So sorry we're late guys, but we're hit. We're ready to go and we're hot and bothered. Uh, say hello to Jay Jay is a former Goldman Sachs manager with the experience of managing over two billion dollars I think 2.3 billion dollars right? Jay That's right. Uh, and Jay's here to talk about what everybody's thinking about right now, which is the collapse of Silicon Valley Bank uh as well as some other collapses that happen with other banks that start with an S Silver Gay and Signature which is it's himself kind of funny.

So uh Jay right off the bat I mean I don't want to waste your time and people can search your background? you have I'm gonna pull up all your socials in the second. You have almost 80 000 followers on Twitter You have a website which I'll show in a second and you have extensive experience so not to beat around the bush. You as a professional, were you surprised to to hear Silicon Valley Bank Uh, go belly up like that and get taken over by the FDIC Absolutely. I Think that the speed of the decline you know we were already.

You know, suspicious of how the government was going to deal okay with with Sbny after the Silvergate debacle and you know what happened. You know what happened with with the send Network and the wind down of that bank. Um, and then taking a step back and talking about Silicon Valley Bank Sivb we were. We were actually equally surprised with respect to the decline of Sivb because you know our view was that over time people would understand that the quality of loans at the bank was not stellar and the bank was an actual almost a Ponzi scheme where it had collected 40 to 50 billion dollars of excess cash per year from Venture capitalists.

and because the portfolio companies of the 2500 Venture capitalists that we're banking with the firm, we're actually burning through cash at 10 to 30 percent a month you know, six to 18 month runways. The only way for this bank to grow its deposits was actually to participate in new rounds. And when the number of new rounds in the in the VC Capital raising peaked in the second quarter of last year, it was very obvious to everyone that this bank was going to be losing deposits on a net basis. and we saw them lose about 20 billion in the third quarter, 10 billion in the fourth quarter.

And you know we think it was very obvious to management and that's why the CEO Becker set up a 10b51 plan to sell 3.6 million of a stock back in at the end of January and I think we think he was very strategic in doing that because he knew that they would have to raise Capital by selling the 21 billion dollars of EFS Securities in the first quarter. So you know why was I surprised I Was surprised by the fact that you know Peter Thiel You know in the middle of this Capital race, you know they're supposed to raise 2.3 billion and we were thinking it would be kind of a slow burn, you know? Death By A Thousand Cuts You know over time people would uncover that this bank was going to lose deposits. They had 7 billion of zero paying deposits and over several months you know people would figure this out. but with Peter Thiel jumping up in his one of his deputies John Wu on national TV on Bloomberg Um saying that everyone should pull money out of this Bank overnight in 24 hours you saw 42 billion dollars leave the bank by the end of Friday I had negative 985 million dollars entered receivership and we think that that was a shock to the entire Venture Capital system because 50 percent of companies in the venture-backed space banked with Svb in a perverse way.

It's actually worse for Venture Capital firms. they actually should have stood up and each contributed of the 500 billion in dry powder. you know, a small percentage you know to help Shore up Capital But you know now you're probably going to see pressure on Venture um valuations. You're going to see a number of these companies potentially not have access to lines of credit, potentially go bankrupt.

You know, see, layoffs, you know. And it's a multiplier effect because these companies are the biggest consumers of SAS products, right? So Datadog twilio Microsoft Oracle These companies are all going to see lower demand for revenue and it's going to have a multiplicative effect. Um, when it comes to the to the US economy and it's in fact, very deflationary, the most deflationary thing you can do to an economy. People are worried about inflation.

They need to be looking six months ahead. The most deflationary thing you can do for an economy outside of a nuclear bomb on a major city is very simply Bank runs and Bank Uh, you know Bank Uh Bank centering receivership because it it's a multiplier effect. and not only do you lose confidence in the banking system, but people will spend less and you'll lose access to key sources of uh borrowing. whether it's Venture debt, credit lines, traditional lending Etc Careful, you're going to trigger a lot of conspiracy theories with that talk.

Well, you know it's not even meant to be conspiracy. it's really just meant to be using common sense. You know? we have about 4 950 banks in the United States 20 years ago, we had 17, 000, Banks Um, about 30 years ago. Actually before the you know, right before the Savings and Loan crisis in the late 80s.

You know, after um, you know, Michael Milken invented the junk bond, then shoved all those junk bonds into savings and loan institutions and blew them up. You know, resolution trusts had to come up. and you know, essentially bail out these savings loans institutions as the first distressed hedge fund. Um, you know, ever since then we've seen a sharp uh Bank consolidation, right? You saw Fleet Bank by Bank Boston You saw Bank America by Fleet and you've had the number of banks Fall by 70 percent.

And you know as the banking systems gotten more concentrated, you know the bigger Banks. You know going into 2008 took more and more risk right? Then you know after the financial crisis, you saw Dodd-Frank You saw Basil III You saw the Volcker rule and you know one of the things that led up to this decline of Sivb. Um, you know and it. It's not meant to be partisan, but it was under the Trump Administration it was the rollback of Dodd-Frank regulations um which made and actually the CEO Becker who was on the board of the San Francisco fed actually you know was was in big support of this, You know was to essentially make it.

So you know this 220 Billion Dollar Bank was you know, not a systemically important bank. and as a result you know this was roughly the 14th largest bank in the United States was characterized as a non-systemically important bank so they didn't have to meet the same Capital requirements that JP Morgan or PNC or State Street or U.S bank had to meet so they're able to hide 15 billion dollars of HTM losses which this was the big biggest mistake the CEO made. He bought 90 almost 90 billion dollars in mortgage-backed Securities with 10-year duration. Okay so if you have MBS that owns 30-year mortgages be you know you essentially have 10-year duration on average on those types of bonds.

For every one percent interest rates go up, you lose 10 points on the bond. This guy top ticked the bond market so that when interest rates Rose 300 basis points, you know he was potentially looking at 25 to 30 billion dollars of losses. As of December 31st he had already marked 15 billion of losses. The tangible Equity of this company.

this company had tier one capital of 15. The actual AFS and HTM losses you know above 15 billion were actually higher than the equity of the actual bank. So when it came to the run the moment feel said take out your money people realized okay after also seeing that they were selling EFS Securities at a 1.8 billion dollar loss That okay you have that 1.8 billion dollar loss plus plus what was going to become a 25 billion dollar loss. the entire Equity of the bank was negative and that's how this happened so quickly and nobody had any chance.

Um to come in and support the bank because you know when you have 25 of deposits leave a banking institution, no one can. No one can save that bank. If it happens in a day when IndyMac Indy Indie Mac went bankrupt and Wama went bankrupt 2008, it actually took 10 days for IndyMac to lose 1.3 billion and for WAMU to lose 16 billion. So I agree with you, there's no Bank on the planet that can withstand a 25 withdrawal in the day that it doesn't happen Banks need trust I mean we all know that all of us running to the ATMs means the collapse I mean that's that's another thing but I just want to point on something you you said earlier.

so you said you you mentioned Peter till twice so does not make that call and and screams fire Does Svb in your opinion collapses on Friday I Think that the venture capitalist had a big um part in the collapse. Um think about Peter Thiel as a Warren Buffett a venture capital he was part of the PayPal Mafia he worked with Elon Musk right to build PayPal He then he was the Uh, founder of his own hedge fund and a number of Uh Venture Capital firms. He's probably one of the most brilliant men on uh on the planet so he knew exactly what he was doing when he said oh, everyone should pull their money out and you know this has to be confirmed. But what I'm hearing is that you know he was trying to push a deal with with Sivb.

You know, Sivb funds. most of the you know about half of the venture-backed companies. They didn't agree with him on certain terms and he did the same thing. By the way that he did to a publication.

um, you know, several years ago when they irked him and he basically did whatever he could to shut that that media publication down. So I think that this is very calculated um and I hope I'm wrong. By the way, this is not fat. This is conjecture.

So I hope I'm wrong. but that I think was the biggest uh driver of the bankruptcy outside of the fact that Becker who by the way being on the Federal Reserve Board of San Francisco should have known what an interest rate hedge is right if you're buying, yeah, we'll talk about that in a second. That's an old Topic in itself. Exactly.

Yeah, that's a huge topic. That's one of the things I wanted to bring you on for because that thing I can't just wrap my hand around. But let's not get ahead of ourselves. But you mentioned Becker getting a getting out of the underneath the Dodd-Frank regulation.

So I heard somewhere that he spent well, no he personally but the bank spent over 500 million dollars on law being that to actually get it through and the Get Out Underneath that 200 billion to set the cap at 200 billion which is absolutely insane I don't know if it's true or not, but I mean talk about the pro. So proper use of funds. So I you you you said earlier. something very interesting and you said the highest return on Capital by the way is lobbying in Corporate America But please, that's true.

Yeah, that's true, that's true. but the in this case he did it to himself if Greg Becker does not get underneath the regulation. uh, he gets stopped way earlier and doesn't destroy his career and everybody involved and a lot of people who will never work in the industry again. Um, a lot of investors.

There's a lot. you hear a lot of people I think but um, you mentioned earlier uh something and I want to expand on that. So uh I think we both agree that the you know a bankrant starts with the spark right? That spark obviously with spiritual, but as Spark does nothing if there's no under underneath like underlying conditions for a fire. Correct.

So I'm saying and you either confirm or or contradict me here. That in my opinion, yes, Peter Thiel started the Spark and maybe even, uh, voluntarily knowingly exactly what's going to happen. But the underneath, the underlying conditions underneath were primed for that to happen. And you You kind of alluded to this earlier and I would love for you to expand this.

I mean I Talked about this in my video, right? So Svb takes deposits. What it does with these deposits. Like every bank, right, It buys something safe like treasuries. And it holds these treasuries and basically makes money off the spread among other things.

And here's the crazy part. right when they bought these treasuries, Well, I'll let you explain the whole story, including the lack of risk protocols because I think it's a fascinating topic and you're doing way better job than me. Okay, okay, so I'll continue to feel a little bit more and then I'll hand it over. So basically, uh, I explained it like this because I'm not a banker.

so I explained it to myself as if and then because I'm a kind of a I'm not the smartest guy in the room. So I the simple explanation is they basically they when they bought these bonds, the prices were extremely cheap. Uh, because of low interest rates? Uh, sorry. expensive because it's interesting buying them at like one and a half percent, right? So yeah, interest rates were pretty much bottomed.

Uh, expensive bonds? uh, inverse relationship, obviously. Of course, as we talked about on the channel many times between the price of the bond and the interest rate. So what happens is that the FED spikes interest rates within the year at record levels. and then the price of the bonds plummets.

And then the bank which was planning to hold these bonds to maturity and be agnostic to this change is now all of a sudden forced to sell these. and that sale basically triggers a lot of questions that leads to that background. But my question to you. And here's the part: I cannot pain I don't have the expertise is how does the bank the 16th biggest bank in the U.S gets in this situation and doesn't have any backstops, insurances and hedges to this kind of like does this Is this sound normal to you? It doesn't sound normal I mean if you if you go to Fifth Third Bank or if you go to PNC's you open up their 10K you know you open up Bank of America's 10K I Know that they're bigger but they have something called you know fair value Hedges They have interest they has with interest rate Futures They use something called a interest rate swaptions fixed to float type Hedges where they're essentially you know, taking their fixed rate exposure and then they're converting it to to floating right? Because most of the loans that Banks make you know tend to be floating rate loans.

So you want to match your floating rate loans with your floating rate liabilities. In this situation, this company had fixed rate assets right? and high duration fixed rate assets and what it could have done you know is simply hedge those You know those fixed rate um, those bonds and essentially reduce the amount of duration risk you know that it saw on its balance sheet. So instead of losing, you know 25 30 billion Mark to Market on the health and maturity portfolio. You know even if it has two-thirds of the portfolio right, the bank wouldn't wouldn't have had a reason to have that type of run that that it had.

Um, we're talking about insurance Jay Right, That's the whole thing here. It's just yeah. fancy talk for insurance. They were cheap, fancy top for insurance.

So there are various ways to interest rates. You can use interest rate Futures right? You can use um, you know, swaptions. Um, you know, and you could? You know you could. Essentially the easiest way is just to buy floating rate assets right? that that actually see their coupons rise when.

um, when interest rates rise. So I think you know another option is also a swap agreement which is when two parties exchange cash flows for a specific time period so it could have entered. You know, a a swap with a counterparty. Um, so there's several ways to hedge.

Another way is a interest rate cap or a caller. Um, a caller is when you combine the purchase of an interest rate cap with the sale of an interest rate floor. right? So you're taking the premium from the sale of the floor and you're using that, you know to buy the cap. So there there's several even very cheap ways that they could have hedge rates.

And I'm just surprised given he had 40 Years of banking experience that he didn't even think of it. And you know I'm running on no sleep because of the volatility in the in the banking markets. I Apologize I'll show you that space at 5am today and you're still on. and I was I was on the space at 2 am.

So I apologize if I'm mumbling here, but you know that's my interpretation of what happened and you know to take a step back. You know banks at their core are facilitators, right? The deposit editors lend their money to the bank, and before that, their paid interest. and then the banks lend that money. They lend long.

They borrow short. They lend long. They naturally have an asset liability mismatch. and you know the bank is profitable if the interest rates they charge for loans are obviously greater than the interest rates they pay for deposited depositors.

One of the issues that we haven't discussed yet is that on 70 billion of the 170 billion of deposits, this bank was paying zero percent interest. There's something in the market called the deposit beta. so when interest rates rise as a bank, in order to keep your customers your depositors, you need to pass some of that interest the risk-free rate to your customers in the last three. interest rate Cycles 1999 cycle, the 2006 cycle, and 2016 to 19..

Most people don't know. We raise interest rates nine times between 2016 and 2019.. we were actually entering a recession even before Covet started. and you know when in the first you know of the three examples I gave the deposit beta was around 37 percent and the second example is 36 percent and the third example is 22 percent.

You know in this type of rate hiking cycle where you see 400 basis points of rate hikes, let's be conservative and say 40 deposit beta. That means you know this company should have been paying at least two percent on its assets. So if you're paying two percent on your assets, that would have completely destroyed the bank's Nim So you know Now we've we've talked about four catalysts for why this Bank saw the the problems that it saw. it didn't it it top ticked buying 90 billion of MBS it didn't hedge they they weren't paying money on deposits so the depositors weren't sticky The Venture Capitalists completely wrecked them and four, you know, we had this reversal of Dodd-Frank and all this lobbying money that the CEO spent the fifth thing which is not a driver, but it shows you a little bit of potential guilt of Becker the CEO is on January 20 on January 27.

If you look at the form four filings, you go to SEC Edgar and you pull up Sivb and you go into the form fours. You'll see that the CFO and the CEO were selling stock. Now when you look at the number, it's a big number. The CEO sold 3.6 million of stock roughly 10 percent of his total Holdings And normally you're like, okay, well was it a scheduled sale? Was it a 10, You know, Uh, b51 plan And when you look at it it originally looks like oh, this guy had planned the sale, it's a normal.

He was selling it every year like you know, like Bill Gates sells Microsoft stock every year When you read when the plan was started, the plan was started at the end of January and they sold the stop in February 27th and between January the end of January and February 27th he was doing a non-deal Roadshow talking to hedge funds about how his bank is so great and talking to all the sell side because he knew he would have to raise 2.3 billion. So my view is this guy knew he needed to raise you know, 2.3 billion back in the fourth quarter and he strategically sold this stock in January then waited a month a little bit more than a month to do this raise and he timed it horribly because you know the FED had been raising rates every single month and he was arrogant because instead of hedging rates, he wanted to make that extra 20 30 basis points instead of paying for interest. He wanted to make that an income and his greed and the culture of the bank you know forced him to blow himself up. But I think his greed also came from obviously from the from that lack of insurance.

like if somebody is in the chat right now. oh sorry it's Nick One of my community members is saying that the chief risk Officer was on payroll until August 2022 but didn't work since April 2022. So that is absolutely right. Absolutely correct just to explain to folks in the chat: Uh I I don't have Jay's expertise I was uh far less in the industry than him, but I still know what a risk officer is.

So the Chief risk officer usually fights all day with the CEO That's the relationship. They hate each other for the most part and the Chief risk officer's job is to be the most anti-business person ever and he goes in there and imagines the worst possible scenario ever for the company and forces the CEO to buy insurance even though the CEO doesn't want to spend the money to do that. Um, so that guy was not employed just to explain to you how bad this is. Now in my humble opinion, what sounds to me here in tell me Jay if I'm right or wrong, it sounds to me like Becker was saying look, why spend all this money on inter swaps, Why spend all this money on insurance right when I'm agnostic to interest rates because I'm just going to hold these to maturity I don't care if interest rate Spike We're still going to sit on these as much as we need and then there's no problem I Don't think you for foresaw when they did this that it's going to be for selling these things at rock bottom prices.

I Think you're absolutely right. And to just give you another example of poor risk management you probably are all aware of Alan Lane and Silvergate which shut down a week prior to this. The truths emerged on November 7th, 2022 when Silvergate actually announced the Unexplained emotion of its Chief risk officer. Guess who the chief risk officer of Silvergate was I don't know it was his name was Tyler Pearson he was the son-in-law of the CEO right? Imagine that this is a multi-billion Dollar Bank And this guy, this guy you know for his daughter's sake right hires her husband to be the chief.

That's the one position you know you don't know. Nepotism is a good idea, exactly. You do it for marketing. you do it for sale.

That's where when I was working for Associated General like all the people that was nepotized they went into. Biz Dev That's how I know who came in. You can never blame anybody for that. I work by the way for stock gen in New York We'll talk about it later.

I'll tell you where I work for her alternative Investments uh um but now I want to ask you on that topic because this is a fascinating topic. So we talked about the the lack of risk leading to this. So can you elaborate a little bit on the unique uh and it's going to lead to my next question about contagion. About the unique profile of this Bank Like as far as how much is it's almost I would say uh, 180 degrees different than any other Bank in the US As far as the lack of diversification and how it contributed to collapse, the diversification was very, very important.

Now the CEO made a decision. His decision was to focus on the Silicon Valley Elite right? And that decision actually hurt him because the bank was not Diversified Like most banks, it didn't have a Cni commercial industrial. It didn't have a you know, a big enough real estate diversification. It didn't have a SBA You know, a government guaranteed program, right? It didn't have you know a diversification even in the types of Securities right? They should have split it into.

you know, short-term t-bills you know, maybe some munis. It may be some shorter duration MBS or what they did with rate Hedges. It was just not Diversified at all. And when you have the same type of client, everyone knows this in investing.

If you put all your money in energy stocks, or all your money into real estate stocks, or all of your money into unprofitable tech stocks, you're going to see some unbelievable volatility when those sectors come into question. So banks are supposed to be Diversified and they're supposed to be serving their depositors and their cost customers. He did the exact opposite. You know, in order to focus on growth, you know.

I This is a lovely graph, right? You can see JP Morgan the top left. Everything You need to know about this. This is everything you need to know. Like you look at the bottom right, you look at Loans plus Securities as a percentage of deposits This guy was reaching because he is trying to offset losses by growing his asset side of his balance sheet right and Loans plus Securities is a percentage of deposits were the worst for Sivb and look at JPMorgan on the top right the most.

Diversified right with Loans plus Securities as a percentage of deposits being very conservative and the estimated retail deposits being very high. The one thing to note about Sivb was that over 93 of their deposits because of the concentration in Silicon Valley businesses were uninsured. Now when you have uninsured deposits and you know that you can lose all your money above 250k and then some VC guy who has a vendetta against the firm you know points out that they have a hole and does everyone pull out your money? That's what results in 42 billion dollars leaving a bank in less than four hours. Uh, so just to clarify to the audience what we're talking about here is, you know when you put your money in the bank you you don't supposed to worry about a bank run because the FDIC would ensure you make you whole.

but that amount is capped at 250 000 which is a different topic. How come it's not adjusted higher? Uh, for inflation? That it's a archaic amount. but it it covers 99 of people, right? 99 of people do not have more than 250 000 in the bank. We saw stats that like 65 Americans are living paycheck to paycheck.

So for most people, that's that's okay. 250 000 is okay. The problem was what Jay is pointing is that this specific bank was catered towards deposits that came from loans that startups and tech companies got that were funds used for payroll and operations. So we're talking about millions of dollars, tens of millions, hundreds of millions in individual accounts which are by definition not insured because they're above 250 000.

And that is the biggest problem here because FDIC cannot help these startups. And the So Now that's my next question. Jay Had the Federal Reserve Sorry if we didn't have that backstop that we that we heard about yesterday and the Ftic would have basically said hey, it's your problem Now with this special composition of this bank and it's a strong position in the startup, Market in the US right? 40 44 of startups are in. That's right.

So what would have been the result? What have been would have been the the outcome if there was no backstop and the government didn't came in and said well, we're going to make everybody whole no matter how much money you have in the accounts. 250 No 250 like what would have been the result. It would have been catastrophic. So to give you some background, but the FDIC was created after the Great Recession it was created to avoid.

You know, massive Bank runs and the Fdic's deposit Insurance Fund as of the end of December 2022 was about 128 billion dollars. The FDIC only guarantees deposits under 250k because most individuals have less than 250k at depository institutions. It hasn't gone up with inflation since for the past 15 years, but that's another topic you know? Um, whether it was 250 or 400 or 500 wouldn't really have helped too much in this case. So if you go to the Fdic's website and they give you something called a waterfall, So my background is bankruptcy.

In special situations, when a company files for bankruptcy, you normally have a dip loan right which is backed by accounts receivable and inventory. Then you have you know your first lien Term Loan that gets a recovery. They get paid first, Then you know if if there's anything left over, it goes to the unsecured bonds or the second lien, then the unsecured bonds, then the mezzanine, then the preferred, then the equity. if there's anything left for the equity.

Similarly, there's a waterfall at the FDIC. First the uninsured depositors get their their in, the insured depositors get 250k. Then you get a receipt. This tells you.

Okay, you have 2 million at the bank, you got your 250k. You have a receipt for 1.75 million. That 1.75 million is returned to you over a period of time in the form of what they call FDIC dividends. So because this bank had a lot of money in treasuries, the idea is that even if you mark down those treasuries by about those MBS which are backed by Fannie Mae Freddie Mac in email, which is why I was referring them to them as government securities.

When these government securities, even if they mark down by 20 or 30 billion to 70 billion, you could theoretically sell them in the market and return 30 to 50 percent of the cash to these guys in the first week. So that's not terrible. The terrible part is that what happens with the next 50 because you have all these loans, nobody knows what these loans are worth. Oak Tree's bidding 40 to 60 cents on them.

So you know there is a probability that if you were to liquidate this bank today, um, that the uninsured deposits may only may have only recovered. You know, 60 70 cents on the dollar, right? So that money is crucial to these companies because going into this rate cycle, they didn't have the ability to raise money at the same valuations that they had in the past. And so as it is, these companies were running on borrowed time. and they're using 62.5 billion dollars of off-balance sheet liabilities at Sivb right as a backstop to essentially borrow on Venture Debt, borrow into revolving lines of credit to essentially fund payroll.

So it wasn't just the deposits that were important, it was the fact that you know that they're burning through 10 to 30 of these deposits of deposits a month. So if you only can return, you know 30 to 50 percent of deposits in the first week. There's a chance you run out of money after a month. And the labor laws most of these companies are based in California Some are in the Midwest, obviously, some are in other parts of the US The labor laws are so strict in California that the board of directors of these companies once they've run out of money, would be forced to fire people because they don't want to take liability in California for hiring people without paying them, so it would have resulted in hundreds of thousands of mass layoffs.

You can kind of just estimate that if they're 2500. VCS right? That bank, with this company and each VC has you know 10 portfolio companies. and let's say that's aggressive. But let's just go with it.

for now. this 25 000 companies and if those 25 000 companies, right have five employees could be 125 000. Uh, people that are tied to this bank. So, and keep in mind, this was systemically important in the tech business.

Now I'm not saying it's systemically important as a bank, given that it only had 220 billion of assets versus 30 trillion of banking Assets in America But it was systemically important for the tech sector. And if if the government hadn't stepped in and I don't want to get political like, we can go through both scenarios. If the government hadn't stepped in, the market would have been a lot lower today. Um, bonds would have been a lot tighter, there have been a big bid for treasury's gold, would have been a lot higher, and tech stocks would have been selling off because companies like Roku at half a billion dollars stuck at this firm.

Now if all of a sudden you thought Roku was going to lose half a billion dollars, there would be short sellers shorting Roku Roblox had over 100 billion dollars, people would be shorting Bill.com one of my favorite companies I Love Bill.com They're such a great wow company! Yeah, if you ever work with Bill.com you know that company is legit and they had money in there Also, not a lot but I mean significant amounts Oprah had money there, right? Yeah? Harry and Harry you know Prince Harry had money there I mean people didn't understand the type of risk they were taking. Um, they're like oh yeah, Venture you know Tech is so safe. Didn't realize that all these companies are burning cash and the CEO doesn't know what he's doing well. I I Yeah, nobody know Greg was wasn't like the sharpest tool in the shadow apparently like in hindsight, but he made so many videos right where he was, he was almost crying.

so that makes it better. Yeah, well, yeah, of course. so. uh Jay So now that this backstop was created, uh for the positors and now that the FED said hey, we're going to help the other banks that are kind of on the brink, we're gonna set up a special facility and we're going to help them with those two things happening.

Uh, is there still any risk of further collapses in smaller? Regional Banks You know what there are Um and I I'm actually not going to name them in this because I don't want people to to freak out. Um, but there are several Banks um that you can actually screen for using the percentage of uninsured deposits and percentage of AFS and HTM Securities versus you know, total tier one and total assets. So using those two metrics Alone Um, and then if you want to do a deeper dive, you can actually look at the banks that have the biggest exposure to office and Mall which are the two biggest problem areas in the 21 trillion dollar commercial real estate market which we think is going to be in Decline for the next two or three years. but those are kind of like the four categories that you can actually screen with to find banks that are at risk.

and it's not a lot of banks. like I said, they're 4 900 Banks Um of those Banks you know there are a couple hundred that are publicly traded and of those Banks I would say that you know they're probably around. You know over a dozen of these names. Um, you can actually see by the trading activity and the halts today that you know short seller sellers are already targeting them.

but you know there are quite a few of these names and a few of them could you know? could enter a receivership? Um but I think the majority you know the our overall banking system is very strong. Um, if you look at the biggest banks in the United States you know with trillions of assets Um, they're only getting stronger. A lot of the deposits that are leaving some of these regionals are going to JPMorgan they're going to be of a they're going to Wells Fargo and their liquidity is only improving. So we're in a unique spot in the United States where the average tier one Capital ratio is 12.5 percent.

Uh, which even if you adjust it right by the 620 billion dollar number which is AFS and HTM losses across the entire banking system, let's put it in perspective: they're 30 trillion of assets, 18 trillion dollar of deposits, and five trillion of Securities. The 620 billion dollar number is not. uh, a fully truthful number because half of it is AFS and half of it is HTM available for sale Securities through Aoci already flow through and they're already in your Tier 1 Capital ratio. So you're only looking at something like 300 million versus 30 trillion of assets and 18 trillion deposits.

So the overall U.S banking system. my humble opinion, um, is actually stronger right than if you look at the Chinese banking system with with the shadow Banking and the real estate collapse and the buildings that are completely empty and secondary and tertiary cities and the demographic cluster demographic issues and much better than Credit Suisse and some of the banks in Europe that have very low uh capitalization ratios in in very, very high leverage. So you know India in two months I think that you know this specific issue may not be of importance and maybe six six months to 12 months from now we're talking about. you know, auto loan issues.

You know, because the economy is going to slow down and we're going to be talking about commercial real estate, but that's a much slower moving, uh, disaster. And it's not something like this which can take a bank down overnight. Yeah? I think when I hear people talk about the Contagion on the super Banks I find it laughable. I mean if anything, they're getting stronger off of this one.

I mean I move some money to some of the bigger things like if you're in JP Morgan if you're in Wells Fargo if you're Bank of America I mean you have nothing to worry about. No, it's it's these amounts are blip on the radar. They people don't understand how little this is for them. Yes And another thing for me, based on what you pointed out, you know a lot of that 300 billion plus of HCM Securities is at the biggest banks.

JP Morgan's gonna have no reason to sell government securities right? Neither is B of A neither is Wells Fargo They're going to do what Becker wanted to do. You just sit on there. Yeah, it's just gonna pay you whatever it's worth. Yeah, that was just master plan.

Brilliant. Yeah, you forgot, it's not JP Morgan Yeah except for the fact that he didn't realize that all his clients burn cash. Look, there's a huge difference. Deposit is is.

it can mean different things. Deposit from Joe Schmo like me: I Don't withdraw more than five percent of my money no matter what. It's always there. It's a sticky thing.

A deposit from a from a startup. it's it's operating cash. It's a Capital it's Are you crazy? Yes. anyways I want to ask a to happen into your macro expertise.

You're a little bit with your permission because I heard you talk about this and I was super impressed I Want to share this with the group so I wanted to ask your opinion. Everybody's trying to guess as always what the FED is going to do with interest rates next. Obviously it's always a topic. Hot Topic now more than ever.

So I have to ask you this question: I'm sorry to put you on the spot. So what do you think? the FED does freezes 25 bibs? 50 bips, It reduces. Maybe what do you think happens next? So I think 50 basis points is off the table. So what that means is that you know last week, after the strong Pce monthly data and the quarterly Pce data that we saw along with the tight labor data, there's if you look at Fed Fed funds Futures on the CME website, there is as high as an 80 probability of a 50 basis point height, right? The market was very, very confident and the two-year was about five percent even.

Powell said it pretty much already. They admitted it. Yeah, Paula was concerned right about inflation. Yeah, and overnight, right? Like I said at the beginning of of this discussion, Bank defaults are extremely deflationary, right? They're just pulling money out of the system, even if you return that money to people afterwards.

right? If you reduce the number of of loans and credit lines in the system, you're reducing money supply. So when you're reducing money supply, it's inherently deflationary. And our view is that Pal cares more about the stability of the banking system than he cares about inflation. Because yeah, they're three big buckets of inflation and probably even talked about in the last three meetings.

There's Goods inflation There's real estate related inflation. and then there's wage inflation. Our view is that Goods Inflation: You look at container ship rates down 90. You look at Lumber back at December lows you look at the cost of laptops and televisions.

All those categories are falling right. You look at used car prices most of the year they're following. They're a little a little bit higher in January because I think we had a very warm January and people are out. Actually one of the warmest januaries in history, but we think later in the year car prices will come back down.

So the biggest categories of goods: Inflation. We're actually going into deflation. And when it comes to real estate, we're talking about commercial real estate. You know their Pimco defaulted on two buildings in San Francisco right? We had Blackstone default on a building in Europe We had Starwood default on a tower in New York right? And we had, you know, the largest Canadian property owner default on two properties in downtown L.A You know.

And so we think that commercial real estate you're going to see. But by the way, the name of that company is Brookfield You're going to see a number of, you know, commercial real estate defaults because there's several hundred billion dollars of maturities over the next two years um, 2023 and 2024 resin corporate debt during Covid. Because of the stimulus, a lot of the corporations were able to refi debt, You know, through 2025 to 2027 with real estate because the lenders were so scared because these buildings weren't filled up. Um, they weren't able to push the loans much further out.

So we think that real estate prices are going to be a big drag on inflation. both. uh, commercial real estate prices, but also residential real estate prices. They're already down like 15 in San Francisco Um, and also rents are already falling.

The reason why we aren't seeing rents in uh CPI is that there's something called oer, right? Owner's equivalent rent is 32 percent of CPI and 16 of PC. What does that mean? If you you have a lease, a commercial lease, or residential lease, everybody's lease doesn't come up at the same point in the year, right? So when rents were Rising very quickly at the beginning of January everyone was like, oh, the government is Under reporting, uh, inflation. Of course they're under Under reporting inflation because even though you're seeing your rent go up 20 30 now everybody's rent's not going up 20 30 at the same time. Now this opposite is happening now now.

rents are falling, but now you're seeing. Oh well. some rents are still going up. Yeah, some rents are still going up because you know they had December leases and they had to wait several months in order to restrike the lease.

I Just remembered the condo conversation when you said that, but my, but my condo was so good. Yeah, exactly right. A little Nikonda, You know real estate is location, location. Yeah, you need to look at.

you know the 20 City averages right and the broad averages and the data we all have free access to from the government. You know your and even you can go on Zillow.com and look at Azilla.com average or a Redfin average right? The the bid ask spread in real estate is very high, which means sellers don't want to sell right and buyers are reticent to buy because mortgage rates are so high. so on average in a year, two percent of real estate um is transferred right from buyers to sellers. In this market when mortgage rates are six seven, eight percent, only one percent of real estate is transacting.

They could take several years for you to see real estate prices actually fall after 2008. Real estate prices in most of the US didn't bought them until 2012.. So we think that real estate is going to be deflationary for the next two or three years and that is going to weigh on inflation. And the final thing is wages right? So wages we think will go up a little bit this year.

but in the long run, right? If you imagine Bank bank failures and people losing access to loans and Venture Capital firms now being defensive and not raising rounds, you're going to see hundreds of thousands of people lose their jobs. And that in itself is deflationary. And by the way, Paul Almost said that's what he wants, right? He wants unemployment to go from what 3.4 percent to Four Points Four and a half foreign. So I mean I Think we can reasonably get there by next year and that's basically all you need for the FED to for the FED to cut.

Um, so that's our view is that the FED is not going to do 50. they might do 25. They might pause. but then in May if they if they do pause, they might restart and they might hike in May June and July and get to that five and a half percent And you know that's in the scenario.

If you know this banking situation, it only affects a few. Banks Now if you see more than five, you know five to say six. Banks You know enter receivership I Think it's a much bigger issue and it might be if you might see a full pause. I Don't think we're necessarily going to see that, but if you see several Banks enter receivership, you know I Do think that that's going to scare the living bejesus out of the Fed I Think the FED is already scared I Think they're scared too.

I Mean you know. Yelling changed her mind in five hours. she was like I saw that we are not going to do any bailouts. No, no, but she didn't change your mind because this is not a bailout Jade only bailing out depositors not Equity holders I made a joke about it on Twitter I can't do it on without getting punished on on YouTube but there's a joke but a guy who's trying to convince a girl.

and anyways Jay One last question before I Let you go and we'll wrap it up. So what does this mean on the grow like not broader scale I Mean we touched upon this on the space a little bit. Does this mess? It translates because everybody the US is leading the way for all central banks. look at the FED all Global Banks look at the U.S banks.

The U.S financial system is leading the way for everybody else. So when people are looking out into the restaurant and seeing this kerfuffle happening, does this weaken the the position of of the United States as far as the well-deserved currency. as far as the desirability, disability, of the of the treasuries and the ability to do is to raise cheap, Capital, etc etc and all this nonsense I Keep hearing sorry I already gave it away. So let me let me ask you a question.

You know as a friend you know we're sitting. You know we're sitting at a bar and we're talking about you know where where we want to put our money when we retire. So I give I'm going to give you four options right? Let's do it. Okay so you can put your money in Chinese bonds, right? Yeah, Um, they're gonna pay you high single digit percentage.

Um, but anything you can never take out the money, the money. you can say no, no, no, you're going to keep your money in here. Yeah, um, no. option two.

You're gonna put your money in, you know, one of the five biggest economies in the world, which is Japan at the beautiful interest rate of 50 basis points for the 10-year Jgb. So every year you're going to get half a percent. Okay, that's not your option for number two. Uh, your option for number three is to invest in European bonds where the banking system is much less capitalized than the United States And they just had Brexit.

And frankly, over the next 20 30 years, we don't know if other countries are going to leave the Eurozone and what's going to happen. Okay, so and then your fourth option unless they're engaging the war. don't forget. Plus, they're engaged with the war with Russia and they might have an energy crisis I Hope they don't have an energy crisis this year, but it will mean huge budget deficits and subsidizing fuel prices in Europe in the winter.

So and then I'll tell you. Okay, it's the US. It has 130 percent, you know, debt to GDP versus 200 in Japan. They're gonna pay you five percent.

The interesting thing about the US is that the U.S you know treasury has Essentially, if you look at it like a stock, it is the net present value of the future tax revenues from the wealthiest people on the planet and from the most Innovative companies on the planet and the biggest companies on the planet. In fact, two-thirds of the world's stock market is actually in the U.S And you are above stockholders and you are above creditors. You have the first priority right to take cash from these companies and individuals above everybody. What would you say? You know? I Once, Uh, aggregated a U.S Tax collection is 5 trillion give or take 5 trillion a year.

That's tax dollars in the US So aggregated tax collections in the Brics countries and it added up to about 700 billion. So so just just to put it in perspective perspective. Yeah, just to give a little bit perspective about the strength of the US economy. So let's talk about Brazil people in the audience.

Let's let's Engage The Audience. We're talking about Brazil You just had a socialist ruler, you know, and he's taking over. You know, the biggest Energy company in Brazil and he's trying to divert dividends away from shareholders. So I mean do you guys want to be part of a of a pure socialist government regime? You know? Well, there's a reason Jay Why every time there's a big mess in the world, there's a flight towards the dollar and towards U.S treasuries every time there's a big mess So because it's not a perfect setup, but it's the best out there, it's the what I call it is the best of the worst.

Even as an American I say it's the best of the worst. Now will it be like that forever? Who knows I can't see that far. I'm a Trader I Can see one year maybe a couple quarters ahead I'm lucky but I think for the next couple years it is going to be continue to be the reserve currency. If we see a global market crash, you'll probably see people by gold.

You'll probably see people buy treasuries and you'll probably see people buy investment grade bonds and fix to float Bonds in some of the biggest companies in the world. that's you know that's usually what happens and then if you think the Market's bottoming, you buy the highest quality. Blue Chip stocks at Big discounts. It's not very complicated, right? So um, you know.

Thank you for the time you know. Uh, on this space, you know we have a team of nine analysts at Specialstitsresearch.com We're working day and night. You know we have 1200, you know, former portfolio managers Traders Prop Traders Uh Retail investors retired? Can I show your website? Please please show your website. You know we have um subscribers from the biggest banks in America UBS Goldman Sachs Um some of the biggest hedge funds Millennium DK um that are logged in and you can actually talk to people.

Um on our Discord They won't even tell you that they're from those firms. They'll have funny names like Donald Duck but you'll be talking to some very sharp Traders Um, we do modeling of some of the biggest companies. We do custom projects. We do a macro report.

We have a list of you know, 800 hybrids and preps that actually some of them actually increase their dividends as interest rates rise. so we had a handful of them that saw 30 return. Since October we have a list of subordinated bonds of some of the biggest insurance companies energy MLPs that are paying you know, eight, Nine, ten percent that are underfollowed by Wall Street Uh, we come. We cover some of the niche areas in special situations in merger Arbitrage that are no longer covered by a lot of the big Banks And we also cover spin-offs split-offs dual class share Arbitrage and just traditional value stock picking and growth stock picking.

and it's all education. It's all ideas. we give you databases and lists. We rank different companies based on what we like.

We don't like you pick. You can see you can see our portfolio in real time in terms of the high level allocations and you can pick what you want to do. It's transparent and we've been building a community of friends and some people put the link to this website on the chat by the way. Thank you thank you very much so you know and they're also showing your Twitter because I think that Twitter is also where people can find you and yeah you know I was funny story I was following like Kai girl for Commodities and energy you know I was following Dr Anas for you know what's going on in Saudi Arabia I was I was just using it to trade my own PA and then during covid what happened was I saw their 20 million people opening retail trading accounts who had no idea what was going on in the general economy and we were one of the first accounts to go heavy shorts backs because it was a complete fraud.

the sponsors were mismanaging um, client assets. you had targets that were valued two or three times what the private Equity Firm should have valued them at and you had these S1 pipe unlocks and 180-day unlocks I went to war with one of them I went to war with Nicola Oh Nikola was a big short of ours right I went to war with them. they worked on my channel by the way they took them to talk to them. Okay yeah yeah, send me the links on my channel and then Financial Times did an article exposing them and then they you YouTube reinstated my channel but absolutely Insanity yeah I was saying Nicola is a is a is a piece of when it was like 80 bucks per share.

You know if if I if I could raise a billion dollars by pushing a wagon down a hill, up a hill and then rolling it down. Don't forget the Nikola Badger the track that never existed. Yeah yeah, there's a lot of we can talk about it for a whole new show. maybe part two of another show.

we should talk about frauds, frauds and specs. Yeah, definitely. Jay Thank you so much guys! Go follow Jay on on. Twitter uh the link to his website is in the chat I put it in the chat so you guys go check it out I Absolutely love his work and I can't recommend it enough I'm gonna put it on the screen again.

It's very simple special set research.com Jay Thank you so much for coming on today! It's been absolutely a blast hearing you talk about these things. We can probably do this again if you'd like. We should do it again. Tom you're very kind.

Thank you for your time today and I'm sorry I was late I have not slept in 24. you will be punished. You will be punished by owning one Nicola share for every minute you're late. We'll see you guys soon.