thecountry, certain markets which
are overheated will have asignificant drop.
I'm really seeing that in valuesof homes in places like Denver
that is just the way it's gonnabe.
(22:20):
We're gonna see more or less, astable housing market going
forward.
A small drop here and there, butnot a massive drop.
Where that changes though, is incommercial real estate, large
multi-family developments andother types, because a lot of
those people, they did what thebanks did.
They thought that interest rateswere going to stay low and they.
(22:43):
Purchased properties with loansthat had short term.
interest rate changes.
What that means is they may havebought the property based on
either some kind of constructionloan or some kind of rehab loan,
which had a fixed interest rateat a lower rate for a while, but
(23:04):
then it would change, and asthings changed, what happens is
that it interest rates, thenhave gone up and now they have
to refinance or the rate adjustsbased on the current rate and
that goes up quite a bit.
Now, even 1% interest ratechange can skew your numbers
significantly, and now all of asudden, you know, it doesn't
(23:26):
work for you.
And you have to sell thatproperty.
So I think we're gonna see inthe commercial real estate
market, you're gonna see thesame thing which played out with
the banks.
That there's gonna be thesetypes of interest rate issues
coming home to roost.
And people are gonna have tosell these properties and
they're gonna become distressedassets because they just, the
(23:47):
numbers no longer work for them.
Instead of people coming andbasically taking out of their
own piggy bank to make thepayments each month, they'll
just either give it back to thebank or they'll try and sell it
for a discount or make a dealwith the bank in some kind of
way.
But, we're gonna see a lot ofthese types of loans, which were
short term loans or adjustablerate, loans go bad and.
(24:11):
That, that that fallout iscoming.
I think because people, again,they didn't anticipate that
interest rates would go up andthey're gonna continue to go up.
So this.
only gets worse.
There are other sectors of theeconomy where this is, similar
as well.
Whether it's business loans orother types of loans which come
(24:32):
due.
And, then they need to berefinanced.
And they'll have to berefinanced at a higher rate.
That all happens at a time whenthe economy is no longer as hot,
so therefore people are makingless money.
So this is all, by the way, bydesign.
So just to understand that thisisn't something which is, you
know, the Federal Reserve didn'tanticipate when the Federal
(24:52):
Reserves raise interest rates,they anticipate.
This to happen and theyanticipate this kind of
destruction and they anticipatetherefore it gets harder to make
money and they anticipate.
Therefore, there some businesseswill go belly up and as they go
belly up that is just ununfortunate reality and people
will lose their jobs again.
They do this because.
(25:14):
Because that makes it harder tomake money.
And as it becomes harder to makemoney, the value of money goes
up.
And as the value of money goesup, fewer people have it.
You have less demand, moresupply.
And again, at that point, thingsbecome cheaper.
Inflation goes down.
It's all by design.
Now, what they don't want is thewhole economy to go down the
(25:37):
tubes.
And that would, if the, if thebanking sector goes down the
tubes, then the economybasically shuts down because we
need some kind of bankingsector.
So therefore they'll banks stopbackstop banks in many ways.
But, don't expect them tobackstop, commercial real
estate.
Don't expect them to backstopother businesses.
There's going to be a hugeamount of destruction and value
(25:58):
coming up ahead.
And what does that mean for usthough?
What that means is that as valas as destruction and value,
therefore think there are dealsto be had.
So people who have cashavailable to buy those deals,
they're going to be in a verygood position going forward.
So in summary people didn'tanticipate that interest rates
would go up.
Interest rates have gone up,they will continue to go up.
(26:21):
The destruction that that causesis by design.
It is meant to pull liquidityout of the market.
It's meant to make things, morevaluable if you like, or money
more those people, who havecash, will be able to use it to
be able to buy more things inthe future.
And that will be a good thing.
So right now what I say to youis, conserve cash as much as
(26:44):
possible and look for the futurewhen you have that cash to be
able to make, investments inthings that will bring you
long-term value.
Be patient though.
there's no timeline when this isgonna exactly happen, but what's
happened with the banks, that'sthe canary in the coal mine.
I think for what is gonna happenin the future, where there's
(27:06):
gonna be more destruction, andthat destruction obviously is a
terrible thing for the peoplethat happens to, but for those
people who can swoop in and takeadvantage of that that will be a
good thing for them.
So, That has been my commentaryon the last week in the business
world.
This has been La Brackman withthe Wisdom for Business and Life
(27:28):
Podcast.
Thank you so much for joining.
If you like this content,please, leave a comment or leave
a review or say at least, youlike it and wherever you listen
to this podcast.
Until next week, have awonderful day.
Welcome this is La Brackman with the Wisdom for
Business and Life podcast.
Thank you so much for joiningtoday.
I'm gonna go solo again, and I'mtalking about the economy.
Over the last week, it's been anup and down wild ride in the
economy.
(00:20):
Last Friday, Silicon Valley Bankwas shut.
And then on Sunday, signaturebank was shut down throughout
the week.
Credit Suisse, which is anothermassive European bank, had to be
bailed out by the Swissgovernment to the tune of 50
billion.
And then just yesterday, firstRepublic Bank had to be bailed
(00:41):
out by other banks for the tuneof 30 billion.
So what's been going on?
Why?
is the economy and the bankingsector in such turmoil and what
does this mean for us?
And is this just a isolatedthing that is taking place in
the banking sector or does thismean something more ominous for
(01:05):
the economy in general?
So in this podcast, I havespoken about certain axioms and
certain kind of fundamentals.
About how things work in theeconomy.
And we've spoken a lot aboutvalue creation and the
importance of value creation andwhat money is and what money
isn't.
And really money is a fiction.
(01:26):
It's something that as long aspeople have trust in then it's
valuable.
Both the second people stoptrusting it and, people don't
think it has value, then itloses value.
And when money loses value, realthings start costing more of
that money, and that's calledinflation.
So I want to talk about all ofthis but let's get back to what
actually happened last Fridaywhen Silicon Valley Bank shut
(01:49):
down.
So what had occurred was thatSilicon Valley Bank had
purchased long-term bonds.
Bonds, which matured in thefuture.
These are bonds which paid outan interest rate.
Over time and then at some timein the future they mature and
the government gives all themoney back.
So these were government bondsand they matured in the future.
(02:12):
Matured means that the moneywould be given back, and that
were repaid in the future or farout into the future, whereas the
interest rate was paid out over.
Now the government constantlyissues new bonds because it's
constantly borrowing money andpeople can buy those bonds.
Now as interest rates go up, youbuy bonds with higher interest
(02:34):
rates.
Interest rates, a number ofyears ago, even a year and a
half ago or a year ago, were alot less.
So Silicon Valley Bank hadpurchased bonds, long-term bonds
with low interest rates, andthen their depositors came along
and said, I want my money back.
And if you want your money, Andyou've bought bonds with those,
(02:55):
with that money, then you willneed to sell those bonds in
order to be able to give yourdeposits their money back.
The way banks work is thatpeople put money in the bank and
whenever the person wants themoney back, they just say, Hey,
gimme the money bank, and, andthe bank then has to give the
money bank.
Now, if the bank doesn't havethat money available because it
(03:15):
bought bonds with it, then toobad the bank has to sell those
bonds.
Now normally, that's no problem.
you can sell the bonds more orless for the same price you
bought them, but if you boughtlower interest rate bonds and on
the open market, people can buyfor the same price, higher
interest rate bonds than to sellthose lower interest rate bonds.
(03:35):
You're gonna have to sell themat the discount because, Why
would someone buy a low interestrate bond for you?
For the same price they couldbuy high interest rate bonds.
Of course, they wouldn't dothat.
So the only way they would buyit is if they would get a
discount.
So Silicon Valley Bank had a lotof depositors asking for their
money back.
They were forced to sell thesebonds, and now they had to sell
(03:57):
them at a loss, and now they hada hole in their balance sheet,
so they had to fill that hole intheir balance sheet and they
were gonna raise money.
people who had deposits with thebank got a whiff of the fact
that, wow, the bank has to raisemoney, which means that they
don't have enough money to coverall their deposits.
Therefore, I should take mymoney out as quickly as possible
so that I am not the last personwith deposits in the bank that
(04:21):
the bank can't cover.
And what ended up happening,therefore, was a run on the
bank.
People said, okay, gimme my, mymoney back.
Gimme my money back.
Everyone said, gimme my moneyback at the same time.
And of course, no bank has.
S in their safe, all the moneyof all the depositors because
they lend that money out.
They buy other things with it inorder to be able to generate
more income.
That's how banks work.
(04:41):
So of course, they didn't haveenough, money.
And at the end of the day, onThursday, they were actually
negative, close to a billiondollars.
And Friday the regulators camein and shut the bank down.
And the same thing happened withSignature Bank on Sunday.
Dead deposits came in, mostlyreal estate people in, in real
Silicon Valley Bank, it wasmostly tech people, but in real
(05:04):
estate, the real estate peopledid the same thing and they
asked for all their depositsback, and the bank obviously
didn't have the ability to dothat.
The government stepped in as weknow, and said, look, we're
shutting these banks down, butwe'll make good on everyone's
deposits and don't worry aboutit.
And the reason why they did thatwas because they didn't want
further runs on other banks, andthat would be contagious.
(05:25):
And before you know it, multiplebanks have failed and, the whole
economy's in really, bigtrouble.
So the governments stepped inand basically said, don't worry,
banks are safe.
We'll backstop all the deposits,which.
Arguably it's the right thing todo or the wrong thing to do.
I don't know.
I think it was actually the onlything they could have done.
But that's what happened.
(05:47):
Now, what is going on hereunderlying all of this, is that
people thought that they couldbuy long-term bonds at low
interest rates, and that thatwould be a good and safe thing
for them to do.
That meant that they didn't takeinto consideration the fact that
(06:07):
interest rates would risesignificantly.
Now, in hindsight, that seems tobe a stupid.
idiotic thing to assume.
We've seen interest rates havegone up, but I can tell you a
lot of people thought thatinterest rates would stay low.
I recall, back when I firststarted getting, you know,
(06:28):
seriously into real estate and Iwanted to really understand real
estate in every possible way.
I got myself a mortgage andoriginator's license.
And there was one individual Iwas trying to tell him that he
should refinance, not onadjustable rate, but on a fixed
rate because he could get 2.5%mortgage and he should refinance
at that time.
(06:49):
And I told him that I don'tthink we're gonna see 2.5%
mortgage rates, for very long.
And historically it's never beenthis slow.
And therefore the chances arethat from now on it just goes
up, not.
but Bank of America who he had,banked with, they came in and
they offered him an even lowerrate, but it was an adjustable
(07:09):
rate mortgage, and he thoughtthat that adjustable rate
mortgage would stay low forforever.
So he went with the adjustablerate mortgage.
but what he didn't realize wasthat interest rates were gonna
go up.
Now he's stuck with, inadjustable rate mortgage with
interest rates going up.
This guy is an executive at abig company, very smart guy.
And he thought that rates weregonna remain low and so did a
(07:33):
lot of people, they didn'trealize that rates would go up
and.
This is, we've spoken about onthis podcast before that people
think because things have beenthis way for a while, therefore
things will continue to be thisway.
It's a kind of bias that humanshave, which is simply not true.
We have to overcome this bias.
Just because things have been acertain way in the past doesn't
mean that they're gonna be thatway in the future.
(07:53):
Both for good and for bad thingshave been bad in the reason
past.
Doesn't mean they're gonnaremain bad.
Things have been good in therecent past, doesn't mean
they're gonna remain goodforever.
Things change and humans have toget their head around.
The fact that things do change.
They do not stay the same.
That's just a fact the way itis, and you have to be
anticipating change.
But this particular change wasreally, really obvious.
(08:18):
if you've been watching this fora while in 2008, let's go all
the way back to 2008 with thefinancial crisis, which was when
we started having really lowinterest rates.
So in order to be able to pumpmore liquidity into the, into
the market and into the economy.
Because what happened was in2008 was that, you know, banks
started to fail and the creditmarkets froze up and people
(08:39):
weren't lending.
and the therefore people aren'tlending and banks aren't
lending, there's no money in theeconomy.
There's no money therefore to dobusiness.
There's no money to innovate,there's no money to create, and
this value creation stops.
And then, you know, the economycan grind to a halt.
You can get into real bigtrouble.
So you have to have some kind ofan ability to lend.
And when banks are very afraidof lending and, and they're not
(09:02):
financing things, then you havea situation where things aren't
getting done.
There's no value.
It can be really, really, Reallydifficult for the economy.
So what happened?
They, well, the Federal Reservecame in and they lowered
interest rates really low.
They started buying up MortgageMax securities and started
buying up bonds and this andthat and the other, and
(09:22):
therefore they pumped a hugeamount of liquidity, in other
words, money into the market.
What they did was theybasically, printed a huge amount
of money, put it into the marketout there, and therefore they
said, go create, use this moneyand create.
And that is what happened.
And for a while, they kept doingthat more and more and more
(09:42):
money.
They called it quantitativeeasing, whatever the hell that
means.
So they kept doing that for awhile.
So you got all this money comingto the economy until it becomes
money becomes easy.
It's easy to make money, easy toget money.
It's easy to borrow money.
Borrow money is cheap, and atthat point, as money becomes
cheap.
Things start to become moreexpensive because money is the
(10:05):
value people perceive it to be,like I said earlier, and as soon
as money becomes easy to make,therefore it doesn't represent
the underlying value.
All that money is chasing moreand more goods because people
can buy things at a cheaper rateand this, so everyone's buying
it.
And obviously if everyone'sbuying it up, therefore there's
more demand for it because a lotof people have money, less
(10:27):
supply of it.
Things go up in value.
That is the way things work.
Now, this would've perhaps beenfine, perhaps been fine, had
covid not happened, but what co,what happened with Covid was
that the economy basically shutdown because of the pandemic.
And as the economy shut down,the government had a terrible
(10:50):
choice to make.
It was either going to allow asthe economy shut down to be for
mass unemployment to happen andpeople to lose their homes, cuz
all of a sudden they don't haveany income if they don't have
any income.
They can't pay their mortgages,they can't pay their rent.
They would be mass evictions ofpeople who rent mass
(11:12):
foreclosures of people who owntheir homes cause they couldn't
pay their mortgage.
Plus at the same time whenpeople would be dying at, you
know, big numbers because of thepandemic.
So the government had a choice.
Either it was going to allow forpeople to be dying, plus a huge
recession where everyone wouldbe hurting and losing their
(11:34):
homes and losing their jobs, orthey would just have the
situation where people would bedying.
Which is a terrible thing cuz ofthe pandemic.
But they would backstop theeconomy, allow people not to pay
their mortgages, allow peoplenot to pay their rent, give very
generous unemployment so that atleast the economy doesn't
(11:55):
completely tank.
And they chose to do that.
Buy again, printing huge amountsof money.
So by printing all this.
Pumping trillions of dollars ofliquidity into the marketplace,
lowering interest rates evenfurther to 0%.
They fueled this crazy economyof 2020, late 2020 and 2021,
(12:16):
where money was really, reallyeasy.
To come by.
People were government wasgiving out these huge hands
handouts and, it was, you know,to businesses, to individuals,
to everybody.
And, interest rates really low.
So anyone could buy a house ifthey wanted to.
Even expensive homes.
So the real estate market wentoff like crazy.
(12:36):
Everyone could afford to rent.
And those who, who, who, whoweren't paying their rent, no
problem.
They didn't have to moveanywhere.
So, rent growth.
Went through the roof and every,everyone was making money.
Now that obviously couldn'tcontinue because money's so
easy.
Everyone's buying things whichthey couldn't afford before, and
(12:57):
therefore you, plus on top ofthat, you end up with a, a
supply chain issue because ofthe pandemic and everything
becomes much, much moreexpensive.
people can buy whatever theywant because they have the
money.
Therefore, there's a huge amountof demand.
There's that, demand, soaks upall the supply.
Therefore things become moreexpensive and at the same time,
you end up with a war, inUkraine and all that together
(13:20):
ends up, driving up inflation.
Now this was all predictablebecause, you make money really
easy for a very long time byhaving interest rates low by the
government, just giving ithandouts, all of this.
ends up in a situation where youhave more money, more easy
money, and as you have more easymoney.
Money loses value because moneyshould be hard to make because
(13:42):
value creation is hard.
And if the money is easy to behad and that money is buying
things which are hard to makebecause of the value creation,
creating value is hard.
Therefore, those things aregoing to come, into pardy with
each.
Eventually the money is justgoing to be worthless.
Therefore, things are gonna bemore expensive.
(14:03):
It's just the way it works.
It's like gravity.
These are just facts.
It's the way it is.
At some point it catches up withone, and right now it's caught
up.
Therefore, the Federal Reserve,what it has to do in order to be
able to make money valuableagain, it has to suck it out of
the economy, make it moreexpensive, and the way it makes
money more expensive is.
(14:25):
By raising interest rates, byraising interest rates am
expiring more expensive.
And it's been doing that, slowlyover the last year or so, and
therefore now interest rates arehigher.
Now, there were a lot of peoplewho thought the government would
never do it.
Now, why would those peoplethink the government would never
do it?
And here, I think, is, is partof what happened.
There was this thing calledmodern monetary.
(14:48):
Which people, a lot of peoplereally believed in modern
monetary theory basically saidthat the government can continue
printing money cuz it owns themoney.
It's, i, it's in charge of themoney as much as it likes with
impunity, it can just continueprinting money without it
causing a big problem.
The only problem that couldhappen because of it is perhaps
inflation.
Perhaps inflation might happen.
(15:09):
But the way to deal withinflation is by raising taxes.
So if inflation happens, don'tworry.
You raise taxe.
That causes, money to be pulledunder the economy, because
people are not paying highertaxes and therefore that deals
with inflation.
By raising, taxes, that money,goes back to the government,
which has printed it.
So it's a circular movement, noproblem there.
(15:30):
And therefore you can have lowinterest rates and the
government printing money withimpunity and no problem.
The only kind of flying argumentof all of that is that no
government or no democraticgovernment is just gonna raise
taxes because if they do, that'sbasically political suicide.
You're never gonna get reelectedin the next, the next, election.
So no government's gonna justraise taxes.
(15:52):
Instead, they paw that off tothe Federal Reserve.
Was it the Federal Reserve to,well, they don't have the
ability to raise taxes becausethat's not what central banks
can do.
Central banks can raise interestrates, which is a similar way
similar to raising taxes, butagain, raising interest rates
that hurts the economy in anentirely different way.
(16:13):
And all those people who thoughtfor some reason that interest
rates would remain low forforever, those were the people
who believed.
This thing called modernmonetary theory.
They somehow believe thatinterest rates and easy money
can go on forever.
Again, a lot of people believethis, so let's not call them
idiots, let's not call themstupid.
But a lot of people thought thatthis was new paradigm they
(16:35):
thought was that low interestrates would go on forever and
therefore they could buy theselow interest rate bonds and that
would be a fine long-terminvestment, although they were
insured in the future.
They didn't realize thatinterest rates would go up and
therefore people would then pulltheir money out of bank
accounts.
First of all, it's harder tomake money, therefore money goes
(16:57):
out naturally because, moremoney is going out than going in
because it's harder to make themoney and therefore, it's
costing more to make money.
Therefore, there's more outflowsof their bank accounts than
going into their bank accounts,therefore, less deposits.
They also didn't realize thatpeople would pull their money
out of bank accounts becausefrankly, bank accounts in the
high interest rate environmentis not a great place to store
(17:19):
your money because.
Banks give low interest rate andthere are other places where you
could get high interest rates.
So people pulling out theirbanks for that way and they
didn't realize that, well,didn't account for that, sorry.
Now they have to sell theirlong-term bonds at a loss.
But it's all a symptom of thisfact that people didn't think
that interest rates were gonnago up.
(17:40):
They didn't understand thisfundamentals of the economy,
that free money can't go on forforever without there being a
really big.
Hike in inflation.
And the only real D way to dealwith inflation is by raising
interest rates, unless you wantinflation going on for forever.
And then if you have highinflation, that causes a whole
(18:03):
other host of problems.
If you have high inflation, thenpeople's earning power goes down
and what cost,$10 this week isnow costing$15, now costing$20.
And that puts the whole economyout of whack and causes other
very large systemic problems.
So in order to make sure thatdoesn't happen, you don't end up
with runaway inflation.
(18:24):
They have to do something aboutit.
There's no choice.
They have to do something aboutit.
Now, What's really interestinghere is I want to talk, I'm
going on rather long here, butthere, there are a couple of
things that we should thinkabout here.
Number one, there are stillpeople, and I see this in the
markets, oh, this happened.
That means because of all thisbank issues, that means the
(18:47):
Federal Reserve will, you know,put a break on raising interest
rates.
That's wishful thinking.
Of course, they're not going todo that.
because if they do that, theninflation will continue being
high.
8% inflation is way too high.
And you know, if you saypercent, inflation's 8% is
probably much higher than 8%,currently.
(19:08):
So, and, and interest rates needto hit higher than the rates of
inflation in order to get thingsunder control.
So the, just to be clear, here,it see it is to me, Total
wishful thinking to think thatthe Federal Reserve is going to
stop hiking interest rates.
It cannot do that unless it isnot serious about taking, the
(19:29):
steps needed to get inflationunder control.
And the head of the FederalReserve has made it very clear
that he is going to do whateverit takes in order to gain
inflation under control.
He has to, that's his mandate.
So the fact that interest ratesare gonna continue to be
increased, is a foregoneconclusion.
So people should not invest ordo anything based on the fact
(19:53):
that they think the interestrates are going to stop going
up.
Now in the long term, will theycome back down again?
Yes, probably.
Will they come back down tozero?
Look, no one's got a crystalball, but I think that's
unlikely.
So interest rates are going tocontinue to go up, in my view.
That's number one.
Number two, what other stacks ofthe economy have been seriously
(20:13):
impacted by this idea of lowinterest rates?
Well, almost every single one ofthem.
Let's go through them.
First of all, peop somethingthat everyone can really relate
to, and that is homeowners,homeowner.
They have bought, homes at lowinterest rates, so they've got
mortgages.
I have mortgages in the threes.
No one can get a mortgage todayin the threes.
(20:35):
I'm refinancing a property rightnow.
I'm getting in the sevens, andthat's considered to be cheap
today.
So getting in the threes, that'sreally unlikely.
How likely is it for people togive up a mortgage, which is in
the threes, to buy a house wherethey're gonna get a mortgage in
the sevens?
Unlikely people.
Why would you do that?
You'd rather stay in a home witha low mortgage because you've
(20:55):
got a low payment, your mortgageis your biggest payment, where
you'd buy another house and nowyou're having to pay a thousand,
1500,$2,000 more for yourmortgage.
Why would you do that?
So people wouldn't do that.
A lot of people are not doingthat.
So therefore, people locked inwith low interest rates, just
like the bank locked in.
SVB Bank locked in with the lowinterest rate for a long term,
(21:16):
people locked in for lowinterest rates for their homes.
Now that's a good thing for themin many ways, but also, It means
that you can have fewer homes onthe market.
You can have fewer homes on themarket.
There's a knock on effect ofthat, which means that there's,
there's less supply and thedemand is still there from new
people wanting to wanting tobuy, which means that can end up
(21:38):
with a really skewed and strangehousing market.
That's just what we can see forthe foreseeable future.
It's gonna be less supply anddemand is still going to be
there, but perhaps less demandas well because, interest rates
are high, but still people needto buy homes.
So there's gonna be a demand andless supply because fewer people
(22:00):
are gonna want to sell.
So that's something to look at.
So I don't think we're gonna seea precipitous.
Drop in home values across thecountry, certain markets which
are overheated will have asignificant drop.
I'm really seeing that in valuesof homes in places like Denver
that is just the way it's gonnabe.
(22:20):
We're gonna see more or less, astable housing market going
forward.
A small drop here and there, butnot a massive drop.
Where that changes though, is incommercial real estate, large
multi-family developments andother types, because a lot of
those people, they did what thebanks did.
They thought that interest rateswere going to stay low and they.
(22:43):
Purchased properties with loansthat had short term.
interest rate changes.
What that means is they may havebought the property based on
either some kind of constructionloan or some kind of rehab loan,
which had a fixed interest rateat a lower rate for a while, but
(23:04):
then it would change, and asthings changed, what happens is
that it interest rates, thenhave gone up and now they have
to refinance or the rate adjustsbased on the current rate and
that goes up quite a bit.
Now, even 1% interest ratechange can skew your numbers
significantly, and now all of asudden, you know, it doesn't
(23:26):
work for you.
And you have to sell thatproperty.
So I think we're gonna see inthe commercial real estate
market, you're gonna see thesame thing which played out with
the banks.
That there's gonna be thesetypes of interest rate issues
coming home to roost.
And people are gonna have tosell these properties and
they're gonna become distressedassets because they just, the
(23:47):
numbers no longer work for them.
Instead of people coming andbasically taking out of their
own piggy bank to make thepayments each month, they'll
just either give it back to thebank or they'll try and sell it
for a discount or make a dealwith the bank in some kind of
way.
But, we're gonna see a lot ofthese types of loans, which were
short term loans or adjustablerate, loans go bad and.
(24:11):
That, that that fallout iscoming.
I think because people, again,they didn't anticipate that
interest rates would go up andthey're gonna continue to go up.
So this.
only gets worse.
There are other sectors of theeconomy where this is, similar
as well.
Whether it's business loans orother types of loans which come
(24:32):
due.
And, then they need to berefinanced.
And they'll have to berefinanced at a higher rate.
That all happens at a time whenthe economy is no longer as hot,
so therefore people are makingless money.
So this is all, by the way, bydesign.
So just to understand that thisisn't something which is, you
know, the Federal Reserve didn'tanticipate when the Federal
(24:52):
Reserves raise interest rates,they anticipate.
This to happen and theyanticipate this kind of
destruction and they anticipatetherefore it gets harder to make
money and they anticipate.
Therefore, there some businesseswill go belly up and as they go
belly up that is just ununfortunate reality and people
will lose their jobs again.
They do this because.
(25:14):
Because that makes it harder tomake money.
And as it becomes harder to makemoney, the value of money goes
up.
And as the value of money goesup, fewer people have it.
You have less demand, moresupply.
And again, at that point, thingsbecome cheaper.
Inflation goes down.
It's all by design.
Now, what they don't want is thewhole economy to go down the
(25:37):
tubes.
And that would, if the, if thebanking sector goes down the
tubes, then the economybasically shuts down because we
need some kind of bankingsector.
So therefore they'll banks stopbackstop banks in many ways.
But, don't expect them tobackstop, commercial real
estate.
Don't expect them to backstopother businesses.
There's going to be a hugeamount of destruction and value
(25:58):
coming up ahead.
And what does that mean for usthough?
What that means is that as valas as destruction and value,
therefore think there are dealsto be had.
So people who have cashavailable to buy those deals,
they're going to be in a verygood position going forward.
So in summary people didn'tanticipate that interest rates
would go up.
Interest rates have gone up,they will continue to go up.
(26:21):
The destruction that that causesis by design.
It is meant to pull liquidityout of the market.
It's meant to make things, morevaluable if you like, or money
more those people, who havecash, will be able to use it to
be able to buy more things inthe future.
And that will be a good thing.
So right now what I say to youis, conserve cash as much as
(26:44):
possible and look for the futurewhen you have that cash to be
able to make, investments inthings that will bring you
long-term value.
Be patient though.
there's no timeline when this isgonna exactly happen, but what's
happened with the banks, that'sthe canary in the coal mine.
I think for what is gonna happenin the future, where there's
(27:06):
gonna be more destruction, andthat destruction obviously is a
terrible thing for the peoplethat happens to, but for those
people who can swoop in and takeadvantage of that that will be a
good thing for them.
So, That has been my commentaryon the last week in the business
world.
This has been La Brackman withthe Wisdom for Business and Life
(27:28):
Podcast.
Thank you so much for joining.
If you like this content,please, leave a comment or leave
a review or say at least, youlike it and wherever you listen
to this podcast.
Until next week, have awonderful day.
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