Fed's Stealth Bailout: The podcast discusses a potential stealth bailout by the Federal Reserve aimed at globally systemic banks, which may be influencing the Fed's dovish stance on interest rates.
Yield Curve Inversion: A significant inversion in the yield curve, particularly at the "belly" of the curve, is putting pressure on banks, prompting the Fed to consider dropping rates to steepen the curve.
Bank Balance Sheets: The composition of bank balance sheets, including assets and liabilities like corporate bonds and deposits, plays a crucial role in how banks are affected by interest rate changes.
Interest Rate Risks: The podcast highlights the risks banks face with fixed-rate liabilities and the impact of rate cuts on their cash flow, potentially leading to a liquidity crisis.
Adjustable Rate Mortgages (ARMs): As rates drop, there is an incentive for consumers to opt for ARMs, which could alter the duration of assets on bank balance sheets and impact their risk management strategies.
Liquidity and Money Supply: Banks may reduce their balance sheet size to manage duration risk, which could decrease the money supply and liquidity, affecting the broader financial system.
Investment Strategy: The discussion emphasizes the importance of understanding these systemic risks to make informed investment decisions and avoid a passive "ostrich strategy."
Transcript
Hello fellow robo capitalists. Hope you're well. So I wanted to reveal some information, some insider intel that I was privy to last week when we did this uh macro camp in St. Barts. Now I don't want to give out any names, but one of the gentlemen that was there was an OG in the they call them primary dealer banks. Let's just call it that. multiple primary dealer banks and he knows the plumbing and certain components of the plumbing like no one I have ever seen in my life. and he was talking to me about his framework which highlights this stealth bailout the Federal Reserve has been doing or is maybe currently doing with a lot of the globally systemic banks. Now, I I can't reveal the specific banks, but I wanted to get you guys up to speed on his framework because it completely blew me away. And in his opinion, this is why the Fed Jerome Pal has really kind of pivoted to taking a more dovish stance. It's not just because of the labor market. It's more so the the banking system and the monetary system and then unfortunately they're backed up into a corner where their bailout could lead to a black swan event that could potentially lead to a a crisis within the banking system itself similar to what we saw during the GFC. I want to be very very clear. This I'm I'm not giving you my opinion. This is not a prediction. This is simply going over someone's framework that is incredibly incredibly sophisticated. Very sophisticated. And you'll see when we go through this that I'm going to try to bring it down to a level that we can all understand, me included. But a lot of this stuff is incredibly uh esoteric, let's say. So, let's start with going over the uh yield curve. I actually should have brought that up. Josh, can you actually do me a favor, Josh, can you bring up the entire yield curve? Um, and while you're doing that, I'm going to start with the bank's balance sheets. So, let's go over to a sample of uh just a slide here that I just pulled up on Google of a bank's balance sheets. Uh obviously oversimplified here, but we're looking at assets and liabilities. So the first component of the we'll call it bailout black swan framework for the banking system is the Fed is going to have to drop rates to steepen the curve. So Josh, do you have that pulled up by chance? Let me just do that on my end >> right now. I'm trying to pull it up. It's just taking a while to render. Uh, I think this is actually the one I'm looking for. It is. Okay, forget it. I got it. Can you see this? >> Yep, we can see it. Okay. So, the first problem and and why this gentleman believes the Fed is going to drop rates uh very very quickly and why this could lead to um or why this will lead to a crisis in the banking system. The reason I call it a black swan is because this is on nobody's radar. Nobody. I can assure you this was definitely not on my bingo card. I had no idea when he explained this to me. I was totally blown away and quite frankly terrified. So right now the curve is massively inverted when you look at the 2-year three-year versus Fed funds. So Fed funds as you guys know right around 4.25%. I think specifically it's 4.33, but we go down or over out to the 2-year and we're trading at roughly 3.6 3.7. You go to the three-year and we're at pretty much the same place. I mean, we're inverted all the way. Yeah, I guess we're we're inverted all the way up to the 10-year Treasury when you look at just Fed funds. I mean this is bananas. So most of you know the basics of how banks operate. They borrow short short-term and they lend longterm or longer term. Now this is with a a a portion of their balance sheet. And this is where it starts to get really, really complicated because with another portion of their balance sheet, they're trying to match up duration to the best of their ability. But with other portions of the balance sheet, and this is all about internal risk management, they're having to borrow short or ideally and lend long. Why? Because those short-term interest rates theoretically will be lower than the long-term interest rates. So you pocket the spread, right? You borrow at 1%, you lend at 3%, you pocket the 2% spread. We know how it works. So when a yield curve is shaped like this, especially when you have this massive an inversion, and now a lot of you said, George, well, the curve was significantly inverted when we look at the uh twos 10 and Fed funds tenure. That is true. That is true. But based on this gentleman's framework, it it's really about I think they would call this the belly of the curve because this is where banks are most susceptible. Now to be very clear, I just want to restate I don't have all the information and and his framework is so complex that even I'm trying to put the pieces of the puzzle together. And uh I I reached out to this gentleman to see if he would be willing to come on to the Rebel Capitals channel, which he which he is. He's totally willing. He's actually going to come on next Wednesday. Um now the challenge is going to be me translating what he's saying because if I just got him on and said, "Hey, explain your framework." It would sound like Chinese. Even to me, it sounds like Chinese. So I gota say, "Whoa, whoa, whoa, time out. Explain that like every five seconds." I got to say, whoa, time out. Explain that. But hopefully I'll be able to uh be a a translator, a good enough translator to where we can actually put this into English. But the one of the big problems here for the banks is this inversion at the belly of the curve. So if if I understand his view correctly and we're going to get some more clarification on that here because I think this is really really important even for the average investor to understand what's happening beneath the surface what's happening with the banking system obviously I mean we know from the GFC how important the banking system is. So this is why the Fed has to drop rates. Okay, we've got to get this curve steepened. it you you can't have it this inverted especially at the belly of the curve because it puts way too much pressure on banks. Now, not all banks, this is what's interesting. It depends on the composition of their balance sheet. So, for some banks, this is a big problem. For other banks, not so much. And for other banks, the bigger problem, and this is where we kind of get into this black swan issue, is the Fed actually dropping rates. So to be clear, for some banks, the Fed, and this is kind of why they're backed up into a corner, they've got to drop rates to steepen out this curve. But for other banks, this puts them in a position to where they could go bust because the composition of their balance sheet is different to to the degree to which the lowering of the rates at the front end of the curve actually puts them in a very compromising position. Let me show you what I'm referring to. Now, let's go over to or back to this balance sheet. So what my framework and my kind of um my model that I my intellectual model let's just call it that when I'm looking at the monetary system or the banking system is I I really look at deposits because deposits are the vast majority of M2 money supply and I'm always thinking about inflation disinflation deflation. I'm always thinking about kind of these broad macro topics, but one thing I didn't consider at all was this line item that you guys can see here on the liability side of the bank balance sheets, and that's borrowings. So, I was always just looking at the liability side of the bank's balance sheet through the lens of deposits, checking deposits or demand deposits and time deposits. So small denomin denomination time deposits, savings deposits, large denomination time deposits. Now CDs as an example. So and I I really wouldn't look I really wouldn't think about things in terms of time deposits or borrowings which basically are corporate bonds. So a a bank, yes, when you deposit money at a bank, that's I don't want to get into technicalities, but that's basically them borrowing money from you. That's your asset. That's their liability, right? So, but banks borrow in other ways. It's not just from depositors. It's also from issuing corporate bonds, which I I didn't even consider that in my analysis. And obviously they're borrowing in terms of savings deposit or time deposits. Now this was more on my radar because it's it's just like a deposit. But what wasn't on my radar were the corporate bonds. So the the corporate bonds here, if you think about it, when interest rates go up higher and higher and higher, well, this impacts even if the deposits the deposit rate they're paying is, let's say, 50 basis points, that doesn't necessarily mean that they can borrow money on a corporate level. If they issue corporate bonds at 50 basis points, there's there's no way, right? There's no way if Fed funds is at 4.33. So, they're going to have to borrow at a corporate level, corporate by issuing corporate bonds, they're going to have to borrow, let's just say 5%. I I don't know what it is. We're just using that as a hypothetical. Okay. So, I always, and you guys know this from watching my videos, I'm always sitting there looking at JP Morgan's liabilities, their their uh their demand deposits. I'm saying to myself, okay, they're only paying one basis point, so who cares what Fed funds is? It it doesn't matter because who cares what the curve is because basically they've got free deposits. They've got free money. Um, and therefore, if the Fed drops the interest on reserves from 4.3 down to whatever, let's just say three, okay, fine. They're not making as much, but boohoo, cry me a river, JP Morgan. But when you actually look at the borrowings here, the corporate debt, it's a completely different story because this doesn't adjust with the Fed funds rate. So, if the Fed drops their uh interest rate or what they're paying on reserves from, let's say, 4.3 down to 3%. You still have that liability at 5%. So now all of a sudden, I mean, initially you were in a let's say negative cash flow position where this component of the liability side of your balance sheet, you having to pay out 5% But on your reserves, you are only getting, let's just say, 4.3. So you've got a 70 basis point delta there. Now, you can absorb that because you're making so much more money on the delta. Let's just say between your reserves and your demand deposits where you're like JP Morgan paying one basis point. But where things become a big problem is if you take that 70 basis point spread down to 170 assuming that the Fed drops to 3%. Right? Because and let's just assume for a moment that for a lot of the banks, which is true, they're not like JP Morgan, so they can't get away with paying people one basis point. So let's just assume that they're having to pay people uh 2%. Well, if the Fed drops rates, well, then likely all banks are going to have to drop the amount they pay on their demand deposits, and therefore the spread would would be similar. But what happens is if a large portion of the bank's balance sheet are not demand deposits, but are corporate debt, all of a sudden you've got a big problem. You guys can see the spread doesn't stay the same because again, you're dropping the amount you're receiving on the asset side of your balance sheet, but for a significant portion of the liability side of the balance sheet, you're having to pay out the same that 5%. So, as the Fed drops rates to bail out some of the banks, it's putting other banks in this precarious position where they also could require a bailout because of this effectively negative cash flow. I mean, I think it's very easy if we look at it in real estate terms. So, let's just assume that you're a real estate investor and you have a a single family home and u let's just assume your monthly mortgage payment is $2,000. Okay, great. But let's assume for a moment that initially this math pencils out because you're able to get $3,000 for rent and you know you got $1,000 of expenses and then you pay your mortgage. So, at the end of the day, you're just uh you're flat. You're even. There's no negative cash flow. There isn't positive cash flow. It's a break even. Okay, fantastic. Well, let's just assume for a moment that the amount of rent you can charge goes from $3,000 down to $1,000 and your expenses are still a,000 bucks. So, where are you going to get the $2,000 to make that mortgage payment? The answer is you don't have it. And that's exactly the position that the Fed will put some of these banks into if they ironically if they actually drop rates and drop rates to bail out some of the other banks. So this is one component of this kind of complex web that is this gentleman's framework that we'll just call the bank bailout bank black swan because it's it's it's it's paradoxically one and the same. But this is just the tip of the iceberg. Where it really, really, really becomes a problem in this gentleman's view is as you drop these interest rates significantly at the front end of the curve, usually that disproportionately impacts adjustable rate mortgages. All right, so let me see if I can pull up uh the spread. Well, I don't think I Let me just um pull up. Let's see. Uh interest rates. All right. So, let's just we'll pull up a chart here. Um mortgage rates maybe this 30-year. Ah, no. That's okay. We'll just pull this up. you guys get what we're talking about. So, as the Fed drops rates here, so let's take the GFC as an example. They started dropping rates in September of 2007. We all know that. And then they went basically down to zero by 2009. But you see that interest rates didn't really do exactly what Fed funds is doing because obviously they're more so tied to the 10-year. But this gentleman's point is that usually what you see in a Fed rate cutting cycle is although the adjustable rate mortgages, the ARMs and the fixed rate mortgages are loosely tied to the 10-year Treasury, if you see the 10-year Treasury going down as a result of a recession or the Fed dropping rates, whatever it is, then you if you see the 10-year or excuse me, if you see the 30-year fixed rate mortgage dropping by let's just say 50 basis points. Usually the arms are going to adjust by or adjust are going to go down by let's just say um 150 basis points. So they're going to go down by a lot more. That's the key here. So why is that important? Let's go back to the balance sheet. So now what we're going to do is we're going to focus on the asset side of the balance sheet and we're going to look at real estate right here. So number 35. So mortgages and it's and you could say that you know the mortgage back securities the banks issue the mortgage they pawn them off on Fanny Freddy. They turn them into this uh mortgage back sausage which I used to call it. Then they sell that out to Wall Street. The bottom line is that mortgage is going to be on someone's balance sheet. Okay? And for a lot of these banks that uh hold some form of mortgage, uh whether it's in the form of a mortgage back security or an actual mortgage direct to consumer, they've got this on their balance sheet. And it's a very very key component of their balance sheet. Why is it a key component? Because if we go back to the liability side, banks have uh all types of let's say duration or uh possible maturity. So if you're looking at a time deposit, well the duration of that if you're looking at the internal risk controls of a bank are going to be I think roughly five to seven years. Now you say, George, how's that possible when it's a time deposit? Because what they're doing is they're just taking the bulk or the aggregate total of all the deposits and they're saying, "Okay, on average, how long, you know, are these uh if we have a customer come actually a better way to say it, if we have a customer come in and deposit, let's say $100,000, how long do they usually keep that $100,000 with us or that balance roughly the same?" And let's just say it's five to seven years. Okay? So that's why you have an average duration for time deposits when you're looking at the internal risk controls of a bank that are a lot longer than tomorrow, right? So it makes sense when you look at it that way. And then they have uh corporate borrowings. We go back to that. These are the bonds. Uh these can be five, sometimes 10, 15, up to 30 years. So you've got really long duration on that liability. And then it's the same thing or similar with CDs that you could have two year, maybe three year, five year. So you've got longer duration um than you would expect. You have much longer duration than I would have thought prior to, you know, taking kind of the the red pill here from this gentleman. So, what's great about the mortgages or the a mortgage type asset is that you can try to match up duration with the asset side and the liability side of your balance sheet a lot better. And if you're a bank, this is exactly what you want to do because obviously there's a few different ways that you can really get yourself in trouble. Number one is if you have FX risk or what that's what I call it. I don't know what the technical term for it, but let's just assume for a moment you had dollar liabilities and your and you had yen denominated assets or your assets were something extremely volatile like Bitcoin, that's a bad idea. That's a real bad idea because if someone does take out, let's say a million dollars or $100 million out of the bank in the form of a time deposit, just what happened to Silicon Valley Bank, then you have to sell some of those assets and those assets just happen to be down by 10% that day. You're done. Like you're forget it. And Silicon Valley Bank again is a perfect example of this. So banks are are are should do their very best to try to not only eliminate that FX risk but also match up the duration. So here's an example. If you have a CD for one year, then it would be fantastic for that bank to be able to buy a one-year treasury because then you you you're matching that up. So at the end of that year, you know, you're going to have to pay that person, let's just say, a million dollars. So at the end of that year, if you can receive a million dollars to pay the million dollars, and if you can get a slightly higher interest rate on what you're receiving than you're paying, you pocket the spread. You have absolutely no risk there. There's no risk whatsoever. But let's just assume for a moment that you had a 2-year Treasury and only a one-year CD. Well, now all of a sudden, you have to sell that two-year Treasury after one year. you're not going to hold it to maturity and it could fluctuate in price where you put yourself in a very compromising position just like the example we gave with Silicon Valley Bank and Bitcoin. Okay, so hopefully we're on the same page there. What happens in a rate cutting cycle when you look at the the mortgage market? And by the way, uh this gentleman was pegging the mortgages on balance sheets of banks in in one form of another at like $22 trillion. So this is a big problem. This is not something that's just like a rounding error or something. This is a real big problem. So for some banks, for others, not a problem at all. Again, it all depends on the composition of their balance sheet. So, when you have the, let's say, the fixed rate mortgage here and adjustable rate here, and they start to go down like this, it incentivizes people to go into adjustable rate mortgages. Now, you say, George, no one's ever going to do that because everyone's locked into a 30-year fixed at 3%. Yeah, that's fine, but we're talking about new people coming into the market and actually buying the homes. Well, they don't have that fixed rate mortgage. And then you do have some turnover. And if you have prices at nosebleleed levels and you have the consumer out there trying to figure out how on earth they can actually afford a home, if you have the arms, the adjustable rate mortgages going down at a more uh at a steeper angle here or going down to a greater degree, then there's going to be a huge incentive for people to go into these adjustable rate mortgages. In fact, I uh posted something on Twitter the other day that I saw on Zero Hedge. Now, I don't know how accurate this is because people came back and said, "Ah, that doesn't really seem right, but the bottom line is the trend." And Goldman Sachs was saying that currently, I don't again, I don't know how they're coming to this conclusion, but like 40% of mortgages are adjustable rate. Now there's got to be they h they have to be looking at a small component of the overall market because we all know that that's there's no way that the uh that 40% of outstanding mortgages are adjustable rate in the United States. But so they have to be looking at a component of the market there. But the whole point is the trend is going higher for these adjustable rate mortgages. And if we see the Fed drop to bail out some of the banks to steepen out the curve, then there's going to be an even bigger incentive, especially if home prices are at nosebleleed levels for the new entrance into the housing markets and the people that are having to sell their house and buy another house, there's going to be an even bigger incentive for them to go into an adjustable rate mortgage. So you should see the percentage change significantly to where let's just say now we're at 90% fixed and 10% adjustable. Let's say we fast forward uh a year or so and we go to where it's like 7030, right? That 7030 that additional 20% on the bank's balance sheets in one way, one form or the other is a huge huge problem. Why? Because it changes the duration on the asset side of the balance sheet of the banks and aggregate total, right? And remember, they want to they want to match up duration. So, think about it. If you have an adjustable rate mortgage, well, the duration on that is, I don't know, five, seven years, something, let's just say, and and where you have to um roll it over or you have to renew it or whatever, and at a different interest rate, and on a 30-year, okay, it's 30 years, it's set. So, not only is that a benefit to the consumer, but in a way that's actually a benefit to the banks if they're setting up their balance sheet this way because they know that they've locked in that 3% interest rate over 30 years. Where if they have a 2.5 interest rate unadjustable, well, that's a that's you've got a duration problem there. If you're matching that up to let's say a corporate bond on the liability side that's 20 years. Well, you try to match that up to a mortgage that's only three to seven years. And again, you got a mismatch in the duration which banks don't like. They don't like this at all for obvious reasons. So, what are the banks going to do? Well, then they're likely going they've got two options there. Number one, they can buy more of the adjustable rate mortgages. So just to keep the math simple here, let's say that on a fixed rate they have 15 years of duration and on an adjustable rate they've got five years. Okay. Well then they just have to buy three of those five-year loans to equal the duration that they had with that one fixed rate mortgage to begin with. So that's one direction they could go. But that's very unlikely. Why? because that really depends on the amount of mortgages being issued and we know that right now there ain't a lot, right? So the the the there would have to be a supply component there that is outside of the control of the banking system in aggregate total. Now it is true that more people would likely be rotating into these adjustable rate mortgages. So there could be more supply coming online. But the higher probability as far as these two options that they have, the two paths they can go down is for them to reduce the liability side of their balance sheet. So let's just assume for a moment they have one of these corporate bonds that are uh coming due in a month. Okay. Well, now what they're going to be incentivized is to go ahead and and and just pay that off and not roll that over. They're incentivized to reduce the size of the of their balance sheet basically because they can't add another mortgage that has the same duration as that bond they're trying to roll over. And if they can't match up that duration, they would rather allow that bond, that corporate bond, the liability side to go ahead and roll off. So if banks are reducing the size of their balance sheet, what are they doing to the money supply? You guys know this from watching my videos. They're decreasing the money supply. They're literally decreasing the money supply. And another way of saying that is they are decreasing liquidity. Not just for consumers, you know, as far as inflation, deflation, disinflation, but also for interbank. And just if you want to know how important interbank liquidity is, just ask 2008 and they'll tell you. So this is a wild oversimplification of this individual's framework who has been in the let's say a key component in uh a lot of the broker dealer banks um business model for the last 30 years. So, another way of saying that is you've got someone that when you look at these global dealer banks, he he is the insider of the insiders. He's the one that's that's making a lot of these decisions on how the banks are hedging their balance sheet. And he he he he does it in ways that are wildly complex and sophisticated. But this is kind of a broad overview of some of the systemic problems and risks that he sees in the system right now. So, because this gets um obviously uh very heady here and I let's go over to chat GPT because I want to have chat GPT try to explain this as far as at least the duration just to make sure that as many people as possible are getting their head around this because if you actually think about it, it it it really makes sense. But let's go over to chat GPT. So hopefully it can explain a little bit better why this duration is so important to a bank's balance sheet. And once you understand the the the banks trying to match up and eliminate that FX risk, so they want if they've got a dollar liability, they want a dollar asset. I think most people understand that. But once you understand that if they have a a 20-year liability, they also want a 20-year asset, right? Once you understand that risk component of it, then I think this will all really start to make sense for you. So I asked chat GPT, I'm like, "Okay, what are the long-term liability? Give me examples of long-term liabilities that banks could have on their balance sheet." Because again going into this I was just myopically looking at demand deposits just because I I look at it from like a customer centric standpoint like the average Joe and Jane but I was completely I had the blinders on like this and I wasn't even recognizing the other you call it 50% of the liability side of the bank's balance sheets here which which is very very important. from that duration standpoint. So CDs, we talked about that uh CDs 5 10 years. If a bank holds too many short-term assets like adjustable rate mortgages, they can't hedge the interest rate risk on paying 4% for the next 10 years on a CD callable or non-matururing deposits. So even and this goes into I think uh their their internal risk management and how they look at a demand deposit or interest rate risk management. Internal interest rate risk management irr. Okay. Even though checking and savings accounts are technically short-term bank model them as long-term for internal IRR. We talked about that. Based on behavior, banks assume people keep money in account for five to seven years. subordinate debt. Banks issue bonds. So here's the corporate debt that we were talking about. Banks issue three to 30 or excuse me 5 to 30year bonds to fund operations or meet regulatory capital. These bonds are fixed rate obligations. So the bank need long duration assets in other fixed rate long duration assets by the way in order to match up those liabilities. And here we get into some of the stuff that Snyder talks about. my good buddy Jeff Snyder. Interest rate swaps used to fix liabilities. And this is I I knew about interest rate swaps. I know what they are. I know that a lot of interest rate uh swap maturities are are negative. I understand why that's a bad sign, why that uh is a signal for what the market is predicting with future interest rates. I get all that, but what I didn't realize is how it impacts a bank's balance sheet here and it impacts the risk decision. uh the the the risk decision making that they're uh that they're actually doing internally here. So some banks enter into derivatives that synthetically convert floating liabilities into fixed rate. These are interest rate swaps. You guys know that the uh uh this effectively adds duration to the liability side and the bank then must hold long duration assets to stay balanced. And then it goes into uh insurance companies and uh that basically have the exact same problem. But I just wanted to focus on the banks. So in review, we've got the Fed having to bail out the banks, some of the banks, because the composition of their balance sheet, and they have to have a steep yield curve, especially when the belly of the curve is this inverted. It puts tremendous, tremendous pressure on them. So as the Fed drops the front end of the curve, although it does bail out some of the banks, it puts the other banks in a compromising position where they could go bust because they are collecting, let's just or they were collecting, let's just say 4.3% on their balance at the Fed, the bank reserves, right? That the Fed's paying them 4.3% on. um and that's going down, but you have a lot of fixed costs. Let's say uh those corporate bonds as an example, those are fixed rate. So, if you're paying let's say 4% and you're getting 4.3, that's fantastic. Okay. But what happens is if you're paying uh 4% and all of a sudden the Fed is paying you 3%. Now, you got a big problem. you got a real big problem because you've got negative cash flow and then you add to that. So if you had that big problem, what would be extremely important for you if you were a bank? Liquidity. Liquidity, right? That's really the only way you get bailed out. Well, you get bailed out otherwise, but you're in a situation where you need as much liquidity as possible. So that but then what's happening is by the Fed lowering rates this is incentivizing along with where housing prices are and everything else that's crazy happening in the economy right now. This pushes people into adjustable rate mortgages. Well, this changes the duration a significant portion of the asset side of these banks balance sheets which for those banks leads incentivizes them to reduce the size of their balance sheet. Let those bonds roll off because they can't find any matching mortgages to to sync up the duration. And then if you have the banks in aggregate total reducing the size of their balance sheet because they they don't want to take that duration risk now with the adjustable rate mortgages compared to the fixed rate mortgages. You have this happening in an environment where other banks need the liquidity very very badly because of what's happening with their fixed costs in the form of those corporate bonds and what they're being paid on their reserves at the Fed. There you go. Have a nice day. Oh, so why should we even care about this stuff? This is not to predict a financial crisis. This is not to predict a stock market crash. What this is meant to do is just highlight some of the risks that most people have. In fact, most people, not including me, 99.99999% of people out there have no idea these risks exist. Absolutely no clue. But the guys, the the few people, guys and gals that are these insiders, and you don't really see them on YouTube videos, you don't see them out there. These guys are are privy to how the plumbing works. They're they're the guys that are actually in there every single day pulling the levers and putting on these hedges and using options and looking at options skew and all these crazy things. And the these if these insiders are worried about stuff like this, I'm not saying you should lose sleep over it, but you should definitely definitely definitely consider it when you're setting up your portfolio. If you don't, then you're just using that ostrich strategy. And I don't think the ostrich strategy, investment strategy, is a good way to set up a portfolio long term. It makes no sense. The the ostrich strategy, the ignorance is bliss strategy. Now, maybe you want to set up your portfolio that way. Maybe you don't want to think about this stuff because it's a little stressful. Maybe you just want to do what all your friends are doing. Maybe you just want to do what Jim Kramer is doing. But that's not me. George Gammon doesn't want to do that. So, George Gammon wants to be privy to this stuff. George Gammon wants to take the economic red pill, the monetary red pill, the banking system red pill that I I want to know how it works because I feel as though I can make better decisions as a result. So in this channel, hopefully you guys realize that I just talk about stuff that I find interesting. So, if I want to know about how this stuff works, then I'm going to do a video on that and try to communicate that to those rebel capitalists out there who also want to take that economic red pill, that monetary, that banking system red pill that you are contrarians by nature. You are skeptical by nature and you don't want to just put money into a 401k blindly like all your neighbors. and the average Joe and Jane and all your friends because you want to acknowledge these risks and you want to set up a portfolio in a way that's far far far more anti-fragile. That's what this video is all about. So hopefully you guys can appreciate that. All right, on that note, enjoy the rest of your day. We're going to have a couple videos today. And always, as always, make sure you're standing up for freedom, liberty, free market capitalism.
A New Fed Stealth Bank Bailout Was Just Revealed
Summary
Transcript
Hello fellow robo capitalists. Hope you're well. So I wanted to reveal some information, some insider intel that I was privy to last week when we did this uh macro camp in St. Barts. Now I don't want to give out any names, but one of the gentlemen that was there was an OG in the they call them primary dealer banks. Let's just call it that. multiple primary dealer banks and he knows the plumbing and certain components of the plumbing like no one I have ever seen in my life. and he was talking to me about his framework which highlights this stealth bailout the Federal Reserve has been doing or is maybe currently doing with a lot of the globally systemic banks. Now, I I can't reveal the specific banks, but I wanted to get you guys up to speed on his framework because it completely blew me away. And in his opinion, this is why the Fed Jerome Pal has really kind of pivoted to taking a more dovish stance. It's not just because of the labor market. It's more so the the banking system and the monetary system and then unfortunately they're backed up into a corner where their bailout could lead to a black swan event that could potentially lead to a a crisis within the banking system itself similar to what we saw during the GFC. I want to be very very clear. This I'm I'm not giving you my opinion. This is not a prediction. This is simply going over someone's framework that is incredibly incredibly sophisticated. Very sophisticated. And you'll see when we go through this that I'm going to try to bring it down to a level that we can all understand, me included. But a lot of this stuff is incredibly uh esoteric, let's say. So, let's start with going over the uh yield curve. I actually should have brought that up. Josh, can you actually do me a favor, Josh, can you bring up the entire yield curve? Um, and while you're doing that, I'm going to start with the bank's balance sheets. So, let's go over to a sample of uh just a slide here that I just pulled up on Google of a bank's balance sheets. Uh obviously oversimplified here, but we're looking at assets and liabilities. So the first component of the we'll call it bailout black swan framework for the banking system is the Fed is going to have to drop rates to steepen the curve. So Josh, do you have that pulled up by chance? Let me just do that on my end >> right now. I'm trying to pull it up. It's just taking a while to render. Uh, I think this is actually the one I'm looking for. It is. Okay, forget it. I got it. Can you see this? >> Yep, we can see it. Okay. So, the first problem and and why this gentleman believes the Fed is going to drop rates uh very very quickly and why this could lead to um or why this will lead to a crisis in the banking system. The reason I call it a black swan is because this is on nobody's radar. Nobody. I can assure you this was definitely not on my bingo card. I had no idea when he explained this to me. I was totally blown away and quite frankly terrified. So right now the curve is massively inverted when you look at the 2-year three-year versus Fed funds. So Fed funds as you guys know right around 4.25%. I think specifically it's 4.33, but we go down or over out to the 2-year and we're trading at roughly 3.6 3.7. You go to the three-year and we're at pretty much the same place. I mean, we're inverted all the way. Yeah, I guess we're we're inverted all the way up to the 10-year Treasury when you look at just Fed funds. I mean this is bananas. So most of you know the basics of how banks operate. They borrow short short-term and they lend longterm or longer term. Now this is with a a a portion of their balance sheet. And this is where it starts to get really, really complicated because with another portion of their balance sheet, they're trying to match up duration to the best of their ability. But with other portions of the balance sheet, and this is all about internal risk management, they're having to borrow short or ideally and lend long. Why? Because those short-term interest rates theoretically will be lower than the long-term interest rates. So you pocket the spread, right? You borrow at 1%, you lend at 3%, you pocket the 2% spread. We know how it works. So when a yield curve is shaped like this, especially when you have this massive an inversion, and now a lot of you said, George, well, the curve was significantly inverted when we look at the uh twos 10 and Fed funds tenure. That is true. That is true. But based on this gentleman's framework, it it's really about I think they would call this the belly of the curve because this is where banks are most susceptible. Now to be very clear, I just want to restate I don't have all the information and and his framework is so complex that even I'm trying to put the pieces of the puzzle together. And uh I I reached out to this gentleman to see if he would be willing to come on to the Rebel Capitals channel, which he which he is. He's totally willing. He's actually going to come on next Wednesday. Um now the challenge is going to be me translating what he's saying because if I just got him on and said, "Hey, explain your framework." It would sound like Chinese. Even to me, it sounds like Chinese. So I gota say, "Whoa, whoa, whoa, time out. Explain that like every five seconds." I got to say, whoa, time out. Explain that. But hopefully I'll be able to uh be a a translator, a good enough translator to where we can actually put this into English. But the one of the big problems here for the banks is this inversion at the belly of the curve. So if if I understand his view correctly and we're going to get some more clarification on that here because I think this is really really important even for the average investor to understand what's happening beneath the surface what's happening with the banking system obviously I mean we know from the GFC how important the banking system is. So this is why the Fed has to drop rates. Okay, we've got to get this curve steepened. it you you can't have it this inverted especially at the belly of the curve because it puts way too much pressure on banks. Now, not all banks, this is what's interesting. It depends on the composition of their balance sheet. So, for some banks, this is a big problem. For other banks, not so much. And for other banks, the bigger problem, and this is where we kind of get into this black swan issue, is the Fed actually dropping rates. So to be clear, for some banks, the Fed, and this is kind of why they're backed up into a corner, they've got to drop rates to steepen out this curve. But for other banks, this puts them in a position to where they could go bust because the composition of their balance sheet is different to to the degree to which the lowering of the rates at the front end of the curve actually puts them in a very compromising position. Let me show you what I'm referring to. Now, let's go over to or back to this balance sheet. So what my framework and my kind of um my model that I my intellectual model let's just call it that when I'm looking at the monetary system or the banking system is I I really look at deposits because deposits are the vast majority of M2 money supply and I'm always thinking about inflation disinflation deflation. I'm always thinking about kind of these broad macro topics, but one thing I didn't consider at all was this line item that you guys can see here on the liability side of the bank balance sheets, and that's borrowings. So, I was always just looking at the liability side of the bank's balance sheet through the lens of deposits, checking deposits or demand deposits and time deposits. So small denomin denomination time deposits, savings deposits, large denomination time deposits. Now CDs as an example. So and I I really wouldn't look I really wouldn't think about things in terms of time deposits or borrowings which basically are corporate bonds. So a a bank, yes, when you deposit money at a bank, that's I don't want to get into technicalities, but that's basically them borrowing money from you. That's your asset. That's their liability, right? So, but banks borrow in other ways. It's not just from depositors. It's also from issuing corporate bonds, which I I didn't even consider that in my analysis. And obviously they're borrowing in terms of savings deposit or time deposits. Now this was more on my radar because it's it's just like a deposit. But what wasn't on my radar were the corporate bonds. So the the corporate bonds here, if you think about it, when interest rates go up higher and higher and higher, well, this impacts even if the deposits the deposit rate they're paying is, let's say, 50 basis points, that doesn't necessarily mean that they can borrow money on a corporate level. If they issue corporate bonds at 50 basis points, there's there's no way, right? There's no way if Fed funds is at 4.33. So, they're going to have to borrow at a corporate level, corporate by issuing corporate bonds, they're going to have to borrow, let's just say 5%. I I don't know what it is. We're just using that as a hypothetical. Okay. So, I always, and you guys know this from watching my videos, I'm always sitting there looking at JP Morgan's liabilities, their their uh their demand deposits. I'm saying to myself, okay, they're only paying one basis point, so who cares what Fed funds is? It it doesn't matter because who cares what the curve is because basically they've got free deposits. They've got free money. Um, and therefore, if the Fed drops the interest on reserves from 4.3 down to whatever, let's just say three, okay, fine. They're not making as much, but boohoo, cry me a river, JP Morgan. But when you actually look at the borrowings here, the corporate debt, it's a completely different story because this doesn't adjust with the Fed funds rate. So, if the Fed drops their uh interest rate or what they're paying on reserves from, let's say, 4.3 down to 3%. You still have that liability at 5%. So now all of a sudden, I mean, initially you were in a let's say negative cash flow position where this component of the liability side of your balance sheet, you having to pay out 5% But on your reserves, you are only getting, let's just say, 4.3. So you've got a 70 basis point delta there. Now, you can absorb that because you're making so much more money on the delta. Let's just say between your reserves and your demand deposits where you're like JP Morgan paying one basis point. But where things become a big problem is if you take that 70 basis point spread down to 170 assuming that the Fed drops to 3%. Right? Because and let's just assume for a moment that for a lot of the banks, which is true, they're not like JP Morgan, so they can't get away with paying people one basis point. So let's just assume that they're having to pay people uh 2%. Well, if the Fed drops rates, well, then likely all banks are going to have to drop the amount they pay on their demand deposits, and therefore the spread would would be similar. But what happens is if a large portion of the bank's balance sheet are not demand deposits, but are corporate debt, all of a sudden you've got a big problem. You guys can see the spread doesn't stay the same because again, you're dropping the amount you're receiving on the asset side of your balance sheet, but for a significant portion of the liability side of the balance sheet, you're having to pay out the same that 5%. So, as the Fed drops rates to bail out some of the banks, it's putting other banks in this precarious position where they also could require a bailout because of this effectively negative cash flow. I mean, I think it's very easy if we look at it in real estate terms. So, let's just assume that you're a real estate investor and you have a a single family home and u let's just assume your monthly mortgage payment is $2,000. Okay, great. But let's assume for a moment that initially this math pencils out because you're able to get $3,000 for rent and you know you got $1,000 of expenses and then you pay your mortgage. So, at the end of the day, you're just uh you're flat. You're even. There's no negative cash flow. There isn't positive cash flow. It's a break even. Okay, fantastic. Well, let's just assume for a moment that the amount of rent you can charge goes from $3,000 down to $1,000 and your expenses are still a,000 bucks. So, where are you going to get the $2,000 to make that mortgage payment? The answer is you don't have it. And that's exactly the position that the Fed will put some of these banks into if they ironically if they actually drop rates and drop rates to bail out some of the other banks. So this is one component of this kind of complex web that is this gentleman's framework that we'll just call the bank bailout bank black swan because it's it's it's it's paradoxically one and the same. But this is just the tip of the iceberg. Where it really, really, really becomes a problem in this gentleman's view is as you drop these interest rates significantly at the front end of the curve, usually that disproportionately impacts adjustable rate mortgages. All right, so let me see if I can pull up uh the spread. Well, I don't think I Let me just um pull up. Let's see. Uh interest rates. All right. So, let's just we'll pull up a chart here. Um mortgage rates maybe this 30-year. Ah, no. That's okay. We'll just pull this up. you guys get what we're talking about. So, as the Fed drops rates here, so let's take the GFC as an example. They started dropping rates in September of 2007. We all know that. And then they went basically down to zero by 2009. But you see that interest rates didn't really do exactly what Fed funds is doing because obviously they're more so tied to the 10-year. But this gentleman's point is that usually what you see in a Fed rate cutting cycle is although the adjustable rate mortgages, the ARMs and the fixed rate mortgages are loosely tied to the 10-year Treasury, if you see the 10-year Treasury going down as a result of a recession or the Fed dropping rates, whatever it is, then you if you see the 10-year or excuse me, if you see the 30-year fixed rate mortgage dropping by let's just say 50 basis points. Usually the arms are going to adjust by or adjust are going to go down by let's just say um 150 basis points. So they're going to go down by a lot more. That's the key here. So why is that important? Let's go back to the balance sheet. So now what we're going to do is we're going to focus on the asset side of the balance sheet and we're going to look at real estate right here. So number 35. So mortgages and it's and you could say that you know the mortgage back securities the banks issue the mortgage they pawn them off on Fanny Freddy. They turn them into this uh mortgage back sausage which I used to call it. Then they sell that out to Wall Street. The bottom line is that mortgage is going to be on someone's balance sheet. Okay? And for a lot of these banks that uh hold some form of mortgage, uh whether it's in the form of a mortgage back security or an actual mortgage direct to consumer, they've got this on their balance sheet. And it's a very very key component of their balance sheet. Why is it a key component? Because if we go back to the liability side, banks have uh all types of let's say duration or uh possible maturity. So if you're looking at a time deposit, well the duration of that if you're looking at the internal risk controls of a bank are going to be I think roughly five to seven years. Now you say, George, how's that possible when it's a time deposit? Because what they're doing is they're just taking the bulk or the aggregate total of all the deposits and they're saying, "Okay, on average, how long, you know, are these uh if we have a customer come actually a better way to say it, if we have a customer come in and deposit, let's say $100,000, how long do they usually keep that $100,000 with us or that balance roughly the same?" And let's just say it's five to seven years. Okay? So that's why you have an average duration for time deposits when you're looking at the internal risk controls of a bank that are a lot longer than tomorrow, right? So it makes sense when you look at it that way. And then they have uh corporate borrowings. We go back to that. These are the bonds. Uh these can be five, sometimes 10, 15, up to 30 years. So you've got really long duration on that liability. And then it's the same thing or similar with CDs that you could have two year, maybe three year, five year. So you've got longer duration um than you would expect. You have much longer duration than I would have thought prior to, you know, taking kind of the the red pill here from this gentleman. So, what's great about the mortgages or the a mortgage type asset is that you can try to match up duration with the asset side and the liability side of your balance sheet a lot better. And if you're a bank, this is exactly what you want to do because obviously there's a few different ways that you can really get yourself in trouble. Number one is if you have FX risk or what that's what I call it. I don't know what the technical term for it, but let's just assume for a moment you had dollar liabilities and your and you had yen denominated assets or your assets were something extremely volatile like Bitcoin, that's a bad idea. That's a real bad idea because if someone does take out, let's say a million dollars or $100 million out of the bank in the form of a time deposit, just what happened to Silicon Valley Bank, then you have to sell some of those assets and those assets just happen to be down by 10% that day. You're done. Like you're forget it. And Silicon Valley Bank again is a perfect example of this. So banks are are are should do their very best to try to not only eliminate that FX risk but also match up the duration. So here's an example. If you have a CD for one year, then it would be fantastic for that bank to be able to buy a one-year treasury because then you you you're matching that up. So at the end of that year, you know, you're going to have to pay that person, let's just say, a million dollars. So at the end of that year, if you can receive a million dollars to pay the million dollars, and if you can get a slightly higher interest rate on what you're receiving than you're paying, you pocket the spread. You have absolutely no risk there. There's no risk whatsoever. But let's just assume for a moment that you had a 2-year Treasury and only a one-year CD. Well, now all of a sudden, you have to sell that two-year Treasury after one year. you're not going to hold it to maturity and it could fluctuate in price where you put yourself in a very compromising position just like the example we gave with Silicon Valley Bank and Bitcoin. Okay, so hopefully we're on the same page there. What happens in a rate cutting cycle when you look at the the mortgage market? And by the way, uh this gentleman was pegging the mortgages on balance sheets of banks in in one form of another at like $22 trillion. So this is a big problem. This is not something that's just like a rounding error or something. This is a real big problem. So for some banks, for others, not a problem at all. Again, it all depends on the composition of their balance sheet. So, when you have the, let's say, the fixed rate mortgage here and adjustable rate here, and they start to go down like this, it incentivizes people to go into adjustable rate mortgages. Now, you say, George, no one's ever going to do that because everyone's locked into a 30-year fixed at 3%. Yeah, that's fine, but we're talking about new people coming into the market and actually buying the homes. Well, they don't have that fixed rate mortgage. And then you do have some turnover. And if you have prices at nosebleleed levels and you have the consumer out there trying to figure out how on earth they can actually afford a home, if you have the arms, the adjustable rate mortgages going down at a more uh at a steeper angle here or going down to a greater degree, then there's going to be a huge incentive for people to go into these adjustable rate mortgages. In fact, I uh posted something on Twitter the other day that I saw on Zero Hedge. Now, I don't know how accurate this is because people came back and said, "Ah, that doesn't really seem right, but the bottom line is the trend." And Goldman Sachs was saying that currently, I don't again, I don't know how they're coming to this conclusion, but like 40% of mortgages are adjustable rate. Now there's got to be they h they have to be looking at a small component of the overall market because we all know that that's there's no way that the uh that 40% of outstanding mortgages are adjustable rate in the United States. But so they have to be looking at a component of the market there. But the whole point is the trend is going higher for these adjustable rate mortgages. And if we see the Fed drop to bail out some of the banks to steepen out the curve, then there's going to be an even bigger incentive, especially if home prices are at nosebleleed levels for the new entrance into the housing markets and the people that are having to sell their house and buy another house, there's going to be an even bigger incentive for them to go into an adjustable rate mortgage. So you should see the percentage change significantly to where let's just say now we're at 90% fixed and 10% adjustable. Let's say we fast forward uh a year or so and we go to where it's like 7030, right? That 7030 that additional 20% on the bank's balance sheets in one way, one form or the other is a huge huge problem. Why? Because it changes the duration on the asset side of the balance sheet of the banks and aggregate total, right? And remember, they want to they want to match up duration. So, think about it. If you have an adjustable rate mortgage, well, the duration on that is, I don't know, five, seven years, something, let's just say, and and where you have to um roll it over or you have to renew it or whatever, and at a different interest rate, and on a 30-year, okay, it's 30 years, it's set. So, not only is that a benefit to the consumer, but in a way that's actually a benefit to the banks if they're setting up their balance sheet this way because they know that they've locked in that 3% interest rate over 30 years. Where if they have a 2.5 interest rate unadjustable, well, that's a that's you've got a duration problem there. If you're matching that up to let's say a corporate bond on the liability side that's 20 years. Well, you try to match that up to a mortgage that's only three to seven years. And again, you got a mismatch in the duration which banks don't like. They don't like this at all for obvious reasons. So, what are the banks going to do? Well, then they're likely going they've got two options there. Number one, they can buy more of the adjustable rate mortgages. So just to keep the math simple here, let's say that on a fixed rate they have 15 years of duration and on an adjustable rate they've got five years. Okay. Well then they just have to buy three of those five-year loans to equal the duration that they had with that one fixed rate mortgage to begin with. So that's one direction they could go. But that's very unlikely. Why? because that really depends on the amount of mortgages being issued and we know that right now there ain't a lot, right? So the the the there would have to be a supply component there that is outside of the control of the banking system in aggregate total. Now it is true that more people would likely be rotating into these adjustable rate mortgages. So there could be more supply coming online. But the higher probability as far as these two options that they have, the two paths they can go down is for them to reduce the liability side of their balance sheet. So let's just assume for a moment they have one of these corporate bonds that are uh coming due in a month. Okay. Well, now what they're going to be incentivized is to go ahead and and and just pay that off and not roll that over. They're incentivized to reduce the size of the of their balance sheet basically because they can't add another mortgage that has the same duration as that bond they're trying to roll over. And if they can't match up that duration, they would rather allow that bond, that corporate bond, the liability side to go ahead and roll off. So if banks are reducing the size of their balance sheet, what are they doing to the money supply? You guys know this from watching my videos. They're decreasing the money supply. They're literally decreasing the money supply. And another way of saying that is they are decreasing liquidity. Not just for consumers, you know, as far as inflation, deflation, disinflation, but also for interbank. And just if you want to know how important interbank liquidity is, just ask 2008 and they'll tell you. So this is a wild oversimplification of this individual's framework who has been in the let's say a key component in uh a lot of the broker dealer banks um business model for the last 30 years. So, another way of saying that is you've got someone that when you look at these global dealer banks, he he is the insider of the insiders. He's the one that's that's making a lot of these decisions on how the banks are hedging their balance sheet. And he he he he does it in ways that are wildly complex and sophisticated. But this is kind of a broad overview of some of the systemic problems and risks that he sees in the system right now. So, because this gets um obviously uh very heady here and I let's go over to chat GPT because I want to have chat GPT try to explain this as far as at least the duration just to make sure that as many people as possible are getting their head around this because if you actually think about it, it it it really makes sense. But let's go over to chat GPT. So hopefully it can explain a little bit better why this duration is so important to a bank's balance sheet. And once you understand the the the banks trying to match up and eliminate that FX risk, so they want if they've got a dollar liability, they want a dollar asset. I think most people understand that. But once you understand that if they have a a 20-year liability, they also want a 20-year asset, right? Once you understand that risk component of it, then I think this will all really start to make sense for you. So I asked chat GPT, I'm like, "Okay, what are the long-term liability? Give me examples of long-term liabilities that banks could have on their balance sheet." Because again going into this I was just myopically looking at demand deposits just because I I look at it from like a customer centric standpoint like the average Joe and Jane but I was completely I had the blinders on like this and I wasn't even recognizing the other you call it 50% of the liability side of the bank's balance sheets here which which is very very important. from that duration standpoint. So CDs, we talked about that uh CDs 5 10 years. If a bank holds too many short-term assets like adjustable rate mortgages, they can't hedge the interest rate risk on paying 4% for the next 10 years on a CD callable or non-matururing deposits. So even and this goes into I think uh their their internal risk management and how they look at a demand deposit or interest rate risk management. Internal interest rate risk management irr. Okay. Even though checking and savings accounts are technically short-term bank model them as long-term for internal IRR. We talked about that. Based on behavior, banks assume people keep money in account for five to seven years. subordinate debt. Banks issue bonds. So here's the corporate debt that we were talking about. Banks issue three to 30 or excuse me 5 to 30year bonds to fund operations or meet regulatory capital. These bonds are fixed rate obligations. So the bank need long duration assets in other fixed rate long duration assets by the way in order to match up those liabilities. And here we get into some of the stuff that Snyder talks about. my good buddy Jeff Snyder. Interest rate swaps used to fix liabilities. And this is I I knew about interest rate swaps. I know what they are. I know that a lot of interest rate uh swap maturities are are negative. I understand why that's a bad sign, why that uh is a signal for what the market is predicting with future interest rates. I get all that, but what I didn't realize is how it impacts a bank's balance sheet here and it impacts the risk decision. uh the the the risk decision making that they're uh that they're actually doing internally here. So some banks enter into derivatives that synthetically convert floating liabilities into fixed rate. These are interest rate swaps. You guys know that the uh uh this effectively adds duration to the liability side and the bank then must hold long duration assets to stay balanced. And then it goes into uh insurance companies and uh that basically have the exact same problem. But I just wanted to focus on the banks. So in review, we've got the Fed having to bail out the banks, some of the banks, because the composition of their balance sheet, and they have to have a steep yield curve, especially when the belly of the curve is this inverted. It puts tremendous, tremendous pressure on them. So as the Fed drops the front end of the curve, although it does bail out some of the banks, it puts the other banks in a compromising position where they could go bust because they are collecting, let's just or they were collecting, let's just say 4.3% on their balance at the Fed, the bank reserves, right? That the Fed's paying them 4.3% on. um and that's going down, but you have a lot of fixed costs. Let's say uh those corporate bonds as an example, those are fixed rate. So, if you're paying let's say 4% and you're getting 4.3, that's fantastic. Okay. But what happens is if you're paying uh 4% and all of a sudden the Fed is paying you 3%. Now, you got a big problem. you got a real big problem because you've got negative cash flow and then you add to that. So if you had that big problem, what would be extremely important for you if you were a bank? Liquidity. Liquidity, right? That's really the only way you get bailed out. Well, you get bailed out otherwise, but you're in a situation where you need as much liquidity as possible. So that but then what's happening is by the Fed lowering rates this is incentivizing along with where housing prices are and everything else that's crazy happening in the economy right now. This pushes people into adjustable rate mortgages. Well, this changes the duration a significant portion of the asset side of these banks balance sheets which for those banks leads incentivizes them to reduce the size of their balance sheet. Let those bonds roll off because they can't find any matching mortgages to to sync up the duration. And then if you have the banks in aggregate total reducing the size of their balance sheet because they they don't want to take that duration risk now with the adjustable rate mortgages compared to the fixed rate mortgages. You have this happening in an environment where other banks need the liquidity very very badly because of what's happening with their fixed costs in the form of those corporate bonds and what they're being paid on their reserves at the Fed. There you go. Have a nice day. Oh, so why should we even care about this stuff? This is not to predict a financial crisis. This is not to predict a stock market crash. What this is meant to do is just highlight some of the risks that most people have. In fact, most people, not including me, 99.99999% of people out there have no idea these risks exist. Absolutely no clue. But the guys, the the few people, guys and gals that are these insiders, and you don't really see them on YouTube videos, you don't see them out there. These guys are are privy to how the plumbing works. They're they're the guys that are actually in there every single day pulling the levers and putting on these hedges and using options and looking at options skew and all these crazy things. And the these if these insiders are worried about stuff like this, I'm not saying you should lose sleep over it, but you should definitely definitely definitely consider it when you're setting up your portfolio. If you don't, then you're just using that ostrich strategy. And I don't think the ostrich strategy, investment strategy, is a good way to set up a portfolio long term. It makes no sense. The the ostrich strategy, the ignorance is bliss strategy. Now, maybe you want to set up your portfolio that way. Maybe you don't want to think about this stuff because it's a little stressful. Maybe you just want to do what all your friends are doing. Maybe you just want to do what Jim Kramer is doing. But that's not me. George Gammon doesn't want to do that. So, George Gammon wants to be privy to this stuff. George Gammon wants to take the economic red pill, the monetary red pill, the banking system red pill that I I want to know how it works because I feel as though I can make better decisions as a result. So in this channel, hopefully you guys realize that I just talk about stuff that I find interesting. So, if I want to know about how this stuff works, then I'm going to do a video on that and try to communicate that to those rebel capitalists out there who also want to take that economic red pill, that monetary, that banking system red pill that you are contrarians by nature. You are skeptical by nature and you don't want to just put money into a 401k blindly like all your neighbors. and the average Joe and Jane and all your friends because you want to acknowledge these risks and you want to set up a portfolio in a way that's far far far more anti-fragile. That's what this video is all about. So hopefully you guys can appreciate that. All right, on that note, enjoy the rest of your day. We're going to have a couple videos today. And always, as always, make sure you're standing up for freedom, liberty, free market capitalism.