ts. Think Responsibly

Why It's Time To Watch Your Banker Like A Hawk

David Reavill

March 16 2025 at 03:26 pm

Considering alternatives A growing number of analysts on Wall Street are calling for a slowing economy — perhaps not an outright recession, but enough of a slowdown to cause headaches for the bankers. With as much debt as we have in the financial system, read “loans” from banks, even a tiny increase in slow payments or defaults can mean big trouble for banks. The past five years have been a loan paradise for banks. With all the money printing and outright gifts (stimulus checks) to individuals and corporations, the banks recorded an all-time low in bank defaults. Many borrowers used those additional funds to pay down their loans, resulting in a loan default rate for consumer loans of a mere 1.5% — nirvana for the bankers. Predictably, banks, credit card companies, credit unions, mortgage companies, and other lending institutions aggressively promoted new loans. I don’t know about you, but at the peak last year, I was getting multiple credit card invitations in the mail every day — something I hadn’t seen for years. The lenders were on a roll. After all, loans are a bank’s most profitable asset, and with hardly any defaults, it seemed like easy money. However, by Q3 2023, all that began to change. That quarter, we saw loan defaults start to exceed the old baseline default rate of 2.5%. While that might not seem like a lot to you and me, to the bankers, their “pain” was beginning to increase. Those loans would have to be written off, and the CEO would have to tell shareholders that the bank’s number one credit expense was rising. A good proxy for how a bank’s loan portfolios are performing is seen in the country’s largest bank, JP Morgan Chase. In Chase’s latest earnings report, Q3 2024, the bank just set aside $3.1 billion in loan loss reserves, nearly double the $1.8 billion the bank reserved in Q3 2023. For Chase, loan losses are rapidly becoming a significant issue for upper management. This increase in bad bank loans will impact you and me in the months ahead. Many years ago, I advised clients not to be very concerned about their lending institutions, the banks, and savings and loans that carried their mortgages, credit cards, and other lines of credit. That’s no longer the case. Back in the day, banks and others were slow to change the terms of a loan. Today, loan contracts are written to provide instant adjustments, almost always in the bank’s favor. A simple email sent out this week can often completely modify the terms of your loan next week. Rates (APR) can be changed instantly, fees modified, and even payoffs can be required in certain circumstances. As discussed in a prior article, attractive low introductory rates can see dramatic boosts when the “special introductory” period is over. Zero interest can become as high as 35% (the highest I’ve seen) when the grace period ends in six months or a year. Store cards, affinity cards (group credit cards), and specialty cards (car repair, medical cards, etc.) are especially prone to this kind of interest rate manipulation. As credit defaults rise, we’re now at 2.75% up from that 2.5% base, and the incentive for lenders to apply higher rates and fees also increases. For the financial institution, it’s a simple matter: send out an email and start collecting extra bank income to offset those loan losses. I remember attending an American Banker’s Association (aba.com) Conference where speaker after speaker extolled the virtues of “fee income” for their member banks to make up for loan losses. Today, bank fee income is on auto-pilot; hit a specific parameter, and you instantly find your credit card or other loan payment increase. So what’s the answer? As consumers, we must become as diligent as the banks in monitoring their loan documentation and notices. No one likes to do this, but you need to pay attention to each “change “ email the bank sends. Also, monitor each monthly statement and look for extraordinary charges. Things may have changed since last month’s statement, so beware. Finally, find out what your alternatives are. Is there a competing credit card or loan company that may be less expensive or more generous in terms? Websites like bankrate.com or nerdwallet.com do a fine job of evaluating credit alternatives and the health of your bank or lending institution. Credit services like experian.com will help you find the right card, given your personal credit score. Don’t be afraid to switch. If your lender is not meeting your expectations, or its charges are out of line, consider making the change. But do some leg work beforehand. First, survey the alternatives. Go to their websites and find out what meets your requirements. Then, pre-qualify and find out if the new lender accepts balance transfers. If they do, consider moving. Although it’s a pain, all your recurring monthly payments will have to reflect the new credit card, but it’s worth it if you can save a substantial amount. If you do make that move, know you won’t be alone. The banks and lenders are already preparing for a more difficult economy. Remember that nearly double in JP Morgan Chase’s loan reserve? It will result in higher fees from the bank. Fees that will be passed on to you. By managing your loans now, while alternative, more attractive lenders are still available, you may save a lot of money in the future. Remember: Managing your loan portfolio is as important as managing your investment portfolio. ** If you enjoyed this article, please consider buying me a cup of coffee. Go to: https://buymeacoffee.com/davidreavill Thanks for reading!

The Cost of "Helicopter" Money

David Reavill

March 26 2025 at 12:51 pm

Official Portrait of Ben Bernanke, former Chairman of the Federal Reserve. ** You’ll likely find this story as ludicrous today as we did 20 years ago. But as we’ve discovered, it’s no laughing matter. I first heard “Helicopter Money” in November 2002 when a trader friend called and said, “Did you hear what that new guy on the Fed said last night? He said we should drop money, as if from a helicopter if we ever get as bad as the Japanese. LOL!” It sounded absurd. I had no idea what my friend was talking about, but for the next week, that’s all you’d see on the internet: Ben Bernanke calling for “Helicopter Money.” His speech, or at least the helicopter part, went viral. Back then, none of us knew who Ben Bernanke was; he was some obscure professor from Princeton who had just been appointed to the Federal Reserve. That was all we discovered when we googled his name. None of us were up on our economic history to know that Bernanke quoted Milton Friedman from years before. But as Friedman and now Bernanke were proposing, if there were ever a time when the economy had its back against the wall, one solution to bring it out of a death spiral would be to pump unlimited amounts of money into the financial system — to drop money, as if from a helicopter, into the economy. To all of us living in the real world, all this seemed like a pure, unadulterated, academic fantasy. For one thing, Japan in the early 2000s, with its aging population and declining economy, seemed far away from the American experience, so whatever application this “helicopter money” might have, it wasn’t for us. Additionally, there were a couple of things that we didn’t know in 2002. First, this obscure Professor would become the Chairman of the Federal Reserve Board, arguably the most influential monetary policymaker in the country. Second, we were edging very close to Japan, and by 2007, we would be “turning Japanese,” to quote a popular song of the day. Our Japanese moment came in Bernanke’s second year as Chairman of the Fed. It was the beginning of the Great Financial Crisis of 2007–09. Just like the US Depression of the 1930s, or indeed Japan’s troubled economy of the early 2000s, financial liquidity dried up, as chiefly bad real estate loans impacted the American financial system. Defaulted mortgages meant lousy debt on the books of mortgage lenders and, ultimately, money-centered banks. Citigroup, one of the big four American banks, was technically insolvent at the height of the crisis. If something weren’t done, the entire economic edifice would collapse. This was the moment that something drastic was needed, and Bernanke was ready. Enter Bernanke and his helicopter money. For the first time, the Federal Reserve, in conjunction with the US Treasury, would inject funds directly into the economy. But in a stroke of marketing genius, the Fed would ditch the “helicopter money” moniker and instead invent the more regal-sounding “Quantitative Easing.” The plan was simple: The Treasury would issue bonds. The Fed then purchased the bonds (placing them on the Fed’s Balance Sheet), and the purchase money was injected into the financial system. Altogether, the Fed expanded its Balance Sheet from roughly $900 billion to $2.25 Trillion, an injection of $1.35 Trillion. Combined with a couple of other “slights of hands” by the Fed, direct support for the major banks, relaxation of certain capital requirements, and the utilization of Warren Buffett to manage issues on Wall Street, the nation came through the crisis fairly intact. Or was it? Eleven years later, a certain virus, labeled COVID-19 for the year it was identified, came at us. Initial reports were that this was a highly deadly pathogen that potentially could kill millions, as it apparently had done in China. America went into lockdown, offices closed, stores closed, and all but the “essential” were told to isolate themselves at home. The economic impact was Great Financial Crisis 2.0. Again, liquidity dried up, placing banks and financial institutions at risk. If anything, this time, it was even worse than before. The terrible second quarter of 2020 saw the most significant drop in economic activity in our nation’s history — greater even than the Great Depression of the 1930s. This time, all of Washington was ready; they’d been here before. In February 2020, just weeks after the COVID Pandemic had been verified, the US Treasury, along with the Federal Reserve, began injecting funds, taking the Fed’s Balance sheet from slightly over $4 trillion to nearly $9 Trillion, a total stimulus of almost $5 Trillion, an unheard of amount. It would take months to determine just how successful this latest injection of Quantitative Easing had been, but early results were promising. In time, various government agencies (like the Bureau of Economic Analysis or the Bureau of Labor Statistics) would report that the economy was back on its feet and everything was normal. But as Mark Twain quoted Benjamin Disraeli, there are “lies, damn lies, and statistics.” What happens when you inject one-quarter of a nation’s income into the financial system? The gross domestic income (GDI) increased by nearly $5 trillion during the COVID-19 crisis. Of course, it's not real income, at least not as we think of income, the product of working men and women, corporations and institutions producing the goods and services that make up the economy. Perhaps accountants can create a new class of income, let’s call it “helicopter income.” Pseudo-income created by those financial wizards in Washington to tide us through the bad times. Of course, this new type of “helicopter money “ has a cost: more inflation, higher prices, and greater national debt. But it’s all worth it. Remember, if another financial crisis ever comes, we always have helicopter money to fall back on. ** If you enjoyed this article, please consider buying me a cup of coffee. Go to: https://buymeacoffee.com/davidreavill Thanks for reading!

How To Manage Your Cash: The Warren Buffett Model

David Reavill

March 20 2025 at 01:49 pm

*Warren Buffett, Chairman of Berkshire Hathaway We started following Warren Buffett’s cash position a year ago. At the time (the end of 2023), he had accumulated $163 Billion, an unheard-of sum. Many felt that the “Oracle from Omaha” had reached his limit, that he’d gone as far as he would. However, it turned out that Buffett had only just begun raising cash. By the end of 2024, Berkshire Hathaway's cash position had risen to $334 Billion—incredible! Today, we’ll explore how he manages such a humongous amount of cash. You’ll find his cash management skills to be as straightforward and successful as his equity investments. Cash Management Cash management is a vital discipline on Wall Street. It’s no place to let your money sit idle, as those extra percentages you can gain by investing cash wisely can make all the difference in your long-term returns. And perhaps even more importantly, any cash investment gone wrong can tarnish a sterling reputation. No one knows this better than Warren Buffett. After all, he’s likely the most famous investor of our time and has been on Wall Street longer than most people have been alive. What’s more, Buffett has accumulated the most considerable “stash of cash” in history. His holding company, Berkshire Hathaway, has an incredible $334 billion in cash in its latest annual report (for year-end 2024). It’s an unimaginable sum, made all the most so when you realize that only four banks in the country, JP Morgan Chase, Bank of America, Citibank, and Wells Fargo, have a net worth more significant than that. And three of the four have recently been added to the FDIC’s list of potentially troubled banks. Banks that the FDIC wants to change how they prepare for the next banking crisis. The FDIC has NOT said these banks are in trouble, but their crisis plan needs to be revised. It’s not something you and I have to worry about; we’re covered by FDIC insurance. But for Buffett, this is a huge deal. His cash position must remain safe, and the only way for him to guarantee that is to hold cash at a safer institution than the nation’s largest banks. Buffett’s only place for his cash is the US Treasury, where he has 80% of his cash holdings. (The other 20% is in various checking accounts, deposit accounts, and other accounts tied to his business activity.) The Berkshire Annual Report tells us that all its cash is in “T Bills,” US Treasury Bills. That makes sense because these are the shortest-term, most liquid Treasury Instruments. T Bills generally mature anywhere from one month to one year. It’s relatively easy to build a T Bill ladder of maturities. In a T Bill ladder, you divide your cash into several portions, investing each in a different month or quarter. Say you have $120,000 in cash. In a ladder, you’d put $10k in each month’s T Bill (January, February, March, and so on). That way, you’d have one T Bill maturing each month. You’d then roll it over to the T Bill offering 12 months from now. Simple. This gives you a steady stream of cash (T Bills maturing) and helps you ride the fluctuating interest rates up and down. No doubt, this is the method that Buffett uses to manage his T Bill portfolio. And it’s worked like a charm. Buffett has been accumulating his cash hoard for several years now. When he began T Bill, interest was only about 1/4%; today, interest on T Bills is nearly 4 1/2%. Buffett didn’t have to anticipate any change in the interest rate; by laddering his Bills, he rolled over his older low-interest bills to the newer high-interest bills as the old bills matured. The same will be confirmed if and when interest rates are lowered. But if all of this seems like too much work or if it’s above your budget (you’d probably need about $10k on each step of the ladder), then I’d suggest any of several Money Market Funds (Buffett would recommend Government Money Market Funds), savings Accounts, or CDs at a solid bank. Check out bankrate.com for an up-to-date list of the best savings accounts. The Macro View Interest rates for 3-month T Bill (blue), 5-year Treasury Note (green), and 10-year Treasury Note (brown). Typically, T Bills have the lowest interest rate (shortest maturity). ** A note about Wall Street’s current view of interest rates: I’ve included a chart of three maturities of 3-month T Bills, 5-year T Notes, and 30-year T bonds. You’ll notice that the interest rate of the 3-month T Bill took off in 2022. This is when the Federal Reserve raised interest rates to fight inflation. Consequently, for two years, the interest rate on the T Bill had been higher than the Bond or Note. In Wall Street’s parlance, the Yield Curve was inverted. Interest rates were not as they should be. Longer maturities should have higher, not lower, interest. To the Street, it was a sure sign that the economy would slow, and eventually, interest rates would come down. So far, the Street has been wrong about that. They thought the Fed would reduce rates this year. But, the Fed has stood pat so far, missing the first two rate declines. Most Wall Street analysts still believe that the Fed may lower rates, perhaps once this year and a couple of times next year. If they’re right, then this might be an opportune time to capture higher interest rates before they fall. ** This has given you a basic framework for how Warren Buffett and Wall Street approach cash management. ** Current Rates T Bills 4.34% (1)CDs 4.06% (br. average) (2)Savings Accounts 4.13% (br. average) (2)Money Market Funds 3.73% (br. average) (2) (1) (https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202406 3/19/2025) (2) (www.bankrate.com bank rate average as of 3/19/2025) ** If you enjoyed this article, please consider buying me a cup of coffee. Go to: https://buymeacoffee.com/davidreavill Thanks for reading!

"Your Banker's Calling" Reflections On The...

David Reavill

March 30 2025 at 04:38 pm

Fed Chairman Jerome Powell Press Conference. ** For anyone who's ever had a bank loan, from a credit card to a home mortgage, you know the chill that runs up your spine at the mention of a phone call from your favorite bank lender. The thought that you've missed a payment, or even if you're late, brings in all the ramifications of a loss in credit score, or, even worse, a hefty penalty or, worst of all, a foreclosure.At that moment, you realize that the banker isn't a member of the family or a friend but an often unforgiving force [of nature] that must be dealt with. To whom are we indebted? Not a day goes by that the financial press doesn't remind us that our country is heavily in debt—$37 Trillion! $37 Trillion! They shout as if to say we're all headed to "rack and ruin." But just who owns our debt? And would there be any flexibility in its repayment? Many of those same Cassandras who remind us of the amount of our debt quickly add that China holds much of that debt and can ruin us at any time by simply withdrawing its loan. In the latest report, China indeed holds a substantial amount of debt, in the form of US Treasuries, $760.8 Billion. You can find that report here: https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/slt_table5.html But while the Chinese are a major holder of Treasuries, they're far behind the number one, Japan. The Japanese hold nearly twice as much, at $1,079.3 Billion. Put another way, China owns roughly 2% of US Debt, while Japan owns nearly 3%. Although these two countries have been rivals throughout history and rarely, if ever, act together, even if both countries decided to withdraw their investments, it would mean a haircut of only about 5% of US Debt—something we could manage. However, there is a much greater force lurking in the background, one that does have tremendous influence over our financial future. It's the nation's banker, the Federal Reserve. It's a fascinating story about how the Federal Reserve obtained all those US Treasuries it now holds in its books. Today, we only have time for a thumbnail sketch. When the COVID-19 pandemic began, the Fed owned roughly $4 trillion in Treasuries. You no doubt recall those times when stimulus checks were deposited in your bank accounts, public institutions were given aid, and corporations and banks provided financial support. The process was Quantitative Easing, and when the dust settled, the Fed had acquired an additional $5 trillion in Treasuries. That capital injection took two years, from March 2020 until March 2022. Since then, the Fed has been selling those Treasuries, taking them off its books. In the three years since the Fed began selling, it has reduced its position by $2.25 Trillion, or more than one-quarter. Here's where the confusion lies. Many, even several financial analysts, see this as a reduction in the nation's overall debt. IT IS NOT. The massive sales of treasuries by the Fed result in a reduction in the Fed's debt, not the nation's debt. In fact, by reducing overall liquidity in the financial system, the Fed encumbers the rest of the country with more debt, not less. Put differently, the funds used to "buy back" the Fed's Bonds come, to a very large extent, from other bonds issued by the US Treasury. Essentially, taking debt from the Fed's books and placing it on the US Treasury's. Most of us should ignore the periodic performance of the Federal Open Market Committee's (FOMC) interest rate decisions and instead focus on the Thursday H.4.1 Release of the latest Assets and Liabilities of the Federal Reserve. https://fred.stlouisfed.org/release?rid=20 This is where the real news is. For the past three years, it has been a tale of the Fed removing liquidity from the nation's financial system as it retires its massive Treasury position. All of this will have a tremendous impact on the economy. If, as many of us believe, the economy is not as strong or buoyant as the Fed believes, then any reduction in liquidity will depress commercial activity. The last three-quarters of GDP Growth have shown declines. There is a decline in business and consumer confidence and a recent uptick in unemployment. Retail sales are a basket case, with real disposable personal income showing mere fractional growth for years. Many factors have contributed to this muted outlook, such as pending tariffs, reduced fiscal dominance, and regulation changes. Nonetheless, the Fed's reduction in system liquidity has been the overarching factor. Watch that Thursday Fed Report (H.4.1) to see how much the Fed continues to put on the brakes on the economy. The Fed's ongoing program of removing liquidity from the system—to date, $2.25 Trillion—is paving the way for a tight money crisis. In the coming weeks, this is likely to become a chief economic trajectory. EPILOG Bank loans can sometimes be adjusted, and interest rates, loan schedules, fees, and other terms can be changed. As a real estate developer, Donald Trump, on occasion, used these adjustments to save some of his commercial projects. Unfortunately, US Treasuries do not have such provisions. But imagine if 20% of the nation's debt could be converted to some novel loan from the Federal Reserve. Then, such an accommodation might be reached, helping put the country back on a solid financial footing. Regrettably, such a vision remains a mere fantasy, as no bank, even the Federal Reserve, has sufficient capital to make such a loan. But given the President's background, it would not surprise me to see him attempt to renegotiate the current terms and conditions of our National Debt. ** If you enjoyed this article, please consider buying me a cup of coffee. Go to: https://buymeacoffee.com/davidreavill Thanks for reading!

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