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I was fortunate to buy BAC three days before Buffett bought into BAC. He got a better deal with his package of common stock and warrants! I’ve been sitting on that original purchase except for gifting over the years.

Like many of you, I buy, hold and try to be tax efficient. I’ve been steadily building up a wall of worry regarding bank stocks. Private equity and specialty companies like Blue Owl are disrupting large account lending. Basel lll and US regulators have limited banks ability to take risks and, therefore have limited big banks ability to make bigger loan spreads.

At the other end, banks are making more money these days primarily because of slashing expenses in people and buildings. I know from business and personal account experiences (not BAC) just how bad customer service has become. We actually prefer to do everything on line as it is hard to get to a knowledgeable person in a bank (phone, chat or in person)these days. It’s when the on-line interface lets us down our proverbial pot boils over.

Let’s also add how there are many players increasingly growing into banking services.

It is all feeling like a case study in a Clayton Christensen disruption book.

With Buffett now selling some BAC, I bring a question to this esteemed group, but first a story.

We have a staff member who moved backed to her home country with her husband in the 1990s. They were a young couple with young children and temporarily put their savings in a bank in that country. Two months later their savings had lost (as I recall), a huge percentage of its original cash value. The country was Mexico and their savings was roiled by the sudden devaluation of the Mexican peso.

Question: What happens to bank stock valuations when monetary devaluations happen? Anyone have knowledge to share?

Comment and second question : Buffett’s recent actions (estate, raising cash, selling some stocks) have a legacy tone to my eye. Is he de-risking the portfolio to geopolitical, monetary and industry disruption aspects or is he doing this in concert to be ready to pounce on mega-deal coinciding with an economic sea change?

I don’t want to give Buffett credit as an all-knowing seer. I can give him credit for usually having a good feel for long term valuations and market swoons.

Uwharrie

Got an answer for what happened to some banks during the Mexican peso devaluation. Please see paragraph 4:

https://en.wikipedia.org/wiki/Mexican_peso_crisis#....

The wikipedia link says some Mexican banks went out of business.

The smart money guys today are increasingly mentioning devaluation of the US dollar at some point as a result of US deficit issues. Most say this will not be a problem until the US starts having problems selling Treasury bonds. These guys and girls say it is hard to say when the tipping point has been reached. This subject matter is in the too hard pile for me. Nonetheless, as an owner of three different bank stocks, I cannot hide my head in the sand. Buffett has a history of selling down to a small percentage of BRK's original holding. BYD is a recent example. Perhaps he is doing the same with BAC. I went into IBM with Warren and I exited IBM about a month after Warren after doing some conversations with companies that use IBM's services. This BAC action by Buffett feels similar. Could Warren be doing a portfolio risk management "house cleaning" in preparation for a long period without his hand on the tiller? De-risking out of bank stocks should a potential devaluation occur during the early years after he has departed the scene?

I welcome your thoughts as this may be a topic worthy of some collaborative discourse.

Uwharrie

I know from business and personal account experiences (not BAC) just how bad customer service has become. We actually prefer to do everything on line as it is hard to get to a knowledgeable person in a bank (phone, chat or in person)these days. It’s when the on-line interface lets us down our proverbial pot boils over.

Tangential, but IME more and more banks and brokerages alike are trying to do away with online support and force people into making phone calls. E*TRADE did away with their online secure messaging which is how I used to do all my interactions with CS. In the most recent case where I had to call them, the "certified broker" - he was very insistent about that - informed me that they were not legally allowed to do that any more. I asked him to point to the law and and he promised to send a link which of course he did not. Odd that such a law would specifically affect E*TRADE and not, say, JP Morgan or SoFi.

Credit Unions are the exception and seem happy to do everything through secure messaging. Generally to a single, clueful individual.

What I can't for the life of me figure out is WHY they want to force people into making phone calls. It's not faster, it's not cheaper, and it's not more effective. It's wading through phone trees, verifying your identity again and again, and trying to get past L1 support to an actual human capable of understanding what you're talking about and doing something about it.

The smart money guys today are increasingly mentioning devaluation of the US dollar at some point as a result of US deficit issues. Most say this will not be a problem until the US starts having problems selling Treasury bonds. These guys and girls say it is hard to say when the tipping point has been reached.

I don't believe the smart money guys.

IMO, the US will never have a problem selling bonds, at least not in any reasonable time frame. Each month the government cuts a bunch of checks. Checks for everything from payroll to Medicare, to Raytheon for some more Javelin missiles, to install EV chargers, what have you. What the government doesn't do is ask the Treasury to sell some bonds first so the checks will clear. Instead the government simply writes the checks regardless if funds are available. Then everyone deposits their checks in the bank. Now there is all this money sloshing around in bank accounts, the banks need something to do with it, and so they buy bonds because that's the best, safest return they can get. In other words, deficit spending drives the demand for bonds, not vice versa.

I don't see any risk of the demand for Treasury bonds drying up for those reasons. Deficit spending can create inflation however, and that's a risk. But CPI inflation is currently about 3% and dropping, which is on the low side of inflation during my lifetime. So I don't see signs of devaluation there. And the 10-year Treasury is at about 4.2% currently, which very expensive compared to most periods since WWII.

If the smart money guys are correct, then the bond markets are wildly mispriced. Big opportunities if that's the case, but I don't think it is.

sykesix is mostly correct in their post. Obviously technically there is a Treasury General Account and we saw those dynamics when the government couldn't have net-issuance of bonds recently. There are rules and such, however arbitrary. But the gist is correct - the deficit spending puts the new money into the system and some of it is sopped back up with taxes and "borrowing."

People often don't realize that the net liabilities of the US government is what we Americans (and a lot of others) use as "money."

It seems to most people that a bank deposit and a 10 year treasury note are fundamentally different, but the fact that government liabilities serve as our money is quite apparent when you get to the short end of the bond market, where the vast majority of the borrowing takes place. "Berkshire Hathaway has $200 Billion of cash." Or is it "Berkshire Hathaway made the decision to loan $200 Billion to the government? There is a reason cash says "federal reserve note" on it.

Moving money from my checking account to my savings account doesn't really change anything fundamental. The money in my account was a liability of the bank in both accounts. One paid higher interest, that's all.

This is also why QE and QT are pointless. QE is supposed to be stimulative (it isn't). The central bank took (at the time) a higher yielding, highly useful government bond out of the hands of the public, who lost that interest income which was then earned by the Fed on their balance sheet, producing a "profit" that was remitted to the Treasury (this is what a Tax is, this is not stimulus) --- and the seller of this treasury bond received bank reserves, a lower yielding (at the time), neutered, almost useless form of money. Both are government liabilities. One is useful in the real economy and paid higher interest, the other paid next to nothing (at the time) and was almost completely useless by the real economy.


Same nonsense with the "Social Security Trust Fund." They looted our trust fund! The assets of the trust fund were/are US Government IOU's. The government "needed money" so they "borrowed" a stack of US Government IOUs from the trust fund to spend on what they wanted to in the here and now!

There is a book "A Free Nation Deep in Debt: The Financial Roots of Democracy" that purports to lay out all this.

Published 2006, Amazon says I bought a copy in 2009...which I still haven't read yet.

(One downside of being retired with internet access is that I can buy books faster than I can read them.)

Excellent points and you're PROBABLY right.

But for me, that's not good enough. Its easily good enough for risk assets, sure. But not nearly good enough for a safety shield which, for me, is what Government Fixed income represents. It's my nuclear bunker. And that, I believe, is generally what treasuries represent for US investors.

Your scenario plays out wonderfully and, as you point out, feeds upon itself in a seemingly endless virtuous loop. Until it doesn't.

And one day when for whatever reason enough people/government/institutions say "hey, that yield is inadequate-I demand more" it can weaken and collapse. The dam breaks. There are MANY ways a collapse trigger could come: Fear of runaway inflation, a sudden awakening to the danger of a debt to GDP ratio off the charts, a loss of reserve status for the dollar, and when it happens you realize the entire system is bult on CONFIDENCE and when that is lost people behave in a herd mentality and they RUN ...and demand for treasuries dries up.

Bell curves of outcomes are not what I'm looking at. I'm looking for the events above and below that belly. What Talib, Marks, and Buffett look at it. Those are the smart guys. Buffett won't go out more than a few months--really weeks. These guys don't predict. They PROTECT.

Extending here is risky, in an arena designed to protect against risk. A Black Swan event in extended maturity treasuries is really not even that black swanny. Unlikely? sure. But not farfetched at all. Unlikely is not nearly good enough for me.

Nassim Taleb -

There was once a turkey who was hatched on a cold winter’s morning. Luckily, he lived with his family in a warm coop, where he had plenty of corn to eat, and spent his time playing with all the other little turkeys.

In springtime, as he got older, he and his friends would go out and play together in the farmyard. They always had plenty to eat and shelter from the elements. On occasion nice people would come and clean the coop, refill the corn bins, and make sure the fences were secure to keep away the bad cats and foxes.

“Gosh we’re lucky,” our turkey would say say to his friends on occasion. “What wonderful lives we have. We are fed and taken care of, and all we have to worry about is having fun.”

As the summer days got shorter and the evenings got colder, the turkeys continued to live the good life. The farmer turned on the heat in the coop, so the turkeys always had somewhere warm to go back to after playing in the yard. And since it was much colder now, they rarely went outside, and slowly they got fatter and fatter.
Our turkey continued to remark to his fellow fowl, “How lucky we are,” and they all agreed that they would rest up during the cold months so they could play hard again in the spring.
And then came Thanksgiving.

The award-winning essayist and statistician Taleb tells this story about the turkey in his book The Black Swan to remind us how difficult it is to predict the future based on past events. From economic forecasting to even our daily lives, we simply cannot know what’s coming, and what's coming may be completely unlike anything in our past. "Consider that the turkey's feeling of safety reached its maximum when the risk was at the highest!" Taleb writes.

I have tried to expand my knowledge of hedging tail risk in recent years. I found that it’s really hard. I tried a couple of things on a very limited basis that were new to me.

Buying a VIX futures fund. Awful idea. If you hold it for any length of time, you will loose money due to the futures contracts having to be renewed burning your principal on premiums. Would only work if you knew a major volatility event was about to happen. But you never do. Strong avoid is my opinion.

Long dated out of the money put options, on the most ridiculously low quality, high priced securities. The premiums tend to be expensive but they do provide enough time for rationally to set in e.g. 2 years. The returns are big if you are right. A small amount in this type of stuff is a useful portfolio hedge.

Best strategies I have heard are the simple ideas:

A little bit of diversification (property, Berkshire, global equities).

Avoid debt.

Buffett’s idea, of sharpening the sword, so you can earn a living in most circumstances, is powerful and the best multigenerational advice I know of. Following from that is earn as much as possible and live below your means. But there are plenty of life’s pleasure worth paying for, so don’t over dose on that one.

Hold some cash to have optionally in case things get cheap.

Gold and crypto might make sense to some people but I just couldn’t bring myself to invest in gold over productive businesses. Even if the market price might decline over the medium term. Buffett’s arguments are too compelling over the extremely long term.

As for crypto, as long as it’s useful to criminals and terrorists; is not a medium of exchange and undermines the institutions that underpin democracy, I will be avoiding that.

Avoid fast women and slow horses.

Interested in other ways of avoiding going to zero?

Interested in other ways of avoiding going to zero?

I think it's useful to make a clear distinction between two principal types of large risk.
(1) The risk that the PRICE of your asset drops a whole lot, but not the value.
(2) The risk that the VALUE of your asset drops a whole lot, and generally the price along with it. Permanent loss of capital.

Arguably type (1) can simply be ignored...just wait it out. And by extension type (2) is the only true risk in any type of investing.

Phrased that way, the best way to avoid the risk is to avoid buying anything whose true intrinsic value has a meaningful chance of a meaningful and lasting drop. That's hard, but not impossible. Beyond deep understanding of your investments, there is diversification. It's not magic, but it can help. If you put 1% of your money into each of 100 companies with different characteristics, it's probably less likely to go to zero than if you put 100% into one company. It might have a higher chance of an uninteresting return, but a lower chance of a spectacularly bad one.

That's all a bit of an oversimplification. Other types of risks you might consider:

There is a type (1.5) risk between the two above: the intrinsic value didn't take a meaningful and lasting hit, but you bought at too high a price so when the price drops you will have taken a lasting loss. Maybe not permanent, but lasting enough that it really hurts, like the people who bought Microsoft at end 1999 and were underwater for 15 years despite the firm doing well throughout. This is avoided by not overpaying for things, even very good things. I recommend never assuming you can sell at a multiple of future earnings higher than the teens...that simple rule cuts out quite a lot of exuberance temptations, but still allows for investments in very high growth opportunities which may have no current earnings.

There is downside deviation risk: the risk that the real total after-tax return on your portfolio falls short of what you truly require. e.g., if you are a pension fund that has to pay out a certain amount in future to beneficiaries, and that payout requires you to make a real 6%/year, then achieving a real return of 4% or 5%/year is a very real failure risk. At a personal level, the "avoid a diet of dog food" risk.

There are also way-out-on-the-tail risks, but most of them can not be hedged against using financial instruments. Asteroid hits, nuclear wars, permanent closure of markets, expropriation without compensation, and so forth. Some people would argue for a small bar of gold in the sock drawer as the best way to hedge this, but I'm an optimist.

Jim

And the 10-year Treasury is at about 4.2% currently, which very expensive compared to most periods since WWII.

Looking at a chart of 10-year yields, this doesn't seem to be correct. If anything, 4.2% is on the low side looking over 50 years or so. If you look at just the last 10-15 years, it's on the high side, but longer term it's low-ish. Here's a link to the best chart I could find -
https://fred.stlouisfed.org/series/DGS10

I’m not sure charts and comparisons tell you very much. As there’s not much precedent for yields appropriate for US debt levels of 120% of GDP with ongoing $1 Billion-$2 Billion deficits in GOOD times (5% nominal GDP), half of which funds existing debt. His is new territory. Throw in what I humbly suspect is a higher floor on systemic inflation….

We’ll say we “saw this coming” just like every other obvious crisis like what brewed from 2003-2007 and exploded in 2008/2009. But we had charts confirming what hasn’t happened—can’t happen. Look at this 30 year trend.

As for crypto, as long as it’s useful to criminals and terrorists; is not a medium of exchange and undermines the institutions that underpin democracy, I will be avoiding that.


The Supreme Pontiff would be proud of his inquisitor for quickly rooting out this heresy.

"I didn't buy Bitcoin for moral reasons" ain't gonna hack it with me. Bitcoin is about the most moral invention in the history of mankind. Sounds more like a dodge, you think it will go up but don't have the courage to invest ... so, you balk instead.

When I've taken my last breath and my brain implant is downloaded to the great AI in the sky, I hope I'll be able to say I wrote my own code and didn't just follow the program. Put me on the bench over there with Galileo please. Or, if I'm wrong, then you can repurpose me as a Bitcoin miner for all of eternity.

What better to do on a Sunday than ponder spiritual matters while going for a troll?

I’m not sure charts and comparisons tell you very much. As there’s not much precedent for yields appropriate for US debt levels of 120% of GDP with ongoing $1 Billion-$2 Billion deficits in GOOD times (5% nominal GDP), half of which funds existing debt. His is new territory. Throw in what I humbly suspect is a higher floor on systemic inflation….

We’ll say we “saw this coming” just like every other obvious crisis like what brewed from 2003-2007 and exploded in 2008/2009. But we had charts confirming what hasn’t happened—can’t happen. Look at this 30 year trend.

35T debt
200T unfunded obligations
27T US GDP
5T US Billionaire assets - not enough to support the debt
4T FED Debt
USD under attack
Banks 500B in unrecognized loses
Consumer stretched
Interest rates going up IMO
Next time bail-in not bail-out
Govt interference in your business
Increased competition from digital tech. (See retail and media)

What's not to love about banking?

As for crypto, as long as it’s useful to criminals and terrorists; is not a medium of exchange and undermines the institutions that underpin democracy, I will be avoiding that.
...
"I didn't buy Bitcoin for moral reasons" ain't gonna hack it with me. Bitcoin is about the most moral invention in the history of mankind.

I tend to agree with you, in that (a) it's not inherently immoral to own blockchain assets, and (b) it's in any case generally not immoral to use a thing in a way that is innocent despite others using the same thing in a nefarious way. Some people steal money using pencils, but I have no problem owning them.

However...the first poster has a point, or at least half a point.
Note that there are really only two reasons anyone holds Bitcoin in this era, if they're honest with themselves.

* One is criminal activity. The most common categories being laundering, coin theft, and tax evasion.
* The other is holding in the hope/expectation that the market price will rise in the short term or long term.

Some folks say they hold because they support the philosophical ideal of an alternative monetary system, but if you scratch the surface it's always just reason #2 for them. If the price had been flat for the last decade, they wouldn't be in the game, philosophy be damned: they want to get richer.

Since there is no coupon, it's certain that the price can rise on trend only so long as aggregate demand for Bitcoin [at any given price] continues to rise. That requires an increase in one or both of the above reasons to hold among the population at large. I would expect both reasons to run out of runway eventually--there being only so many people on the planet--causing long run price rises to halt. With no up-trend in price, that removes reason #2 entirely after a while. The process might take decades to unfold, of course, but flatlining and boredom and irrelevance seem to be the likely destinations. Which is not necessarily the same as going to zero.

Jim

Note that there are really only two reasons anyone holds Bitcoin in this era, if they're honest with themselves.

* One is criminal activity. The most common categories being laundering, coin theft, and tax evasion.
* The other is holding in the hope/expectation that the market price will rise in the short term or long term.

From the woods the weasel looks at the farmer and thinks to himself: why did he put a fence around the chicken coupe? It's criminal he says, and it's selfish, why ... it's a threat to our democracy! The farmer looks back at the weasel and thinks: poor weasel, he blames me for his flawed monetary system ... he should have studied less Keynes and more Friedman.

Since there is no coupon, it's certain that the price can rise on trend only so long as aggregate demand for Bitcoin [at any given price] continues to rise. That requires an increase in one or both of the above reasons to hold among the population at large. I would expect both reasons to run out of runway eventually--there being only so many people on the planet--causing long run price rises to halt. With no up-trend in price, that removes reason #2 entirely after a while. The process might take decades to unfold, of course, but flatlining and boredom and irrelevance seem to be the likely destinations. Which is not necessarily the same as going to zero.

Not correct. In round numbers, the world's assets total $1,000T. Of that there is $100T in "cash." Ten to one ratio. My belief is that the 10 to 1 ratio is currently relatively constant. For example, imagine that the worlds governments printed another $100T tomorrow. Would we now have $1,100T in total assets and $200T in cash? No, asset prices would be bid up quickly until we returned to the 10-1 ratio. That would be $2,000T total assets and $200T in cash. In a Bitcoin world, BTC replaces all cash. That's $100T. Then it starts to eat into other assets people hold in lieu of cash. T-bills, gold, raw land ... any asset that you own in order to escape inflation rather than being excited by the return. When people don't have to invest their "cash" to preserve their wealth, they're happy holding on to more. So, maybe now the ratio goes to 5-1. Total wealth can be $1,000T and cash can be $200T. Then, over time, real wealth goes up as new businesses are built. The value of Bitcoin goes up to maintain the new 5-1 ratio. If BTC replaced all currencies, it could go to $200T. Call it $10MM/BTC. Nothing like the 68,000X return early investors got but still not too bad. Maybe I am a little greedy?

Before you start laughing at the above, one more note. BTC is a good example of The Prisoner's Dilemma from game theory. First to flip wins. Right now the inmates are singing. Two of the US presidential candidates have committed to holding BTC as a strategic national reserve. TO SUPPORT THE USD BY HOLDING RESERVES IN BTC! That's the US govt executing a speculative attack on their own currency. Could be the trigger that causes a lot of other currency holders to flip too.

It's cute that you think that anything a presidential candidate says has any meaning. Politicians say stuff to bambozzle the yokels all the time.

(1) The risk that the PRICE of your asset drops a whole lot, but not the value.
(2) The risk that the VALUE of your asset drops a whole lot, and generally the price along with it. Permanent loss of capital.

Price and value are not independent variables. Reflexivity exists.

Value is a function of price for many assets. I know fundamental investors correctly believe that price is a function of value. But it's not as if value is an independent variable, even when defined as the sum of all future discounted cashflows. Because the terminal cash flow is always the price, and many times dominates the flow intermediate cash flows like dividends.
Quite obviously, the value of an asset that has no cash flows is nothing but its discounted future price based on the projected supply and demand.
I believe that gold and Raphaels have some very widely variable intrinsic value because I believe someone somewhere will always want them. I am not convinced that that is true of Blockchain assets, even the now well-established ones like bitcoin and Ethereum. Forget NFTs and metaverse properties.

Do we believe that the Blockchain servers and exchanges will continue running in the event of an apocalypse? Or hyperinflation for that matter?

Maybe I am Luddite.

It's cute that you think that anything a presidential candidate says has any meaning. Politicians say stuff to bambozzle the yokels all the time.


I'll add yokel to the long list of smears ... my furry little friend.

"Some folks say they hold because they support the philosophical ideal of an alternative monetary system, but if you scratch the surface it's always just reason #2 for them. If the price had been flat for the last decade, they wouldn't be in the game, philosophy be damned: they want to get richer.

Since there is no coupon, it's certain that the price can rise on trend only so long as aggregate demand for Bitcoin [at any given price] continues to rise. That requires an increase in one or both of the above reasons to hold among the population at large. I would expect both reasons to run out of runway eventually--there being only so many people on the planet--causing long run price rises to halt. With no up-trend in price, that removes reason #2 entirely after a while. The process might take decades to unfold, of course, but flatlining and boredom and irrelevance seem to be the likely destinations. Which is not necessarily the same as going to zero."

This is more commonly known as Greater Fool Theory.

Looking at a chart of 10-year yields, this doesn't seem to be correct. If anything, 4.2% is on the low side looking over 50 years or so. If you look at just the last 10-15 years, it's on the high side, but longer term it's low-ish. Here's a link to the best chart I could find -
https://fred.stlouisfed.org/series/DGS10

Agreed, the yield is low compared to most periods in the past. Keep in mind the price is inverse of the yield. Bond yields are low right which means bond prices are high. My point is simply that if the bond market was worried the Treasury won't be able to sell bonds in the future the price should be cheap. That's not what we are seeing.

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