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Porter Stansberry

@porterstansb

Oct 18 • 25 tweets • 5 min read • Read on X

Why is silver soaring? The banks are in trouble. These details are public: Berkshire (BRK) sold 260 million shares of $BAC at $41, for proceeds of $10.6B. But Berkshire still owns more than $30 billion worth of $BAC. But probably not for long: here's what's not public, yet.

Berkshire has also sold all of its commercial banks, except Citi, since early 2020. Sold 100% of its 346 million shares in $WFC; Sold 100% of its 150 million shares in $USB; Sold 100% of its 60 million shares in $JPM; Sold 100% of its 12 million shares in $GS.

And Buffett isn' the only well-connected asset manager to dump every American bank. Dalio's Bridgewater (the largest hedge fund in the world) dumped over $100 million of Bank of America and virtually every bank stock too, including: JP Morgan (JPM), Bank of America (BAC), Wells Fargo (WFC), Goldman Sachs (GS), Morgan Stanley (MS), Bank of Hawaii (BOH), PNC Financial (PNC), Citizens Financial (CFG), and Capital One Financial (COF). Why?

The reason: there's a $1 trillion+ hole in the commercial banks' balance sheets. No one currently at the Fed Reserve is willing to talk about these issues, but here's what Thomas Hoenig, former vice chairman of the Federal Reserve, said:

"Guys, I only want to know one question, how long before you fail? Not how complicated you can make the formula to confuse me and certainly confuse the public."

Hoenig is not just any central banker. He was the head of the St. Louis Fed for 20 years ('91-2011) and has long been among the 2-3 most respected central bankers, ever, at the Fed. What Hoenig warned about is: current regulations do not match economic reality.

"Risk-weighted capital flat-out misleads, the only thing a real bank investor wants to know is how much real equity capital is there. That tells the investor how prepared the bank is to absorb a shock, no matter where it comes from on the balance sheet."

Buffett is a “real” bank investor. So is Dalio. But, as you can tell by $BAC's share price, which is trading at near all-time high multiples, most of the public is not. In fact, NOBODY in the mainstream media has bothered to tell the public anything about the truly enormous scope of these problems. I wonder why...

How bad is it? Quoting from the St. Louis Fed's Bank Capital Analysis report of June 30, 2022: Since 2019, banks increased securities holdings by $2.0 trillion, increasing the share of securities as a percentage of total assets to 33.7% in the second quarter of 2022 from 17.8%

Let me make sure you understand what that means. It means that fully one-third of the reserves of our biggest banks are deeply “underwater.” That's because they bought $2 trillion worth of long-term bonds (and mortgages) at interest rates around 1%.

The real market value of these assets has plummeted because of rising interest rates. It was soaring losses on these assets, which led to the run on deposits in the spring of 2023 at Silicon Valley Bank, Signature Bank, and First Republic Bank.

These banks didn't fail because they made bad loans. They failed because they owned long-dated Treasury bonds. Total losses on those bank failures were $40 billion. How in the hell did this happen? Mr. Hoenig explained:

"It's a political process. It's not a market process. The market no longer determines capital in the financial, especially in the banking industry. It's now politicians, lobbyists, and the regulators who have to battle it out among themselves."

"Therefore, you get these non-market solutions like risk-weighted capital. And banks are incentivized to increasingly leverage their balance sheets. And, thanks to the ‘financial repression' of the COVID era, when the Fed's bond buying binges took long term rates to below 1%, there was an enormous amount of interest rate risk in the U.S. bond market back in the summer of 2020."

To stem the run on the banking system, which threatened to spread and could have easily de-stabilized the entire system, the Federal Reserve created a new lending program, The Bank Term Funding Program, which offered loans of up to one year, against the banks bond holdings.

Key to the program: the loans were made against the face value of the collateral, not the market value. This made sure that the banks could meet redemption demands from depositors.

Loans under that program soared throughout 2023 and peaked in the spring of 2024, at over $160 billion. With the Feds handing out money, none of the big banks bothered to raise new equity to plug the holes in their balance sheets.

This was a "kick the can down the road" solution. Fingers crossed that interest rates will go back down and the banks balance sheets will be saved. But that didn't happen. In fact, when the Fed began to cut interest rates, long-term rates went higher!

And then there's this: in March of this year, the Fed announced that no more loans would be made under the program. As these 1-year loans expire, they most be repaid. The outstanding balances on the program are plummeting, down to $66 billion currently.

And interest rates keep rising, pushing the value of those 2020 bonds down. Of all the banks that took on interest rate risk in the summer of 2020, nobody took more risk than Bank of America, which purchased more than $500 billion (!) of long-dated bonds in 2020.

Today, Bank of America reports it has $86 billion in unrecognized “mark to market” losses on that bond portfolio. The bank has tangible equity (that is, real equity) of $200 billion. If rates go above 5%, I believe Bank of America's tangible equity would be wiped out.

It' not just $BAC either. The end of the Fed's BTFP will lead several major banks to raise more capital. But, if interest rates continue to rise, the bank runs we saw in the spring of 2023 will return – with Bank of America most at risk.

With $2 trillion in deposits, Bank of America's shareholders would, most likely, not survive a run on its deposits. Right now, the stock is trading at 15x earnings, which is in the top of its valuation range. And Buffett is dumping. ETF bag-holders unite!

If you want to learn more about why much higher interest rates are a virtual certainty (because of soaring Treasury issuance) please watch the Breaking Point video with @peterstongeph_d : porterandcompanyresearch.co/tbsew-rt3

Subscribe to my newsletter to receive unique market insight that's beyond the talking heads, and learn what drives investment returns... and how to protect your portfolio: members.porterandcompanyresearch.com/subscribe-1/

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Porter Stansberry

@porterstansb

Oct 22

“Everyone has a plan until they get punched in the face”

That’s the situation Jerome Powell finds himself in, with the bond market punching back against the Fed’s best laid plans to lower borrowing costs

Following Powell’s move to cut overnight interest rates by 50 basis points on September 18, yields on long duration bonds like 10-year U.S. Treasuries have run screaming in the opposite direction - spiking by 50 basis points instead

This wasn’t supposed to happen…

In normal environments, when the Fed is in sync with the market, long-term borrowing costs follow the path of the overnight lending rates set by the Fed. But when the Fed makes a policy error – like cutting rates ahead of a Presidential election, even with inflation running hot – the market fights back

We’ve seen this movie before, and spoiler alert: it doesn’t end well

In 1971, despite inflation running at over 4%, Fed Chair Arthur Burns cut interest rates to boost Tricky Dick Nixon’s political prospects ahead of the 1972 Presidential election

By cutting rates with inflation running hot, the Fed allowed price pressures to become entrenched in the U.S. economy. American workers grew fearful of continued price increases cutting into their wages, and began demanding ever-higher pay increases

This fueled a self-reinforcing wage-price spiral that unleashed a decade of double-digit inflation, crippling interest rates and stagnant economic growth: a toxic brew known as “stagflation”

It took the Volcker Fed bringing overnight interest rates to 20% to finally quell inflation in the early 1980s

But in the interim, U.S. investors suffered a lost decade of negative inflation-adjusted returns in both stocks and bonds. The S&P 500 index ended 1979 at the price level as 1968… and after accounting for the rampant inflation that pushed prices up by over 50%, stock investors lost half of their money in inflation-adjusted (real) terms

Bond investors didn’t fare much better, with the 10-year Treasury logging losses of 3% per year after adjusting for inflation, or a roughly 30% loss in purchasing power over the decade

It was the worst decade of investor returns since the Great Depression.

In this thread, I'll explain why all signs indicate a repeat performance ahead 👇

Unlike stocks, which can often temporarily economic gravity during periods of rampant enthusiasm (like today), the bond market is a much tougher customer. For the fixed income investors, inflation is enemy number one - the silent thief that can transform positive nominal rates into a negative real (inflation-adjusted) return

By prematurely lowering short-term interest rates before taming consumer prices, Jerome Powell is repeating the fatal mistakes of the Arthur Burns Fed, and stoking fears of entrenched inflation

Bond investors remember the 1970s. And the growing fears of persistent inflation crushing their real returns mean they are now demanding a larger margin of safety, sending borrowing costs shooting on the long end of the curve, like the 10-year Treasury rate

The 10-year U.S. Treasury is one of the world’s most important lending benchmarks, which determines borrowing costs for a wide range of consumer and business loans throughout the global economy. This includes things like the standard 30-year U.S. mortgage rate, where yields were dragged higher in kind with the 10-year Treasury, spiking by 50 basis points in the wake of Powell's recent rate cut

This is a big problem because higher borrowing costs, paradoxically, contribute further to inflation. This is particularly true in the housing market, where higher mortgage rates feed directly into a higher cost of home ownership.

The average monthly payment to own the average-priced U.S. home is now $2,215. This means it now requires an annual household income of $106,000 to own the average home in America, up from $59,000 just four years ago in 2020

Unsurprisingly, shelter costs were one of the biggest gainers in the September inflation report, spiking by 4.9% year-on-year and running well ahead of headline inflation at 3.3%

Meanwhile, the Fed’s rate cutting campaign - which was supposed to support U.S. economic growth - is also backfiring. Instead of lowering borrowing costs and encouraging more lending, higher long-term rates in the real economy are doing the opposite.

We can see this in the fact that new mortgage applications just fell off a cliff, down 17% in the latest weekly data. Mortgage re-financings fell even harder, down a whopping 26% in last week’s numbers.

Higher borrowing costs aren’t the only factor contributing to sticky inflation. Insurance is another major culprit, where costs are rising across the board at rates well above the headline CPI

Insurance is a major cost of living for virtually every American adult, and one that’s often legally mandated. Just try filing your taxes without reporting medical insurance, getting a mortgage without homeowners insurance, or driving a car without an auto policy

Insurance companies took a major profit hit from the initial wave of post-pandemic inflation. That’s because they had priced their previous policies based on historical inflation rates of 1-2%. As a result, they were left nursing large losses on these policies when sky-high inflation sent their claims spiking well above their estimates

Now, insurance companies are exacting their pound of flesh from policyholders

Over the past couple of years, as old policies expired, insurers made up for lost ground with significant price hikes on new policies. Consider employer-sponsored health insurance plans, which are on pace for a 7% increase in costs for the second straight year - or roughly twice the rate of current CPI inflation. This is the fastest rate of cost increases in over a decade, and has added $3,000 to the average family health insurance premium in the last two years alone

Meanwhile, premiums for home and auto insurance policies are each increasing at double-digit rates, as anyone who recently renewed their policies knows all too well. And with two back-to-back devastating hurricanes that are expected to generate outsized losses for insurers, the industry will be raising rates further to recoup these losses

These and other sticky costs are the reason why - even after stripping out things like volatile food and energy prices - the Fed’s various measures of “core inflation” have all remained stubbornly stuck above 3% for the last 43 months following the CPI’s last sub-2% inflation reading. And if you analyze the median price in the CPI basket, inflation has remained stubbornly stuck around 4%

Notably, this was the same floor on inflation that the Fed was unable to breach during the 1970s stagflation:

Read 6 tweets

Porter Stansberry

@porterstansb

Oct 19

Here's the quiet part out loud. With 10-year yields at 4.08%, the losses on "Held to Maturity" securities at America's largest banks are going to have dramatically worse prices, leading to big losses that, thanks to ridiculous accounting rules, they are allowed to hide. So, who's hiding the most?

We know there's a direct and inverse link between the value of these roughly $2 trillion in securities and the 10-year Treasury yield because the Fed itself (!) conducted the correlation study, which I cited in an earlier thread.

The losses I estimate below are based on today's yields. However, if (as I believe is inevitable) we see yields pushing higher, especially if / when they reach the 4.5% range, the losses on these banks "Held to Maturity" or HTM portfolios could easily lead to more bank runs and failures, like occured at Silicon Valley Bank and First Republic.

Read 9 tweets

Porter Stansberry

@porterstansb

Oct 19

This photo, taken at last year's Berkshire meeting, explains why Buffett is dumping his entire Bank of America stake, once one of his top 3 biggest all-time investments. If you don't know what this photo means, you could be on the verge of losing everything. A thread:

There's a very dangerous secret about these signs. And although the jargon is complex (so that most people won't know what's happened) the reality of what's gone wrong is simple to understand. But, trust me, nobody is going to tell you. Even the comments on this thread will try to mislead you -- watch.

Those two signs "available for sale" and "held-to-maturity" were Buffett's sarcastic, insider-way, of expressing his disdain for a kind of accounting that allows banks to HIDE investment losses -- of any size -- from the public.

Read 22 tweets

Porter Stansberry

@porterstansb

Oct 16

The IMF is warning on America's runaway debt. They should be warning about the millions of people who are about to die in a futile attempt to maintain America's economic hegemony. America's Empire was modeled after Britain's. And it will collapse in the same way: in violence. A thread:

Incredible irony. The IMF is warning about America's debt load and runaway government deficits. If you don't know what that's ironic lemme explain: The IMF was created to build a new system of monetary colonialism, with the U.S. dollar at its center.

The IMF lends huge sums of newly printed dollars to governments. When these governments inevitably end up unable to repay their foreign loans, the IMF prescription isn’t less government or sound economics: it’s to raise taxes and devalue the local currency.

Read 25 tweets

Porter Stansberry

@porterstansb

Oct 9

What I see in America today is a country on the cusp of a major collapse in our standard of living. You should always ignore the government’s manipulated data and look at real world indicators, like: the price of Ford F-150 and the price of gold. Look at standards that are universal, like life expectancy, infant mortality, and electrical usage per capita.

-- Life expectancy is in free fall in the U.S., even as it rebounds around the world, post Covid. In '23 it declined for an unprecedented 2nd year in a row, to 76. Worse, pediatric mortality is also rising, something that's never happened before.

-- Infant mortality is soaring, with to 5.6 deaths per 1,000 live births, up 60% (!) since 2021. This, to me, is the most devastating critiques of Obamacare. We spend more than anyone else in the world and still get terrible results. But will the government get out of the way? Never.

Read 15 tweets

Porter Stansberry

@porterstansb

Oct 8

America is in big trouble, no matter who wins this election. Why? Consider these numbers. Direct transfer payments made by the Feds = $3.8 trillion. That’s 48% of all Fed spending. These payments go to 67m Americans. However, only about 70m Americans pay any meaningful amount of income tax and those taxes only raise $2.3 trillion. And that’s not the real problem…

America is $35 trillion in debt already. These debts are already so large, there’s no legitimate market-based way to finance the astronomical growth in transfer payments that lies ahead. I’m not talking about a crisis in 2040. I’m talking about a crisis by 2026. And still, that’s not the biggest problem…

The biggest problem is that as dependency grows and the baby boomers age, there’s fewer and fewer workers to support the system. Today are 134 million full-time workers in the U.S. That sounds like a lot, but it’s only about 40% of Americans. And, it includes the 25 million people who work for the government.

Read 17 tweets

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