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There are a number of I think mistaken assumptions in your post. One is that the wealthiest keep most of their money on deposit. The more money someone has, the more risks they can take with that money to keep up with inflation. It is the middle class and poor who need to keep most of their assets in bank accounts, not the wealthiest, as the middle class and poor need to have liquid capital in case of emergencies. A wealthy investor can afford to tie their money up for several years in far less liquid but very lucrative investments with returns that exceed inflation.But you might make an argument that inflation harms the wealthy more than the working class.
That assumes the poorest people's wages keep up with inflation. That is often not the case as the unskilled or low-skilled labor have the least bargaining power when it comes to wages. If you're not making more money to pay back the fixed amount of debt, that doesn't work. Moreover, much of the debt poorer people often assume like credit card debt is often variable rate that rises with interest rates and inflation.On the other hand, if you have lots of debt (assuming at a fixed-rate) you are helped by inflation as you pay back the debt with cheaper dollars.
My grandfather used to say the business cycle was driven by how long it took to forget lessons learned the hard way. He rolled up banks working for The Comptroller of the Currency during the Great Depression.It’s easy for investors to dismiss the ripples from the collapse of Silicon Valley Bank SVIB as contained and nothing to worry about when it comes to a broader portfolio.
But if there’s one thing to know about banking crises, it’s that they are never just about the banks. They may start there, but they don’t end there. Easy financial conditions tend to lead to higher risk-taking and a complacency that long-established patterns will continue. Until they don’t.
As Warren Buffett has been known to observe, only when the tide goes out do you see who’s been swimming naked.
The Worry Is Fear
The failure of two major regional banks since Friday threatens to erode investor and consumer confidence to a degree that could spiral in unexpected ways. And with inflation still raging at the highest levels in 40 years and the Federal Reserve raising interest rates at the most accelerated pace since those years, things are starting to break.
“The worry is about fear,” says Tim Murray, capital markets strategist for multi-asset portfolios at investment manager T. Rowe Price.
In good times, too, policymakers get lax and tend to feel like it is safe to repeal or reduce important protections designed to prevent systemic events and consumer safeguards.
And pity those with such a narrow view of investing. Unless you’re 25 and DCA’ng into a 401K every couple weeks. Over the next 35 years an S&P index fund should do just fine.I think in Grantham's case, given the models he uses, it's safe to assume he is referring to U.S. large caps, i.e., something akin to the S&P 500 or Russell 1000.
https://www.washingtonpost.com/business/2023/03/13/svb-crisis-backstop-revives-the-specter-of-moral-hazard/bb2731c6-c188-11ed-82a7-6a87555c1878_story.htmlDepositors with big cash holdings are – reasonably – expected to be aware of the risks and spread their cash around several institutions. Businesses backed by venture capital, such as the customers of SVB, ought to have been advised how to manage their liquid holdings.
... the sight of depositors being made whole ... provides a disincentive for both depositors and banks to be prudent. There’s no reward here for SVB customers who banked more carefully.
https://scholarworks.umt.edu/cgi/viewcontent.cgi?article=10130&context=etdA good first step... would be to cease the present practice of fully paying out uninsured depositors when bank failures occur. This practice, of course, is de facto insurance [emphasis in original] ... Paul Duke, Jr. reports that "many [bankers] support proposals to give depositors a 'haircut' a 10% of 15% loss on deposits above the [FDIC insurance limit] — when a bank fails. Two of banking's biggest guns, Citicorp Chairman John Reed and Chase Manhattan President Thomas Lebrecque, support variations of this proposal (WSJ, Aug 3, 'S9, A16). ... Such a shift in policy should not encounter insuperable opposition since it falls far short of enforcing the insurance limitations which legally already exist.
Since the Continental Illinois bankruptcy the federal banking and S&L authorities have adopted a too—big—to-fail policy. The policy is closely related to the unwritten policy of rescuing any faltering American corporation if it is large enough. The most notable cases so far have been Continental Illinois and Chrysler.
...In the beginning this de facto extension of coverage only applied to the banks and S&Ls which were large enough to have a wide financial influence. ... only the eleven largest banks were originally covered, hence the designation "too-big—t o—fail". The government however was rightfully criticized for this policy on the grounds that it put smaller banks at a competitive disadvantage, so, to correct this inequity the government has for several years made it a general policy to pay off all depositors in both large and small failed banks.
Bank stocks, particularly, were hit hard, with the KBW Nasdaq Bank Index (BKX) slid 3.9%. Among the biggest U.S. banks, Wells Fargo (WFC) sank the most, -4.7%.
While banks often benefit from higher interest rates, in that they are able to collect more interest from the loans they provide, the demand for loans declines as it becomes more expensive to borrow. With higher rates, specifically, demand for mortgages also tumbles. And if the Fed tightening leads to a recession, defaults on loans will increase.
Wells Fargo (WFC) has been one of the biggest mortgage lenders for years, but is scaling back its presence in the sector. The bank reportedly laid off hundreds of mortgage bankers this week and it aims to create a more focused home lending business.
At the same time, banks will also be pressured to pay more interest on deposits as account holders shop for the best rate.
FWIW...
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I enjoyed the mildly stated but pointed conflicts between the two women in the early segment. Kettner thinks active management best now. Avoid index funds. Reinhard primarily uses index funds due to low cost. Ketterer likes foreign developed markets which she sees as cheap if measured against the U.S. the past decade. But Reinhard says to reduce exposure to foreign markets which have been hot more recently. Favors U.S. holdings.March 10, '23
https://www.bloomberg.com/news/videos/2023-03-11/wall-street-week-full-show-03-10-2023
Ketterer at Causeway is so smart and engaging. But I just don't need small-cap volatility anymore. The other guest, Barbers Reinhard from Voya says you would do well with EM if you can hang on for 3-4 years into the future. Not interested, after EM has burned me so often.
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