Issue #19, Volume #1
The Bad News: You’re Paying for His Losses
Three Things You Need To Know Now:
1. Sixty-six banks now face insolvency risk. The Federal Deposit Insurance Corporation’s (“FDIC”) “Problem Bank List” grew to 66 at the end of the second quarter, up from 43 a year ago, as the value of “Problem Assets” for banks jumped alongside Treasury yields. Today, the yield on a 10-year U.S. Treasury hit 4.18% – up from 3.78% at the end of September. This is a problem for banks (like Bank of America… see below…) that piled into Treasuries during 2021 and 2022 when yields were at an all-time low. Since the Federal Reserve began its rate-cutting campaign, long-term yields have risen, resulting in major unrealized losses for these banks. Today, the unrealized losses on securities at America’s largest banks are already dramatically worse – as of the end of Q2, $517 billion of these loans were underwater. Inflation remains sticky, and if yields continue to rise, these Treasury bonds held by the bank will continue to fall in value. Now legendary investor Stanley Druckenmiller has placed a large bet that Treasury yields will continue to rise – he’s using around 15% to 20% of capital from his hedge fund to short U.S. Treasuries.
2. Lock up your Bitcoin. A new paper from economists at the Federal Reserve Bank of Minneapolis made headlines over the weekend for suggesting that the government should ban (or aggressively tax) Bitcoin. The paper (which you can read here) is extremely “wonkish,” but the authors’ primary argument is clear: The existence of a “private-sector security that is in fixed supply and that is not a claim to any real resources,” like Bitcoin, is a hindrance to the government’s ability to run “permanent primary deficits” (i.e., tax your wealth via inflation). Therefore, banning or heavily taxing Bitcoin would solve this “problem” via “financial repression.” To be clear, this was a research paper from Fed economists, not an official policy proposal. But it’s still disturbing… It’s further evidence that to government bureaucrats, you and your family are just variables to be manipulated to suit the government’s needs. And though this kind of policy isn’t imminent, the fact that it’s being discussed at all is worrisome. As the burgeoning sovereign debt crisis worsens, Bitcoin could eventually become a target. If you own some Bitcoin (and we hope you do), we recommend holding at least a portion of it yourself rather than via an exchange-traded fund (“ETF”) or other third-party custodian.
3. Gold hits another high. The U.S.-dollar based price of gold hit another all-time high, of $2,740 per ounce on Friday – driven by (as we wrote in The Big Secret on Wall Street on Thursday) central bank buying, falling interest rates, and a steadily rising distrust in the U.S. dollar. And while the price of gold is up 32% for the year, the NYSE Arca Gold BUGS Index (HUI), the best measure of gold mining stocks, is nearly 50% below its all-time high (achieved in 2011). Gold is a great way to protect your portfolio and your wealth – and the shares of gold mining companies are also a fantastic way to build your wealth. I recently spoke about this with Marin Katusa, who for my money is the world’s foremost expert on gold trading, and has insight on what people at the highest levels of the gold market are thinking. You can watch the video of our conversation here.
And one more thing…
Is the Financial Times reading Porter’s Daily Journal? Clearly, someone at the global finance and investing newspaper of record has it hitting their inbox…
On Friday, October 11, I wrote…
… it doesn’t matter whether we elect either Kamala or Trump.
Neither candidate can ever tell the truth about [how the growth of the U.S. economy is being driven]. If they did, the government would face an enormous financial crisis – immediately.
But, if you don’t understand this lie, you’ll be absolutely gutted, financially.
… the government is creating the illusion of a strong economy…
… fueled by the largest accumulation of debt in the history of the world: America is adding $1 trillion to its government debt every 100 days.
The endgame of America’s mounting debt, and other challenges the country faces, as I explained on October 9, is “a long period of suffering” – and the collapse of the dollar that we’ve written about extensively.
Meanwhile, on Friday, October 18, an opinion piece in the FT was headlined, “Harris and Trump are equally silent on the expanding U.S. debt.” It details the factors behind the national debt and explains,
As is often discussed, growing national debt could trigger a fiscal crisis. But the absence of a fiscal crisis does not indicate that all is well. The U.S.’s fiscal imbalance has been slowly eroding wages and incomes for decades.
The FT concludes:
This bipartisan consensus [to ignore the debt and pretend that it doesn’t exist] is a threat to future prosperity.
That’s underplaying it (what you’d expect in an establishment publication like the FT)… but still accurate. And it’s precisely what we said.
I talk a lot more about America’s fiscal destruction, and what to do about it, in a presentation that we’ve called Breaking Point. Yes, it is an effort to encourage readers to subscribe to The Big Secret. But beyond that, it’s also full of solid advice about how to protect yourself, your family, and your wealth from what’s coming, and it’s well worth a watch, even if you’re already a paid-up subscriber or Partner Pass member.
Meet Bank of America’s CEO – The Worst Investor in History
This is Bank of America ‘s CEO Brian Moynihan.
He’s one of the worst investors in history. And if you’re one of the one in five Americans who has an account at Bank of America (BAC) – the country’s second-largest bank – you’re right now paying for his losses.
And even if you don’t have the distinct displeasure of banking at Bank of America, you’ll be paying for his losses anyway.
You might think I’m joking. I wish that I was.
On Friday, I explained how as part of the COVID bailouts, the government created around $7 trillion in new money. This cash was mostly deposited in American banks – which were then faced with the “good problem” of what to do with all that money.
Encouraged by banking-sector regulations that ignore market reality, a lot of that money – levered up many times – wound up in (oxymoron alert) risk-free Treasury bonds. Safe, right?
There’s a thing about bonds, though: Price and yield move inversely. That means that the long-dated Treasury bonds and Treasury-backed “Agency” debt that American banks gorged on back when interest rates were a rounding error… are now worth a whole lot less.
What this means is that around one-third of the reserves of our biggest banks are deeply underwater – that is, the real market value of their assets has fallen because of rising interest rates (see point #1 of “Three Things You Need To Know Now” above). It was these soaring losses, ignored by the regulations, that led to the run on deposits in the spring of 2023 at Silicon Valley Bank, Signature Bank, and First Republic Bank.
Which brings us back to our friend CEO Moynihan. In 2020, his bank bought $500 billion (yes, with a “b”) in mortgage bonds at the all-time high price for those assets. Since then, as interest rates rose, the value of those securities has fallen by more than $100 billion.
That’s one of the largest single investment losses in history. For perspective, the Enron bankruptcy led to losses about half as big.
But look at Bank of America’s earnings… and you won’t see any loss anywhere (in fact, in the first nine months of 2024, the bank’s financial statements show that it earned $22 billion). That’s because banks don’t need to report mark-to-market losses on their bond portfolio.
No private investor would have taken this kind of interest rate / duration risk. But because accounting rules allowed the bank’s managers to hide future losses on these investments, their incentives were to take these risks. Heads we win. Tails, nobody will know – and the losses won’t show up in our earnings.
Meanwhile, Moynihan has been paid more than $100 million since 2020, when he gave the nod to begin loading up on U.S. government bonds.
Bank of America has just under $2 trillion in customer assets, second in the U.S. only to JPMorgan Chase (JPM). And it has around $200 billion of tangible – that is, real – equity.
What that means is that it wouldn’t take that many of the 65 or so million Americans with accounts at Bank of America to decide that they want their money back, now – perhaps because they want to find something better than a 0.04% yield on their savings account (keep reading) – before Bank of America would be in very (very) serious trouble.
Don’t tell anyone… but when you put your hard-earned cash into Bank of America – or any other bank – it doesn’t just sit in a safe. It gets lent out… it’s used to buy Treasuries on leverage… and it’s put to use in ways that are beyond the financial imagination of regular folks. The upshot of that is that there isn’t actually that much cash on hand, relative to total deposits, to give back to depositors if they ask for it.
Like all commercial banks, Bank of America solicits deposits from customers and offers a range of products and services plus interest in return. Now, you can quibble with me here, but virtually all of Bank of America’s services (checking, bill paying, credit cards) have become completely automated and are available, for free, from a wide range of other branded financial product companies.
In other words, ain’t nobody banking with Bank of America ’cause Bank of America provides something special, like an ATM, a local branch, or the ability to write a check. All of those services are completely commoditized and, for most Americans, virtually all commerce is digital.
The reason you put your money in a bank – Bank of America or any other – is so that it’s safe. That means, safe from theft and fraud.
What Americans most need from their bank right now is to be protected from our government, which keeps printing money, devaluing the dollar, and causing inflation, the likes of which we haven’t seen since the 1970s.
At the very least then, Bank of America should offer its customers a rate of interest on their deposits that helps protect them from inflation.
Core inflation, according to the government, is now running at 3.3%.
So, what is Bank of America doing to protect its customers from this ongoing debasement?
It’s paying as close to nothing on deposits as you can get. If you’re in New York (rates vary very slightly between states), you’re lucky to get 0.02% on your checking account… the “Diamond Honors” savings account offers a paltry 0.04%.
What’s so bad about that? I mean, inflation isn’t Bank of America’s fault.
True, but without the protection of the U.S. government, Bank of America would, mostly likely, collapse tomorrow. That’s because it has a huge hole in its balance sheet that the government… is allowing it to fudge.
All those people with accounts at Bank of America might say: I’m not worried because Bank of America is “too big to fail.” And the FDIC will pay back depositors, right?
Yes… perhaps. But the FDIC is dramatically underfunded compared to the unrealized losses on U.S. banks’ balance sheets.
So the FDIC will undoubtedly need more money: And the Federal Reserve will always backstop the banks, no matter how poorly run they are, or greedy their managers, or absurd their risk-management policies. And when that happens, who pays the bill?
You do… I do… as more money-printing generates more inflation… continues to run up the federal debt… and, as I’ve written before, slowly erodes the fabric of American society.
Central to this is the end of the dollar: watch as central banks around the world buy gold, as depositors leave banks for Bitcoin-based accounts with dollar-spend visa cards, and as the cost of carrying our national debt explodes as cheap short-term debt rolls off and creditors demand 7%, 9%, 12% to finance our government.
For Bank of America, which has made a horrendous error of building its reserves in an asset class that’s likely to collapse at the same time, and for the same reason, as its customers begin to seek alternatives, what’s unfolding is an existential threat.
And… because digital networks allow those deposits to be shifted immediately, 24/7… I believe Bank of America’s customers should beat the rush.
Get out now, before inflation steals your money slowly or before Bank of America’s incompetent managers steal all of it overnight.
There’s no reason to keep your money in a bank that’s run by people like this – especially when they can’t pay you anything for taking the risk.
Good investing,
Porter Stansberry
Stevenson, MD
P.S. I love introducing new people to subscribers… At last month’s Porter & Co. annual conference, I added to the lineup Pieter Slegers, a young Belgian man who writes Compounding Quality. I’m glad that I did.
Pieter focuses on exceptionally high-caliber companies that have big moats and trade at a reasonable price… which, well, is precisely what I do too.
While he’s still a young man, he’s got the insight (and performance) of an investor with decades of experience, and following his ideas could make you a lot of money. Look here to see what he has to say about Nvidia (NVDA). And take a look at this to see his list of companies he’d be prepared to hold for decades.
But Pieter is also smart about another topic not enough people know about or appreciate, and that is dividends… Pieter has launched a new service called Compounding Dividends. His objective is to uncover the companies providing a reliable stream of dividend income that are meanwhile growing at attractive rates that will simultaneously compound your capital.
Pieter has put together an offer exclusively for Porter & Co. that’s only available through this link, and it gives you the chance to get a Founding Member package to Compounding Dividends for the price others pay for his basic membership. To take advantage of this offer, simply click here, select the “Annual” option, and then Pieter will manually upgrade you to the full Founding Member level.
Mailbag
As always, let me know what you think, by emailing me at [email protected]. I’d love to hear from you!
Today’s letter comes from D.N., who writes:
Hi Porter,
I am a lifetime Stansberry member and recently bought your Porter & Co. subscription. I enjoy reading your emails and agree with you on the coming issues. Your recent Breaking Point interview was quite educational. I have learned to trust your instincts and have been preparing myself accordingly.
I have a question that all of your readers could benefit from. What are your thoughts on money market funds that usually invest in less risky assets? Research shows that almost 7 trillion is currently being invested in them, and the 5% yield is pretty attractive.
Do you see any dangers of keeping money there with what is coming? Asking for a friend. 🙂
Porter’s comment: It’s a great question, and one we get often.
It’s true that money market funds offer a compelling yield, and, as a general rule, should come with low odds of default risk. The Federal Deposit Insurance Corporation (“FDIC”) also provides insurance for money market accounts held at banks, of up to $250,000 per depositor at each bank.
But even assuming zero default risk, keeping a substantial portion of one’s net worth in money market funds is virtually guaranteed to be a losing bet over time. Why? Because the entity on the other side of the transaction that’s paying the interest on money market funds – the U.S. government – can not afford to pay today’s 5% interest rates. Uncle Sam’s interest bill has already shot to over $1 trillion per year.
If the Fed kept rates at 5% and forced the U.S. government to finance all of its outstanding debt at that rate, the annual interest bill would soon approach $2 trillion. That’s 40% of what the government collects in tax revenue each year. An analogy would be a household that takes home $100,000 in earnings each year and then pays out $40,000 in credit card interest… It’s completely unsustainable.
And since an honest default on our obligations isn’t a viable political outcome, the monetary and fiscal authorities have only once choice left: a dishonest default through inflation.
What will this look like? Well, we’re already seeing it start to happen. The Fed will begin lowering interest rates as inflation continues running hot, causing short-term interest rates (i.e., the same rates paid in money market funds) to eventually fall below the rate of inflation. This will have the effect of pushing the interest payments you receive from short-term bonds held in money market funds to fall below the rate of cost increases, and thus creating a negative inflation-adjusted return.
This is the single greatest risk facing investors today, and it’s one that is virtually certain to occur.
So that’s the problem… What’s the solution?
Well, there’s one particular class of businesses that we think provides the ultimate inflation hedge: insurance companies.
As you know, if you’ve ever bought insurance, you must pay your insurance premiums in advance. That means, until you file a claim and until that claim is settled, the insurance company can use your capital, for free. This capital, known as “float,” can be put to work in financial markets, generating a return before paying out policyholder claims. This becomes a legal form of a perpetual money machine. Instead of paying for the privilege of borrowing money, these companies get paid to tap into the capital from their policyholders. And in the meantime, they can invest that capital and earn a return. This is the secret wealth-compounding formula many investors have used to amass some of the world’s largest fortunes.
We have made insurance a core pillar of our research focus at The Big Secret on Wall Street. And to date, we’ve delivered extraordinary returns for subscribers. The table below shows all five insurance companies we’ve recommended since inception. Note that we’ve achieved a 100% win rate, with an average annualized return of more than 50% across all recommendations:
In this Thursday’s issue of The Big Secret on Wall Street, we’ll be publishing our latest insurance recommendation – and one we believe could easily become the best performer to date. Why? Because unlike the well-known, widely followed insurance stocks we’ve recommended to date, this is an undiscovered opportunity. It’s valued at less than $1 billion today, and has a low outstanding share count because insiders own over 30% of the company. And it has almost no coverage among Wall Street analysts. As a result, this hidden gem trades for just over 7x earnings, compared with 20x to 30x or more for the more well-followed insurance companies we’ve written about previously.
To get this recommendation as well as a look at all the insurance companies listed about the full Big Secret portfolio, click here to subscribe.