Incentives TRUMP Ethics every time
-Steve Eisman
Welcome back to the Rambling Mind Newsletter. This is your Market Update.
Markets
‘Twas another terrible week for the Stock Market. But these are my favorite weeks in the Stock Market because they force stocks that I want to buy to remain lower for longer. Remember to be successful in the Stock Market, it is not about timing the market but rather TIME in the market. Continue investing in your 401(k), IRA, HSA, etc. However, ensure you have an emergency fund to ensure you survive long enough to see your bets play out to your benefit.
This newsletter is 1,955 words, a 9 min read
Tale of the Tape
Economy
Jerome Powell went before Congress on Tuesday to discuss what the Fed is doing to the economy. He was very clear about one thing, rates are going higher faster and staying higher for longer.
💬In His Words: “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
These were not the words investors (or politicians) wanted to hear. The S&P 500 immediately dropped 1.5% on Tuesday in response to his comments
Takeaway: This should not have been surprising to anyone. Powell and the Fed have been very clear about their goals. Inflation going back to less than 2% is the only focus. Inflation slightly slowing for a month is not good enough for the Fed to begin reducing interest rates.
At least those were thoughts heading into Thursday evening.
Friday morning higher rates were taken off the table. At least that is the expectation from investors as Bond Yields collapsed. The U.S. 2 Year Treasury yield had been trading around 5% after Jerome spoke on Wednesday but fell to 4.5% Friday. That is a massive move for a Treasury Note.
What happened: Silicon Valley Bank, the 16th largest bank in the US, that no one had ever heard of, collapsed due to a bank run.
🙋🏾♂️Two Questions: What is Silicon Valley Bank?
Well as the name implies, it is a bank in Silicon Valley. It has been the bank of choice for most venture-backed start-ups because of its friendlier terms with new unproven companies. Most of them usually find it hard to do business with most banks.
It worked with and held the assets of more than 50% of all venture-backed tech and healthcare start-up companies in the US.
What is a Bank Run?
A bank run is when a large number of banking clients try to withdraw their money from a bank at the same time because they believe the bank will fail
Important to remember that banks only keep about 15-20% of the cash that is deposited. The rest get loaned out in various ways (everything from a mortgage to a company bond)
This helps keep money flowing in the economy.
It is also how banks make money
It is also why we make money from interest on our savings and can only withdraw from a savings account 6 times a month.
Bank Runs were key in causing the Great Depression of 1929 (this led to the creation of FDIC).
To learn about the events that cause Silicon Valley's Bank Run, watch this video
Takeaway: This is the largest Bank Run in US history. Bank Runs were a common thing in the past as Banks were more incentivized to take large risks than to protect your money.
However, today most banks have FDIC (Federal Deposit Insurance Corporation) Insurance. This ensures that anyone who keeps their money in a United States-protected bank, their money is guaranteed safe by the US government up to $250,000 at each bank. I never thought I would see a Bank Run in my lifetime. Especially because after 2008 extra regulations were put in place to regulate the banks even more.
My Takeaway: This is why we do not keep our money in crypto and why crypto cannot become mainstream. Having an insurance policy is necessary for our economy to carry on as normal. Most of what we do relies on our ability to trust each other. Crypto tries to avoid relying on trust by using algorithms but we are not computers we are humans.
The failure of Silicon Valley Bank might cause the fed to pause its rate increases. They need to review and ensure they are not causing much deeper problems without realizing it. The sudden increase in Treasury Yields was a key player in the bank’s failure.
The Labor Market continued to exceed all expectations in the month of February.
🔢By The Numbers: The economy added 311,000 jobs versus an expected 205,000
Jolts Job openings for January closed at 10.824 million vs. the 10.5 million expected.
Initial Jobless Claims came in at 211,000 vs. 195,000 expected and 190,000 last month.
The unemployment rate was 3.6% vs. the 3.4% expected.
The increase was due to an increase in labor force participation. Aka more people are unretiring themselves
Workers are staying unemployed for only 8.3 weeks vs 9.6 weeks pre-pandemic
Takeaway: The labor market remains super hot. However, there was one kinda negative within the jobs report. Wage growth has stalled meaning inflation is making a larger dent in the finances of everyone.
The strength of the Jobs report provides cover for the Fed to raise rates. Inflation remains the Fed's number 1 concern, as long as the SVB situation does not become a virus that infects other banks. The Fed will continue tightening its belt to ensure it kills inflation.
Your Pocket
This is a new segment for the newsletter. It is for things that do not fit perfectly as an economic story but I find it interesting because it is how people are spending their money on stuff. Let me know your thoughts.
Companies are focusing their efforts on high-income earners. They are adding a "luxury" feel to basic products.
Who: Every company from Krispy Kreme to Six Flags
Krispy Kreme is cutting back on discount and bargain deals and leaning into specialty donuts that you would typically get at local donut shops
Six Flags is increasing prices to reduce the number of guests and "elevate the guest experience."
Even WD-40 is adding a "smart straw" to get people to pay more for the same product.
Why: This is what we might call the Starbucks Effect. Starbucks popularized the idea of changing a basic item into a luxury good by offering more options or fancier options to more people. With inflation continuing to eat into the bottom lines of companies, playing the low-profit margin but high sales game is no longer appealing to companies. Everyone wants that Apple-like profit margin. Reducing expenses but increasing profit by producing and selling fewer products but at a higher value.
Takeaway: Companies are doing this because they know customers are willing to pay. With the rise of social influencers and the rise of "self-care" industry. It is easier than ever to market to a large audience and encourage higher levels of spending on basic products. For example, you will be hard-pressed to find new car models that cost less than $25,000.
What they are saying: L’Oréal’s CEO Nicolas Hieronimus recently said, “All around the world, people are spending more on better products. The pandemic has generated this desire to pamper yourself.”
My Takeaway: Two of the most dangerous words in personal finance, are "I deserve." This is how companies convince us to spend more on random crap that we do not really want and we definitely do not need. Now more than ever, it is vital that you decide for yourself your financial priorities. What you will choose to spend money on and what you will choose to ignore. Do not allow social media or other influences to determine what you spend your hard-earned dollars on.
According to a new study published in the Proceedings of the National Academy of Sciences, more money does equal more happiness.
Research Findings: The study found that happiness rose as income rose, even accelerating at levels beyond $500,000/year
This Study counters a previous study from 2010 that found that happiness plateaued after about $75,000/year ($103,000 in today's dollars)
But: Although more money does bring on more happiness. Its total effect is tiny when compared to every other part of your life
The Study notes, "An approximately four-fold difference in income is about equal to the effect of a weekend".
Meaning having a free weekend to spend doing whatever with whoever, brought on exponentially more happiness than making 4x your income.
My Takeaway: I love a quote from a video I watched a while ago, "If money does not buy you happiness, you are spending it wrong."
Stats of the Week
The new price of the Tesla Model S after another round of Tesla price cuts.
Model S was $94,990 cut by $5,000.
Model X was $109,990 cut by $10,000.
Takeaway: Tesla is acting more and more like a car company. Elon Musk said, "The desire for people to own a Tesla is extremely high. The limiting factor is their ability to pay for a Tesla." Similar things have been said by companies like Ford, Honda, GM, Toyota, and many other car manufacturers. With more competition entering the market, whatever edge we thought Tesla had is eroding away faster than the ice caps in Greenland.
My takeaway: I used to compare Tesla to Apple because I believed the brand power was very similar. I was very wrong. I must apologize to Apple for demeaning the company.
Apparently, when the weather is bad outside, we spend more money.
By The Numbers: According to Adobe Shopping Analytics, we will spend an extra $13.5 Billion due to rain, wind, and snow.
Why: The ease of online shopping and all the various Payment Plans. It has removed the pain of buying things.
For the first time in 35 years, Vinyl outsold CDs
By the Numbers: CDs sold 33 million last year. Vinyls sold 42 millon.
How?: CDs are DEAD but Vinyls are having a resurgence as the old is all of a sudden new again.
Vinyl has become a collectible. The pandemic gave people the time to reappreciate their love of the crackle and pop of vinyl players.
BUT: Never get it twisted, streaming remains KING! 84% of all music revenue comes from streaming.
The amount of Yeezy gear stuck with Adidas after cutting ties with Kanye West due to anti-Semitic comments
The lost sales from the Yeezy product cost Adidas $630 million in Q4 2022.
Adidas expects to lose $730 million this year
Looking Ahead
😪💤Sleep Walking
This week is going to be a tough one for most of us. We shall be sleep deprived as we try to adjust to having our clocks move an hour ahead of us. At least we won't be in total darkness when we go to work and get off work. It is also the beginning of March Madness.
Change those clocks!!
🎈Inflation
One thing that might wake us up next week is the inflation report for the month of February. It will be released Tuesday morning. Inflation continues to be the most important factor for everything in the economy right now. Depending on what the numbers tell us, we might see an even more hardline stance from the Federal Reserve regardless of the Silicon Valley Bank's failure.
The expectation is for CPI to be 6.2% vs 6.4% in January.
Sports I Love
After embarrassing their father's father's father last Sunday by losing 7-0 to Liverpool. Man U redeemed themselves on Thursday by beating Real Betis in the Europa League Round of 16.
But they followed up by tying Southampton.
I am still very nervous about this team. Guess I got excited far too soon.
Extras
🍭Sugar-Free But Strokes Included
NO DUH!! Whenever we replace natural with chemical, what exactly do we expect?
The Study: Scientists found a link between using the popular sugar substitute erythritol and an increase in strokes and other heart conditions. Per Morning Brew:
Patients with more erythritol in their system had a higher chance of having a stroke, suffering a heart attack, or dying within three years.
Erythritol was also tied to an increased risk of blood clots in mice and human blood samples.
Takeaway: Researchers recommended further investigation to better understand what is happening.
🍯My Takeaway: Use honey or natural sugars
*I am a tiny shareholder in this company.