March 2023
According to Hunter, the risk around the banking system today is much less than 2008 because the default rate on the mortgage rate is not as high as it was before the Great Recession. There are also more systems in place to prevent mass failures, like the Bank Term Funding Program, which allows banks to borrow money from the Fed against their assets to pay depositors.
Still, it’s important to take action if you have more money in the bank than the FDIC-insured limit. Hunter and Chris advise listeners to consider enrolling in ICS (Insured Cash Sweep) if they have a business account or a very large deposit in the bank to ensure their money is FDIC-insured. ICS can distribute the assets in your account to hundreds of different banks so that no more than the FDIC-insured limit sits at each bank. Morton advisors may also consider investing in Treasuries as a way to preserve capital because this allows for some interest to be earned while the money stays in your possession.
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Hello, everybody, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm Chris Galeski, your host, joined by Hunter Daniel, Portfolio Management Analyst, Senior Trader. Just somebody that I really enjoy talking to because he loves to dive into the details. And we have a lot of interesting things going on, especially with a couple of banks failing, another bank being bailed out or purchased by UBS with Credit Suisse having issues over the last couple of weeks.
So, Hunter, thank you for joining us.
Yeah, thanks for having me back, Chris.
So we did an episode with Meghan. We talked a little bit about Silicon Valley Bank and Signature Bank and how those banks or the banking system is far different than maybe a Schwab or a Fidelity. But it was interesting in some of the Fed's comments yesterday because those two banks are more smaller, mid-sized regional banks. And when there's fear or concern about how safe your money is, deposits tend to leave those smaller, more regionalized banks go into bigger banks.
Right. And cause contagion even though there might not need to be one. Right. But the Fed is trying to instill confidence and say, hey, don't worry, we're going to do whatever we can to help you feel comfortable that your money is safe at these banks. Tell me a little bit about what you heard from the Fed.
Yeah, absolutely. So listening to Jay Powell, I think the biggest thing that I took away from the press conference was that it was actually on the table to not hike rates. So he came out and said at the press conference that they discussed that. I think going forward, their target Fed funds rate terminology. End of the year is about 5.13%.
Right now we're in a range at 4.75 to 5%. They're still running off the balance sheet, but we took an additional 300 billion back on to the balance sheet from the Bank Term Funding Program.
And the Bank Term Funding Program is that program that allows banks to borrow money against assets that are on their balance sheet. So maybe they took some of the deposits and they invested in mortgage backed securities or Treasury bills. And if they need to come up with money to give to depositors, they can borrow against that from the Fed.
That's the Bank Term Funding Program.
Exactly. And on your last episode with Meghan, what's unique about this is these are not troubled assets. These are assets that just have unrealized losses due to the duration of the portfolio. So essentially, when rates go up, bonds act inversely from a value perspective and as rates go up, the value of bonds go down. Now, these securities, we believe, will be matured fully at the par value.
And so that's why the Fed is willing to loan against these securities, because these are not impaired assets. We don't believe that these are mortgage backed securities in which, you know, customers are not going to be paying their loans.
Which is what happened in 2008.
That's right.
I mean, in 2008, just about anybody could go and borrow money. It was stated income. Right. So you could say, I make $1,000,000 a year and here's a loan. Now, you actually have to prove it with many, many pages of documents. But a lot of these banks had those types of loans on their balance sheet. And so when people all of a sudden couldn't pay their mortgages anymore, they defaulted on those loans and they caused contagion.
That's far different than the assets that they own today.
Yeah, and a really interesting statistic I read recently is 99% of mortgages are less than 6% right now. Right now, the current mortgage rate is about 6.7%, down from the high of 7.25%. So essentially, you know, maybe people's home values are fluctuating. Residential real estate did go down last year for the first time in a long time. But we have better lending standards.
And the people that have purchased these homes are able to continue to service that debt. And, you know, they have very preferential interest rates. So we're not seeing the level of refinancing or the level of selling to buy a bigger home that we've seen historically and in traditional real estate markets.
Yeah. Thanks for bringing that up. You know, when obviously since we did the episode with Meghan, Credit Suisse has now come out. They've been in trouble, but they've kind of been in trouble for a long time. And so the Swiss National Bank and then UBS kind of came together and worked out a deal to help figure out who's going to own and operate Credit Suisse.
It's sort of the timing of that between what's happening with Silicon Valley Bank and Signature Bank. It's alarming or concerning for people. But these are two different issues, so to speak. And Credit Suisse has been having some trouble for a while. Do you want to talk about that?
Yeah, absolutely. So, I mean, I think a lot of it is things are really globally connected. I think that we're feeling inflation over here in the United States. And sometimes we think that's an isolated event. But you've got inflation. I believe the last print in the U.K. was 10.6%. You've got the European Central Bank raise rates ahead of the Fed.
And the U.K. bank is, I believe, is going to raise rates again as well. And so we know that if the long dated maturities in the portfolio of bonds, if rates have to be raised, it impairs asset values. And so it's a similar kind of situation that's happening with UBS and Credit Suisse. I think it's going to turn out well for UBS.
I think they're getting a really good opportunity at the price that they're able to close the acquisition at. But I think overall, it helps stabilize the system.
Yeah. Thank you for. Thank you for mentioning that. You know, obviously what's going on here is turmoil in the system, lack of confidence in banking. We could do a whole episode on the moral hazard of somewhat of what's going on right now with banks and everything needing to get bailed out. But essentially what I think is hard for the average person to really comprehend, and even me at times, is that these banks provide a social good, right?
They are there to store your dollars, allow you to borrow, you know, so you can buy homes or cars or build businesses. And when there's fear that those monies that are at that bank are not safe, how much should the government step in to make us feel more comfortable? We have things like FDIC insurance levels and all this other stuff, but sometimes that's not enough.
And so it is a balancing act. I think what people should do is really understand how much money they need to have at a bank and make sure that it's covered under FDIC insurance levels. If you're an individual person, that's $250,000. If it's a particular type of trust, your levels of FDIC insurance can be far greater.
You should talk to your banker about that. But then businesses, businesses have access. We don't need to go into it. But something called ICS, insured cash sweep. Right. Right. And so that allows those banks to partner with hundreds, if not thousands of other banks and secure large amounts of money under FDIC insurance.
Absolutely. And even for our clients and the potential clients that are gonna be signing up with Morton, we have a cash management strategy as well in which we're able to go out and buy Treasuries for clients and help manage that as well. If there's one thing I've learned in my ten years in the industry, the ‘08/’09 financial crisis changed a lot of people's, it scarred a lot of clients and a lot of clients that we have, and I'm sure a lot of your clients, they have a cigar box under their bed with cash. And that cash, the average bank sweep right now is earning 35 basis points across the United States. And we have a solution for that. You know, feel free to reach out to your financial advisor and talk to them about that.
But we'd be happy to put that cash to work for you and earn a significantly higher rate of return than the average bank sweep.
Thanks, Hunter. I know we work very closely together throughout the weeks, you know, helping to find solutions for people to not only protect but grow their cash. Another thing that's come about with the last year, the Fed raising interest rates, safer assets being vulnerable or bonds losing money and stocks losing money, is those types of assets have not been providing the diversification that you once would like.
Now that cash is actually earning something or you can earn something in a Treasury bill, that provides some safety and diversification, I mean, if you can earn, you know, 4 to 5% on a very short term loan to the government, there's some safety there. That's right. Potentially some diversification. But if you're only using stocks, bonds and cash to diversify, you're probably missing out on a lot of great opportunities.
Yeah, and that's what we talked about last time, Chris, is we're really excited with all the fixed income managers we have, particularly, you know, they have a lot of floating rates. You know, they haven't extended their duration yet into this market. But we're excited that when and if they make those decisions, we think that we'll have some capital appreciation if potentially rate hikes ease or we start to look about where the Fed might turn from being restrictive to more accommodative.
And so and I think what you're getting at, Chris, is, yeah, it's nice to get 4.5%, 5% out of T-bills. But with inflation where it's at, you know you're going to need to be able to return an actual real yield after inflation.
Correct. Yeah. And there are other assets that over the long term can, you know, have somewhat done that. And even gold's done fairly well as of late with some of the turmoil. But I guess I don't want investors to become complacent. There are some very serious, scary things that are going on and potentially talks of a recession.
The Fed is doing whatever they can to instill confidence in the banking system, which I believe is the right thing to do, that the banking system should be a place where we feel confident, but don't just take their word for it. If you've got more money in the bank than you should above FDIC insurance levels, talk to your banker, talk to your Morton advisor.
Let's find a solution to make sure that money is still safe and protected.
Yeah, and something that I want to highlight we talked about last time on our podcast is that we specifically target the Treasury only money market funds. That's because here at Morton we really, really are concerned about capital preservation. We didn't have any additional insight that we were going to have some of the biggest bank failures ever in the United States history.
But we really think about capital preservation because clients are coming to us with their hard earned money and they spent a lifetime to build this wealth. And it's our job because we're entrusted with that money to make sure we maintain the capital first before we go out and look to make a return on that. Obviously, we want to make return, but we're not out there reaching for yield in a situation in which, you know, a money market may break the buck, for instance.
And so that's something that we're really focused on, not just on the treasuries and the money market side of things, but every one of our investments. One of the things that Meghan, our Chief Investment Officer really likes about managers is managers that are paranoid, that are really always looking around the corner, trying to really find...
Think that's what I like about Meghan...
Yeah. And so that's an ethos that we have here because we know what a privilege it is to be entrusted with our clients life savings. Yep.
Hunter thank you so much for joining us. Obviously a lot going on with banks and the Fed giving themselves the opportunity to say, hey, we're not going to raise rates going forward. Things are a little bit more fragile. But even though they're instilling confidence, saying they're going to do whatever they can to make sure the banks are fine and depositors are safe, don't just take their word for it.
They are part of the reason why we are in this situation that we're in. They kept interest rates at near zero for way too long. So thank you for joining us.
It was my pleasure to be here, Chris.
Check out recent episodes of THE FINANCIAL COMMUTE:
Ep. 26 Silicon Valley Bank Collapse: The Morton Perspective
Ep. 25 Your Gas Bill & The Movement Towards Energy Alternatives
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Information presented is for educational purposes only and is not intended as an offer or solicitation with respect to the purchase of any security or asset class. This presentation should not be relied on for investment recommendations. Any investment strategy including the private investment opportunities discussed herein are speculative and involve a high degree of risk. References to specific investments are for illustrative purposes only and should not be interpreted as recommendations to purchase or sell such securities.
