The Darkside of Finance
This newsletter is going to be a bit darker than usual. There are a few items and events that have happened this year worth noting, even if they are scary or leave us still looking for more answers. In general, we are positive, happy, long-term financial planners and investors at Sterling Edge Financial. In an effort to balance out good ideas and strategies to inform your finances today, we will touch on market risks, stories and concerns we see heading into Summer 2023.
Debt Ceiling Deal has Been Reached.
It seems Congress is in need of more attention and threatened to not increase the debt ceiling. Failure to increase the debt limit would have prevented the government from paying obligations the US has already said it would pay for, such as social security benefits, veterans' benefits, interest on government debt, etc. After much negotiation, it appears cooler heads prevailed, and an increase in the debt ceiling has been reached.
What should we think about the national debt?
As Americans, the amount of national debt we have accumulated is at a level so high, we should be concerned (over $31 trillion). It hasn't been this high compared to GDP since the end of World War II. Looking forward, we believe our clients would do well assuming higher tax rates and reduced or lowered government services. The nation has simply signed up or created too many financial obligations. Realistically, economy and population growth are projected (at best) to be lower than we experienced the last 40 years. It will be difficult, if not impossible, to get ahead of future obligations with continued deficit spending.
I say this with a genuine concern as a Financial Planner. Rolling back the tape on federal spending since 1998... it is clear neither party has a track record of avoiding deficit spending. For more on this topic, I recommend reading Ray Dalio's Big Debt Crises.
In April, news came out that Charles Schwab borrowed over $45 billion from a federal agency, the FHLB. That's a lot of money for a company worth $80 billion. A question everyone has for Chuck (SCHW) today is, are you ok? Similar to First Republic Bank, Charles Schwab has a basket of investment assets earning interest below the rate they are currently paying on their own obligations / debt. If you are a bank, like Schwab, that's a problem. Schwab has responded that they this challenge as short-term in nature, and something they will be able to get over before it becomes an issue. In May, Schwab issued an additional $2.5 billion in debt.
It is important to note, Schwab is really a big bank. If you dig into their financials you will find a large percentage of their earnings are bank / banking related.
Will Schwab Go Under? Are They Next?
We do not see Schwab going out of business in the near term; however, if you are a consumer using their platform you might want to review your holdings, account protection fine print, SIPC insurance, account titling and how your holdings are titled with Schwab. If you have $250,000 on their platform or more, consider diversifying with another custodian(s) and track Schwab's investor relations statements in the news.
How to Manage Custodian Risk?
Another way to manage custodian risk is to evaluate and consider using a Private Trust Company. (Sterling Edge Financial has used private trust companies, such as SEI Private Trust and AssetMark Private Trust to help mitigate custodian risk since 2018)
Risks in Banking - Two Tiered Banking Systems
Recent challenges in the local and regional banking market were brought to everyone's attention this Spring, seeing how fast people moved their money in 2023. In the age of attention (Instagram, Twitter, TikTok, Facebook, etc.), bad information and fear can move at lighting speed. It is fair to say that disingenuous actors can deliver fear in a hyper personalized package right to your phone in a few seconds. This is the first time it helped support a bank run. We saw Silicon Valley Bank go down followed by First Republic. While disappointing and scary, banks go out of business regularly. Banking regulations, banking insurance like FDIC, and government actors all played their part well. It is something to be thankful for and a silver lining that shouldn't be overlooked.
Want to Know More?
I found interesting insights and perspectives provided by Scott Galloway on his PodCast No Mercy/No Malice. Scott is very familiar with the story line and banks involved (Silicon Bank). His personal experience in business provides a healthy point of view for those seeking more.
(Note: Scott tends to be direct. His choice of words and language will occasionally be offensive.)
What do we think about Big Banks and Jamie Dimon Headlines?
Jamie Dimon is talking a lot, because other banks doing poorly gives him an opportunity to make a lot of money. Looking forward, consumers should be more afraid of the Mega Banks getting bigger (Bank of America, Chase, Wells Fargo) and smaller banks fading away.
The Mega Banks are the winners of the regional bank failures so far in 2023. With poor offerings and uncompetitive engagement with small businesses and communities, Mega Banks are underwhelming players in the bank sector that are built to serve big business, not the average person. Unless you have $15 million dollars or more in annualized banking needs or seek to be underwhelmed by banking services, Mega Banks are not creating meaningful value for the average consumer outside of credit cards and mortgages. They don't need to, and they really don't want to. It's like asking McDonalds to care about your balanced diet.
If you are looking to expand your banking options or explore better banking solutions, be sure to reach out / let us know. We have a list of banking ideas, solutions and providers that are designed and actively providing a high level of value to our clients. (checking, savings, home loans, HELOCs, high yield savings, CDs, money markets etc.)
Does Sterling Edge Financial have a bank offering?
Due to high demand and interest, we will be highlighting and offering access to free checking accounts and a high yield money market account (4.30%) to current Clients starting June 20th.
We hope you found this months updates helpful.
Debt Ceiling News - https://www.npr.org/2023/05/29/1178660890/biden-and-mccarthy-reach-a-deal-to-avoid-default-heres-whats-in-it?utm_source=hs_email&utm_medium=email&_hsenc=p2ANqtz-9NVFz-nsfjB2EhwxTQVjABQXgu3JbhdKcZuLdVIMCa466UB7Xd7t8hP9y-xgijLOizRHoX
Congressional Budget Office Demographic Report 2023 – 2053
Big Debt Crises – Ray Dalio - https://www.bridgewater.com/big-debt-crises/principles-for-navigating-big-debt-crises-by-ray-dalio.pdf?utm_source=hs_email&utm_medium=email&_hsenc=p2ANqtz-9NVFz-nsfjB2EhwxTQVjABQXgu3JbhdKcZuLdVIMCa466UB7Xd7t8hP9y-xgijLOizRHoX
How the economic Machine Works – Ray Dalio - https://www.youtube.com/watch?v=PHe0bXAIuk0
Schwab Turns to costly FHLB - https://www.risk.net/risk-quantum/7956520/schwab-turns-to-costly-fhlb-advances-as-deposits-drop?utm_source=hs_email&utm_medium=email&_hsenc=p2ANqtz-9NVFz-nsfjB2EhwxTQVjABQXgu3JbhdKcZuLdVIMCa466UB7Xd7t8hP9y-xgijLOizRHoX#:~:text=The%20brokerage's%20banking%20subsidiary%20increased,%E2%80%9Ccontinued%20client%20cash%20realignment%E2%80%9D.
Why Schwab, a Financial Giant, Got Hurt in the Regional Banks Panic
Like Silicon Valley Bank, the company holds billions in bonds that have declined in value
How SEI Private Trust Safeguard your Assets - https://www.seic.com/families-individuals/our-insights/sei-private-trust-company-safeguards-your-assets?utm_source=hs_email&utm_medium=email&_hsenc=p2ANqtz-9NVFz-nsfjB2EhwxTQVjABQXgu3JbhdKcZuLdVIMCa466UB7Xd7t8hP9y-xgijLOizRHoX
No Mercy / No Malice – Podcast – Venture Catastrophists - https://www.profgalloway.com/venture-catastrophists/?utm_source=hs_email&utm_medium=email&_hsenc=p2ANqtz-9NVFz-nsfjB2EhwxTQVjABQXgu3JbhdKcZuLdVIMCa466UB7Xd7t8hP9y-xgijLOizRHoX
Jamie Dimon – JPMorgan - https://www.bloomberg.com/news/articles/2023-05-16/dimon-says-it-s-unlikely-jpmorgan-will-buy-more-struggling-banks?utm_source=hs_email&utm_medium=email&_hsenc=p2ANqtz-9NVFz-nsfjB2EhwxTQVjABQXgu3JbhdKcZuLdVIMCa466UB7Xd7t8hP9y-xgijLOizRHoX#xj4y7vzkg
15 Largest Banks in the US - https://www.bankrate.com/banking/biggest-banks-in-america/?utm_source=hs_email&utm_medium=email&_hsenc=p2ANqtz-9NVFz-nsfjB2EhwxTQVjABQXgu3JbhdKcZuLdVIMCa466UB7Xd7t8hP9y-xgijLOizRHoX