Silicon Valley Bank Collapse Explained: What the Banking Crisis Means for Your Money

Vance Crowe [00:00:05] Welcome back to the podcast. I'm glad you're here. Today we have a special edition of the Vance Crowe podcast, and that's because some of the banking system is doing some kind of wild things. So I called one of our favorite guests of the podcast, Jeremy Lakosh, to have him sit down and talk with us. Jeremy is a longtime participant with the podcast, but also writes for Seeking Alpha, and is one of those guys that I turn to when I say what's going on with markets. Not because he's a guy that winds me up, but actually because he's a guy that calms me down. Jeremy, welcome to the podcast.

Jeremy Lakosh [00:00:42] Thanks for having me back, Vance.

Vance Crowe [00:00:44] So let's get an update. It is Monday morning. What is going on in the world right now as regard to the banking? What happened over the weekend? So

Jeremy Lakosh [00:00:53] We appear, we appear to be having a liquidity event that is underway right now. And essentially what's going on is the banking system as a whole, during the height of the COVID Pandemic, when they were flooded with easy money, purchased a significant amount of US treasuries because there was nowhere else to put that money. And the safest place to put it in theory is US treasuries. The problem that we're beginning to realize this week and last week as well, is that treasury prices are not as stable as what you would think to be for AAA rated security. And so the, as the yields have gone up over the last 15 months, the prices of those treasuries have gone down. So now in order for a bank to sell those treasuries, they have to take billions of dollars of unrealized losses, and a handful of banks have needed that liquidity over the past week. And basically what happened with SVB is they sold the, some of their securities, they took a two and a half billion dollars hit and that perpetuated depositors to go in, put a run on the bank and cause it to fail. So we're here today because of the easy monetary policy of the COVID Pandemic.

Vance Crowe [00:02:28] Yeah, on my way into the studio today, I was listening to President Biden, went on the air at I think 6:00 AM Central time and said, Hey, I just wanna assure everybody everything's fine. And he said some rather extraordinary things. First of all, one of the things he said was, Hey, if you had more than the FDIC limit for insurance, which is $250,000 in your account, if you're above that, don't worry. You can still have access to, to your money. We are going to find a way to be able to make, make you have that money. Surely this is done to try and stop people from rushing to get their money out or to try and move any accounts that have more than 250,000 on. But a pretty extraordinary step, isn't it?

Jeremy Lakosh [00:03:13] Yeah, I, and I think to some extent, the government over the weekend made the right move in terms of backstopping all deposits in banks. They haven't, they haven't explicitly said that yet. I guess Biden was pressed on it and was non-committal. But there is enough capital in the banking system that if banks were to begin to fail, other banks would be able to purchase the assets of the failed bank and take on all of the deposits and be, and be okay. Now you're gonna have shareholders, bond holders, other counterparties still wiped out. But I, I think it's a wise move here to essentially say that that portion of the banking system is well capitalized. Now, where he said, he said something this morning that I don't agree with him saying, and that is that no taxpayer dollars will be shelled out to bail out the financial system. And it's not that I think we should do that, it's that it's way too early to suggest that the $100 billion trust that's been set up from FDIC fees is going to be adequate to do it. I think he could have done without saying that this morning and that that may come back to haunt him if this liquidity issue continues to spread.

Vance Crowe [00:04:44] So let's look at the week ahead right now. If over the weekend, signature Bank of New York's, they were taken over. So now there's two banks. These are, how big are these banks and how much does this affect, say, regular banks out in the world?

Jeremy Lakosh [00:04:59] So Silicon Valley Bank was the second largest bank failure in American history. Signature Bank is the third law, largest bank failure in American history. And so these are significantly large financial institutions. And I, again, I think that it was a prudent move for the FDIC to walk into Signature Bank yesterday because they probably were going to do it today anyways. What does this mean for the rest of the financial system? I think that regional banks that have significant exposure to US treasuries and agency backed mortgage securities and don't have a lot of cash on hand could run into problems where they're, they're gonna have to make one of two decisions if the depositors come in. They're gonna either have to sell those agency backed securities and take realized losses, or they're going to have to go to the Federal Reserve and tap a new facility that was created over the weekend designed to lend to banks against those securities so that they don't have to take those realized losses. And that even though that is a, a prudent step to be made, you have to do it without the markets finding out that you've done it because they'll kill your stock by selling it off if you suggest any hint of distress.

Vance Crowe [00:06:35] Yeah, and I think for people that are not really well acquainted with how banking works, you know, you might have this sense that, oh, I put my money in a bank as long as I don't have more than $250,000, I can get it back. Only rich people have more than 250,000. This isn't a big deal. But the reality is, the bank, the retail banking section that just deals with, you know, cashing my paycheck or, or my regular checking account is not that big of a portion of the overall banking system. What is big is all of the businesses that keep their money in a bank in liquid accounts because they've gotta do payroll, they've gotta pay vendors, they've gotta have accounts receivable. So there are millions and millions of dollars and depends on how big of a business it is or how much turnover they're having that this is what the cash is in the banks. And when people are talking about a run, what they're saying is, a business says, look, I cannot afford to not have access to a half a million dollars a week. I, I won't be able to pay my workers, so I'm gonna go get that money out. But the funny thing is, if right now you decided, Hey, I want to go pull all of my money out of these deposits, where would you go? You're talking about regional banks, like w would you take your money out of that bank and go put it in Bank of America? Help me understand how this works.

Jeremy Lakosh [00:07:57] So part of the problem here is that we can now use this to withdraw money. We don't need to physically walk into a bank anymore and say, I wanna withdraw funds. We can use a cell phone and be connected to multiple financial institutions right here. So I could sit here and move money around or on a computer and not have to physically walk into a bank. That's part of the problem we're up against right now is be a bank run is always in history occurred quickly, but now it can occur at lightning speed. If, if there are people out there who have uninsured deposits and they're uncomfortable with the situation at hand, the most prudent thing to do, quite honestly, is to go to the bank that you're doing business with now and ask them to sweep those funds into a treasury backed instrument. It's, it's, I I think it's called a, a collateralized sweep. I did this about 11 or 12 years ago when deposits with the company I worked for were uninsured. Essentially what the bank would do under those circumstances is purchase US treasuries collateralized against those deposits. So they would use those excess funds to, to purchase treasuries. And essentially those treasuries would back, would, they would back those deposits in the event of, of a failure.

Jeremy Lakosh [00:09:35] So it, it would create some additional peace of mind for the entity that has the uninsured deposits. And quite frankly, right now you're gonna get four, four and a half percent on short-term treasuries. It's not a bad time to buy 'em.

Vance Crowe [00:09:51] And so when people go in to buy a treasury in the way that you're describing it, what they're doing is they're saying, Hey, I'm going to trust that the US government is going to pay me more money based on me giving them a loan for this money that I'm giving them.

Jeremy Lakosh [00:10:05] Yes. So the system that I'm talking about is essentially the bank. The bank would actually earn the income on the treasuries because they are purchasing the treasuries on behalf of their customer as collateral to their deposit. So the customer does not hold the treasury, the bank actually still holds it, and they would earn that, that extra income. But your question brings up another point that appears to be occurring in our economy. And this, this is what I ran into when I looked at SVBs financials over the weekend. Customers during the latter part of 2022 started moving their money out of non-interest bearing accounts and into interest bearing accounts. Some of them were with the same financial institution, which is no big deal, but I found over the last three months that the US treasury rates have risen faster than banks are able to offer certificates of deposit. So what I think is occurring is that some customers are saying, wait a second, I can get the most for my money safely by buying US treasuries. And they're taking it out of the bank, they're taking it out of the, the checking account. They're foregoing a CD and they're going right to US treasuries. And as a result, they're pooling money from the bank

Vance Crowe [00:11:30] And the banks, the the thing that they need are deposits. And right now, as, as the interest rates have gone up on how much they had to pay for a long time, banks were able to take in all of this money and they had to give almost no interest rate at all. If you had a business account there or a retail account, you'd be getting, you know, 1% or something along these lines like very, very small. And so it was essentially like they had free access to capital for them to go out into the world, and then they would take those deposits, which they had to pay very little for, and they'd go loan it out to all these businesses. And so then as the interest rates start climbing up, all a sudden the people that have deposited their money are like, wait a second. Why, why are you able to charge more for your loans than giving me the money for leaving my money with you? And banks have all been very, very, very slow to change those deposit rates because they know once we give those deposit rates at a higher rate, it's gonna cost more for us to make money. And in this environment it's been, they've been trying to make as much money as they can. My sense is because everybody knew there was a storm coming, and so they're trying to get as much in before the storm actually hits.

Jeremy Lakosh [00:12:44] Yeah. And, and to highlight the second edge of that sword a little further, when we flushed the economy with cash in the second quarter of 2020 through the first quarter of 2021, that's when the rates were really the lowest. At that time, banks did not have anywhere to put that money. So they purchased US treasuries. And I wanna highlight an example. I looked this up this morning. The three year treasury bond, which was the average duration of a bond that a bank would buy, was priced at 113 cents on the dollar at the height of the, the low interest rate era today, well last week, that would've been worth 100 cents on the dollar. So in order for a bank to sell that treasury, they'd have to take a 13% loss or write off a five year treasury, which is on the further end of that was 118 cents on the dollar prior to the raise of interest rates. Today it's 99 cents on the dollar. So that's an 18% hit that banks would have to take. And if you go to the St. Louis Federal Reserve website, you can actually look at the statistics as to what banks bought during that period of time. From April of 2020 to February of 2021, banks bought $800 billion of US treasuries.

Jeremy Lakosh [00:14:18] So that's $800 billion of treasuries that are subject to the losses I just provided. They also bought $450 billion of mortgage backed securities, which are experiencing the same price volatility. So overall you have 1.2 to $1.3 trillion of assets. And that does not include the assets that were purchased right as the COVID pandemic started or after, 'cause they were still price cheap for a year afterwards. But basically you're looking at, oh, roughly about $150 billion of unrealized losses sitting on the books of these banks right now.

Vance Crowe [00:15:00] And those unrealized losses for in my understanding is that if a bank, which had all kinds of liquidity for a while there, they had so much money sitting around as cash that they were like, we gotta do something with it. So they went out and bought what had traditionally been really secure things like bonds. But if you, if you put those bonds, you buy them, you don't actually have to on your accounting say, we've made that loss until you sell. So for a long time you can be like, well, we know that we bought them at this much and we know they've gone down, you know, let's say that 18%. But until we actually sell it, until they come to maturity, we don't actually, that unrealized loss is something we don't have to account for. Or I mean, you may, you account for it, you know it's there, but it's not known to your borrowers. It doesn't act, you don't have to go off and sell other assets to, to make up those losses. And it seems as though right now a lot of those unrealized losses are coming due. People did this two years ago, they were two year treasuries. So it can't just be SVB and Signature Bank that are the only two that are feeling this.

Jeremy Lakosh [00:16:07] Yeah, correct. Bank of America has tens of billions of dollars of unrealized losses. If you look at their SEC financials, I think it's pretty much every publicly traded bank in the United States right now has this on their, their balance sheet. And basically what it has done is it has taken those securities which are being held by the bank and made them no longer liquid. Meaning if I sell those securities right now, I have to take a realized loss and the realized loss when I publicly announce it creates the bank run. So now my liquidity is only my cash on hand, and it may be any securities that mature within the next six months that are priced closer to par and have a little to no losses on them. And so essentially what we're seeing is the available technical liquidity of banks over the course of last week was cut easily in half. So now they can't touch that money because if they do, they signal distress. And, and that's why the, the Federal Reserve and the Treasury set up that facility over the weekend that allowed people to borrow against those versus taking the loss. But again, you've gotta be able to do that without broadcasting to the world that you have a good example, first Republic Bank, the ticker, there's FRC, they announced over the weekend that they have $70 billion of untapped liquidity that they could tap into today their stock is down 60%.

Jeremy Lakosh [00:17:52] So it's still not mattering that banks are are saying these things because the market is looking at it saying, well, they're gonna tap into that facility, which is gonna erode the value of our share price. So we need to sell that stock down.

Vance Crowe [00:18:09] There's something really interesting about the psychology of what's going on here, right? Whether it's at the individual level, what am I personally going to do? Or the psychology of the markets, masses of people, which is that these banks, it's, they're, they weren't surprised that they've, that the treasuries have gone down, they've known for weeks, months even that they, they had these unrealized gains. What is going on or unrealized losses? What is going on that all of a sudden people are paying attention to it and, and, and making change based on it.

Jeremy Lakosh [00:18:44] I think what's happening is at the bank level, the folks that are actually in the bank making these decisions, they never thought interest rates would go as high as they did. And in fact, up until two weeks ago when we had a big bump up in interest rates, I don't think the market as a whole thought that interest rates would go up as high as they did. And when I say as high as they did, the six month treasury got to five and three 8% last week, and a couple other maturities around it crossed the 5% threshold. So what these banks didn't do as a result of thinking rates wouldn't go so high, is they didn't go out and purchase hedge or derivatives against those higher rates sig, not Signature Bank, but Silicon Valley Bank did not have any interest rate swaps, which they could have used as a hedge against these unrealized losses. So the banks that you are gonna see targeted by the market this week are going to be the ones that weren't prepared for the higher rates.

Vance Crowe [00:19:54] And from a bank's perspective, they're looking at the higher interest rates like the, the Fed raising interest rates, at least in the short term is like, Hey, this is great for the first time we are, we are able to move up how much we're charging customers for this. So if the prime rate goes up and then we, you know, the, then you get prime plus plus a little bit, the banks for a while thought, Hey, we're sitting in tall cotton. But it's funny because if you're saying the Fed is the one that has changed these interest rates, they're doing it by, you know, dictum, they get to just decide what the rates are if they go up, did they know what they were doing that they were gonna crash some banks by continuing to move these rates up?

Jeremy Lakosh [00:20:37] Yes and no. If you look at the Fed meeting minutes that came out last month for the last Federal Reserve meeting, the participants of the Federal Reserve shared three concerns that they had with the higher rates. One, one of those concerns was unrealized losses. So they were aware that this was becoming a problem. The second of those three items that they shared that I think is gonna hit us in the coming weeks is there is a concern with the Fed that non-banking financial institutions are going to begin to experience liquidity problems as well, because they are holding a significant number of mortgage backs, securities, which also have eroded in value over the last year. And some of these non-bank institutions, they're not as regulated. Some of them are privately held, so we don't even know as the general public what they're experiencing. And if those entities begin to fail, you're gonna have a wave of mortgage backed securities essentially hitting the market and causing further pricing problems.

Vance Crowe [00:21:50] So let's talk about this. Who is a non-banking institution that gets to play in this world?

Jeremy Lakosh [00:21:57] So I'm, I'm thinking specifically a mortgage. Mortgage REITs, Fannie Mae and Freddie Mac are probably the two widely known GSEs. They're already backed by the federal government, but there are smaller institutions around the country. Penny Mac is a good example. Now Penny Mac is actually, well insulated themselves from this, but basically what they do is they go out and they originate mortgages and they don't have deposits, so they don't have depositors, but what they do is they take investor money, they originate mortgages, and they either hold them or they sell them. And for the institutions that sold mortgages or sold a majority of their mortgages, they're doing a lot better than those that decided to hold the mortgages and then acquire more debt against those mortgages in an effort to, to sell more. And so what these institutions are essentially is they're investor backed institutions that originate and hold mortgages. And much like US treasuries, they're seeing a lot of the unrealized loss volatility as well.

Vance Crowe [00:23:11] So let's widen our lens out even further. I was listening over the weekend and heard that the mortgage applications is down to something like a 20 year low that because interest rates have gone up so high, people that were moving around houses, I mean, people were swapping houses every two, three years for a while there because they could get access to easy capital. Well now all of a sudden people are like, you know, if we're playing, what's that game where you're trying to get the, the chair, right? All of a sudden people are freezing and they're not selling houses, they're not putting mortgages up. What happens in the economy as people stop buying houses and you stop seeing this e economic churn happen.

Jeremy Lakosh [00:23:52] So yeah, the, the game of musical chairs, the the music has slowed down dramatically and the number of chairs available has shrank back to what I was talking about before. With these non-bank entities whose jobs it is to originate mortgages, they need to originate so many mortgages in order to stay solvent because they utilize the sale of those mortgages to pay their creditors. So they're the ones that are gonna see the most problems when the sale activity declines because they have counterparties that they still have to pay for those in your, in your listener group that follow these companies closely, some of the publicly traded ones, the first sign of stress you'll see is if they issue forbearance agreements with those counterparties and that's what they did during the COVID pandemic.

Vance Crowe [00:24:46] Let's put that in regular language. What does that mean? Yeah,

Jeremy Lakosh [00:24:49] Basically a forbearance agreement means we are going to defer payment to you for 30 days. And, and what that does is it offers the institution an opportunity to raise liquidity or capital. Now since they don't have depositors, they aren't subject to a run. So they'll be able likely to have better access to, to capital markets in that 30 to 60 day period. Not all of them will survive, but I think a decent number will because there is still a decent amount of capital out there that would, that would come calling at the right price. So basically they would defer their debt payments for a period of 30 to 60 days in lieu of, of some additional activity. I do want to touch on something though that you said that highlights the slowdown in the mortgage market. I recently refinanced some business debt that I had a couple of weeks ago, and when I did that, I started receiving calls from mortgage companies because they saw my credit file had been pulled soliciting me to go for them instead of going to the bank that I was, I was doing business with. And I told the mortgage officer about this and told the bank officer, I said, I'm getting all these calls from people. And he said, he, he said, yeah, you're gonna get about four or five of these calls over the period of a day or two over the weekend. It was a Friday and a Monday. I got over 60 calls from these people and I got an additional 20 calls in the two weeks after that.

Jeremy Lakosh [00:26:28] Some were from the same company after I had told them, no, I've already refinanced. And so that tells you how desperate this industry, the non-bank, privately held, mortgage backed companies are getting when it comes to acquiring new business, 80 phone calls in a period of two weeks.

Vance Crowe [00:26:50] So imagine right now you are a farmer. You, you just did harvest back in the fall, you've been selling your grain throughout the winter, you are sitting on a pile of cash. What are you doing with this cash in order to be able to make sure that you can use it to buy things like input seed, fertilizer, these kinds of things, but that you don't lose the, it's buying power. What, what do you do right now?

Jeremy Lakosh [00:27:19] So I, I think that for a farmer, I would highly encourage them to go to their community bank. I'm hoping that they would already have a relationship there. Community banks are great because they take deposit or money and they lend it out within the community at large. So you're helping your community whenever you deposit into a community bank. But I would go to that bank and I would say that I have X number of dollars and let's just assume for our conversation it's all uninsured. What would be uninsured deposits? I would request from the bank that, that treasury sweep be initiated with those funds and possibly per our conversation. 'cause I don't know much about how sweeps have changed over the last 10 years, but it's quite possible that the farmer could ask for three to 4% on, on those, on those sweeps. So they'd still have access to their cash in real time, but they would earn an interest rate of, of around 4% for participating in this. Another option would be to get a certificate of deposit, which is FDIC insured. The up to a certain level, the certificate of deposits, even though they are time deposits, meaning that you can't touch 'em within a certain period of time, you can get some as short as two to three months out and still earn an interest rate of greater than 4% on those as well.

Jeremy Lakosh [00:28:51] So they're safe places to put money in the banking system. I wouldn't, I would not rush out to a JP Morgan or a Bank of America just because they're part of the big four and you know, they have a federal backed guarantee because that money is gonna end up, could end up in another country, quite frankly. Being lent out a community bank is a good place to to, to store the money under the right program and allow it to go to work for your community at large.

Vance Crowe [00:29:26] So you're looking two to three months out, right? With putting these kind of your money away for a little while. What do you think the economy looks like in two to three months? What, what happens? You know, are we gonna see more bank runs? What's your prediction here?

Jeremy Lakosh [00:29:42] So it was about six months ago that I made a fundamental change in my investing philosophy and I decided to start building a treasury ladder and I would also put CDs in there if the CDs offered a better rate than treasuries. And that happened about once in every 10 instances. Essentially what what I'm thinking, and I'm continuing that strategy because I don't think that this is the end of the business cycle. I think that this event is more like a, a bear Stearns in 2008 or a new Century Financial in 2007. It's a major credit event, but it does not turn us into a recession. It, I think it will go away over the course of this week. I think that the interest rate regime from the Federal Reserve will at a minimum hold possibly go higher still later this year. And I think the ultimate liquidity event will occur later on in the business cycle that will, that will ultimately lead to a recession. And I know that some people are saying, well, why would you advocate higher interest rates still knowing that these events might occur? It is because these events occurring right now, albeit painful and shocking, are still much easier to digest than price instability, which is what you're gonna get if you lower interest rates from here.

Jeremy Lakosh [00:31:14] So I'm expecting a hold of interest rates, I'm expecting this situation to mitigate by the end of this week, and I'm expecting a larger liquidity event later.

Vance Crowe [00:31:27] That's fascinating that you are, that you're saying, Hey look, if you stop the interest rate increases at this point and you turn the money printers back on, you make liquidity widely available, what you will then see is no one will have any idea how much things should cost. And you'll start seeing price of price of food changing, price of houses going a little bit wild because it's, it'll be a big guess. Nobody will know what's going on for sure. Yeah. Not that anybody knows what's going on for sure anyway.

Jeremy Lakosh [00:31:57] Right, right. You know, and, and the folks that want lower interest rates right now are the people that believe that higher interest rates caused this. And that's not true. This was caused by 0% interest rates and unlimited monetary expansion at a time when we really didn't understand what was going on. The, the Fed, whenever it prints money, it prints it in an unbelievable pace without tying it to any type of asset loss or deposit drain or anything like that. So we still need higher interest rates right now to maintain price stability. The, the, the consumer price index for services, which is a huge part of our economy, is only like one or two tenths of a percent off of its 40 year high right now. So prices are far from stable in this economy, they're still elevated and we need to continue this higher interest rate regime in order to bring them back under control,

Vance Crowe [00:33:01] You know, to make that real. I, I had some movers like this weekend and I, they did some pretty intense work for several hours and we got done and I was thinking like, how much do you tip these guys? And I, I like genuinely was like, is a $40 tip a lot of money or a little money? Like I really don't have a sense right now for like what is, what is a large amount of money. I know that $40 coming out of my pocket feels like a lot of money, but I don't know that when they get that $40, if it feels like a lot of money, I, I really just don't. I I, things have changed so rapidly that I have lost my ability to know what things should cost

Jeremy Lakosh [00:33:48] Or, or try going to a restaurant and finding out that the bill comes out 10% higher than what was on the menu. And they have to tell you at the register, well, our prices actually went up again and we didn't have the, the time or the inclination to change the menu because we don't know where they're gonna be at three or four months. That's been a common problem that I've been hearing from people over the last six months. And, you know, and the, the cost of food

Vance Crowe [00:34:16] Just this, just this week I went to the, to a a Mexican restaurant and they had a sign at the cashier's register, if you have a price problem with your bill, please politely ask to see the manager. And like it was implying like, don't yell. Right? Like, and so that, that's like a serious issue, right? That's the kind of thing that you see when you're traveling in the Mediterranean or something where, where like the, what the bills on the menu don't match the bill that you're paying.

Jeremy Lakosh [00:34:45] Yeah, yeah. And that's reflective of the cost of food, which just like services is, is a hair off of its all time high right now. And, and again, we, we have not gotten these things even remotely close to under control. And if we decide to lower interest rates, the, the instability is gonna be almost instantaneous because by all, by all accounts of, of the measurements I'm looking at, we still have too much money running around the economy right now to the tune of about a trillion dollars. And, and if we decide to add to that, it's just gonna continue this upward spiraling of prices.

Vance Crowe [00:35:27] Well you said a couple of interesting things there. The first one is how, like that you look around and you see there's too much money out there. How would you come to to that conclusion?

Jeremy Lakosh [00:35:38] So the Federal Reserve of St. Louis, they do a great job of monitoring the deposits that are basically being held at all federal reserve banks. And that dollar amount right now is a close to $3 trillion. So there's $3 trillion of money that banks have parked at the Fed. That dollar amount prior to COVID was between 1.5 and $2 trillion, which I just think is a healthier monetary base to have. Therefore, I'm concluding that with that being a trillion dollars higher, that that's about how much excess liquidity is floating around out there

Vance Crowe [00:36:22] When an individual is looking at the situation right now, surely they could go take their their phone out and they could say, I want to move it from this bank to that bank. But if they, if they, if they are afraid that the money is, they're not gonna have access to it, the natural tendency is to say, well, I'm gonna go and get some physical cash out. Do you think that the panic that is going on or the fear, the, the things that are going on in the media will generate a lot of people to go to their ATMs or to their bank and, and withdraw large amounts of cash? And if they do, what is the consequence of that?

Jeremy Lakosh [00:37:03] So I think that there's gonna be some people that do that. I think that there's gonna be some people who felt the sting of Silicon Valley Bank personally, and they have money in other financial institutions, and so now they're gonna begin to pull that. I don't think it will be big enough to ripple across the economy, but if it were to be big enough to ripple across the economy, then you would see a massive bailing out of financial institutions once again, similar to what we had in 2008, because banks aren't capable of covering the deposit needs of their customers all at once. In fact, they're, they're probably equipped to handle about a 15% withdrawal quickly. And maybe with the new facilities over the weekend, they'll be able to handle 20 to 25%, but they're not capable. The, the banking system naturally isn't capable of producing all deposits at once. And so if it were to become a big issue, then you probably would see taxpayer money, just like contrary to what President Biden said this morning, taxpayer money come in to, to backstop those institutions.

Vance Crowe [00:38:27] It bank essentially just like a, something different about holding cash, but if you went to your bank right now, like the most that they would give you would be, you know, a few thousand dollars maybe up to $10,000. And it wouldn't be very long before they'd be like, actually we need to make a phone call. We can get you that in a few hours because banks anymore don't even have vaults, right? They keep a few thousand dollars, you know, a hundred, a hundred thousand, $200,000 in, in a small vault, but like they're not keeping a huge amount of money there because for the most part, people don't come in and ask for cash. But you could imagine a situation in which people that don't understand banking at all, or people that do understand banking decide, Hey, I wanna go get physical money out. They, they don't realize like the Federal Reserve has to send a delivery truck out to drop off the money at the bank because it's literally not at the bank.

Jeremy Lakosh [00:39:27] Yeah, I think the bank would probably try to talk you into a cashier's check in order, in lieu of taking large amount of cash and that would probably facilitate a 15 to 30 minute meeting depending on how obstinate the, the customer would be. But you know, back to back to the very beginning of all of this, some of this is occurring because people don't even understand how the FDIC system operates. Just because you have an uninsured deposit with a bank doesn't mean you're going to lose money. When, when Silicon Valley Bank failed the FDIC when they stepped in, sure they insured the insurable deposits, but they went out and looked for banks to acquire the assets of Silicon Valley Bank. And if I'm an acquiring bank, this is a great opportunity to get new customers, new business, but I'd be stupid to make an offer that says, well I'll, I'll cover 80% of the uninsured deposits because all I'm doing is inviting those people in to then run on my bank. So an acquirer of Silicon Valley Bank assets would want to say, we will take all deposits and we will back all deposits. And that's how the, the healthy part of the FDIC system works. But people just generally aren't aware of that. And, and this could be a conversation for another day, but the education system in America does a really poor job of any type of personal finance education.

Jeremy Lakosh [00:41:06] And so obviously the average person isn't gonna understand how the FDIC operates and, and it's gonna perpetuate the, the fear and the bank runs and, and everything else.

Vance Crowe [00:41:19] Yeah. So Jeremy, I know you always kind of have your finger on the pulse of things you're writing for seeking Alpha right now you're watching what's going on with the economy. What is some numbers, some, some things you're looking at to tell you what's gonna happen or, or, or when something has changed, that's enough to make you change your behavior.

Jeremy Lakosh [00:41:42] So I, I'm gonna look today at how bonds investment grade bonds with long durations or trading because those have gotten slaughtered in the interest rate hikes. There are, there are double A rated companies that issued low coupon bonds at par during COVID and those are now trading at 60 cents on the dollar. Just to give you an idea of, of how much of a selloff has occurred there. If those bonds rally, if they go up 5 cents on the dollar, let's say, then I know that money is pouring into, into safe assets. That also means that there's likely a built in stabilizer occurring here where we're gonna drive interest rates down by going to the flight to safety. That drive in interest rates down is gonna buoy the, the bank positions better and things will slowly stabilize over the course of this week. If I see that investment grade corporate bonds are declining in value today, then that's gonna send a signal that basically investors are more comfortable sitting in straight cash and money is coming out of the market. And that's where we would, we would, or I would think that we're headed more towards a black swan event and a recession because of that behavior. So in the, in the 24 hour term, that's what I'm looking for to suggest that we are actually stable beyond that, I'm going to continue to watch inflation every month that the, the inflation report comes out this week is February's report, which is almost old news already because we've had a lot of events occur here in March.

Jeremy Lakosh [00:43:32] But I'm gonna continue to watch those reports to see that inflation is, is heading towards 2% and the, the quicker it gets to 2%, the quicker we're gonna be able to lower interest rates towards something more stable. And I'm also gonna keep an eye on the labor market. We still have about 10.8 million open jobs in the US economy. Now 5 million is considered a healthy number, so there is a large healthy number in there, but to have 5 million more means that we still need 5 million people to join the labor force before the labor market starts to see some semblance of normality. And until that happens, people who are desperate to hire are gonna pay higher wages and those higher wages are gonna get spent in the economy and it's gonna fuel more inflation. So the, the inflation reports and the labor market reports continue to be important. Things that I'll be looking at.

Vance Crowe [00:44:35] Well, Jeremy Lakosh, I could go all day on this, but I'd really like to get it published and I know that you and I can connect and do this. Again, thank you so much for your time. If people wanted to read and follow what you're saying, where would they go to find out more?

Jeremy Lakosh [00:44:50] So you can access my articles directly by going to seeking alpha.com and search my name Jeremy Lakosh. Some of those articles are behind a paywall, some of those are available for free. I am gonna try also to post some things on my Twitter account, which is at Jeremy Lakosh and people could see what I'm, I'm most interested there on Twitter.

Vance Crowe [00:45:16] Well Jeremy, thank you so much for coming on. We'll have you on again soon I'm sure. Stay safe out there.

Jeremy Lakosh [00:45:22] Thanks Vance. Take care.