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💬 Quote Of The Week

🍽️ The Main Course

Headlines That Matter

Economy

Bank On This

🚀 The quick version: We have been getting a lot of questions from readers about all of the recent bank headlines and what it means for your investment accounts.

Let’s quickly recap what’s going on:

Regional banks go under. Earlier this year we saw three regional bank failures (defining terms: regional banks hold between $10 billion and $100 billion in total assets, community banks hold under $10 billion and large banks hold over $100 billion). These bank failures were contained as larger banks stepped in to gobble up most of the assets at bargain prices and the government assured us they were there to help. Everyone seemed to move on thinking the issue had been put to bed.

Moody’s signals it’s not over. Moody’s (one of the three main credit agencies in the U.S. - the other two are Fitch and S&P) recently chimed in stating the banking sector is not “all clear” and downgraded the credit rating of 10 community and regional banks (translation: when a bank’s credit rating is lowered, this is another way of saying the rating agency views them as more risky).

The timing is peculiar as the downgrade happened several months after the regional bank failures, leading us to initially think some of it was just a delayed reaction. While we still think this to some extent, Moody’s highlighted several risks with these 10 banks that speak to a more cautious outlook (one of them being their over exposure to a commercial real estate sector that is seeing more an more weakness - especially in large cities).

Fitch might be next. Now all of a sudden Fitch announced this past week they are thinking of downgrading not just a few banks, but the entire banking sector citing some of the same risks as Moody’s but also noting that the rapid rise in interest rates is hurting every type of bank.

The reason rising interest rates can hurt banks is that most make money by long term lending (think mortgages) and also parking spare cash in safe investments (like long term Treasury Bonds) which offsets any interest payments they have to make to customers (like savings accounts or certificates of deposit). As interest rates rise quickly, they have to adjust upward the interest they pay customers in real time while still being locked in to longer term loans outstanding at lower rates which creates a profit crunch.

Regulation next shoe to drop. Adding to this pressure, the government has decided to finally react to the earlier regional bank failures by proposing new regulations (to take effect likely later this year). One of the key regulations will require banks to hold more money in reserve just in case things go south. While an obvious idea in theory, this new regulation coupled with the mix of forces above will create an environment that may actually further pressure the banking industry over the next 6-12 months.

Here’s why:

• Banks will need to raise money from investors (or lend less) in order to meet these new government reserve regulations (likely later this year / early next).

• If they are all downgraded by Fitch, investors will demand higher interest payments because they will be deemed a more risky (this will already apply to the 10 banks downgraded by Moody’s).

• Higher interest payments will pressure profitability and banks will need to need to cut expenses or find other ways to make money (ex. raise loan rates, raise fees, lay off workers, or find other ways to save) to maintain profits.

👪 How it affects your family:  Changes in the banking system are always worth paying attention to. Here are some ways families may be affected and actions you can take to be prepared:

• Watch your investments. If you currently own bonds of any bank or financial institution, the value of that bond on paper will go down if Fitch decides to go through with a downgrade. Check your portfolio or ask your advisor about any exposure you may have to the bonds of financial institutions so you are at least aware of this potential risk and can decide what (if anything) to do.

• Call your bank and make sure your accounts are FDIC insured. Most banks and U.S. financial institutions are FDIC insured up to $250,000 (this usually also includes CDs or multiple types of savings accounts but make sure). This means even if your bank were to cease to exist tomorrow, the U.S. Government would pay you what’s in your account up to $250,000. Call your bank today and ask specifically about your accounts to make sure you are covered so you can be ready for even the worst scenarios.

• Watch out for increased fees ands higher loan rates. As noted, with banks likely having to pay higher interest rates to investors while dealing with more regulation, they will need to make up that extra cost somewhere. Each bank will be looking at all of their costs closely over the next several months and we would bet several choose instead to just increase fees or loan rates as a solution. Usually, but not always, we would say the larger banks would be increasing fees less than the smaller ones as the larger banks are in a better position to absorb slightly higher costs for a period of time (should you want to move your account). Regardless, start looking at your monthly bank statements carefully, ask questions if you spot something that looks off, and check out our guide of 10 common fees banks use and how to avoid them. 

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Investing

The Big Short

🚀 The quick version: As we approach the end of August and see a stock market showing strong gains year to date, it is worth highlighting some cautious information to keep in mind.

Michael Burry bets big. Famous investor Michael Burry, from the film “The Big Short”, revealed through a 13F filing last week he had put on a $1.6 billion bet that the market will go down (this represented 90% of his funds total holdings translation: it’s a big bet).

Beware of September and October (historically). No one ever truly knows what the future holds, but Michael Burry’s bet does have some historical backing to it. Looking back at history the stock market’s worst month by far is September (average monthly return since 1950 has been -0.5%); October has also seen many of the market’s worst crashes historically; the Bank Panic of 1907, the Stock Market Crash of 1929, and Black Monday 1987 all happened during the month of October.

Professional investors are not confident on any direction. The S&P 500 has traded “sideways” (term for in a band) in a range of about 4300 to 4600 since about May. When the market does this it tends to mean that investors are less sure of where the market goes from here. This in itself does not mean the next move will be down, but it just highlights the overall lack of conviction either way in where the market is headed in the near term.

👪 How it affects your family: First of all, for most families and long term investors, we would suggest ignoring most of the above and treating it as noise. The best course of action for truly long term minded investors would just be to continue to focus on consistently investing a little when you can (and also teaching your kids the basics of the stock market).

Also, for what it’s worth, we are a bit more optimistic on the market in the short term than Mr. Burry (he has been wrong before) although we would be the first to say that anyone’s short term prediction is a fool’s errand (including ours!).

With all of this in mind, here are some further resources we created to help you where ever you are along your investing journey:

• Watch your brokerage account. Even if you are more of a long term investor, it’s worth paying attention to these 5 common mistakes people make with their brokerage accounts that wind up eating into their returns.

• Watch these indicators. If you want to try to be more strategic about when to invest, here is a guide on a few indicators you can watch to help you better determine when to make your moves.

• Learn from the best. For anyone interested in going further and learning which stocks some of the best investors like Mr. Burry are invested in, there is actually a way to do that. Every money manager in the U.S. managing over $100 million has to file a form called a 13F that discloses all of their holdings no later than 45 days after each quarter. Here is a step by step guide on how to read a 13F filing (and teach your kids).

Dinner Discussion ❓

Answer below (no peeking!)

🥘 The Side Dishes

A few things to know…

🌮 Free tacos. We’ll be the first to admit Taco Bell isn’t what we think of for a healthy family meal, but it IS delicious. And from now through September 12th they are offering a free Taco every Tuesday.

📱 The end of ChatGPT? Turns out the company will need new funding by the end of 2024 to stay in business. They spend $700k a day and are seeing their user base shrink to 1.5 billion in July from 1.9 billion in May.

💇‍♂️ 2023 Mullet Champion. Following up on our story a few weeks ago, we wanted to send a big congrats to Rory Ehrlich from PA, the 2023 Kids Mullet Champion.

🪙 Missing money? One in seven Americans has unclaimed property (ex. uncashed checks or inactive brokerage accounts) just waiting for them to collect. Find out if you are one of them by just searching for your name (if you get a match just claim you cash!).

🏎️ Get the latest racing roundup. For anyone interested in Formula 1, check out The Racing Recap, a free newsletter to help you always stay on top of the latest trends. Subscribe for free here!*

💵 $ell your $tuff. Want to make money on stuff you no longer need? Here is a step by step guide on how to do it.  

📈 WTF is “girl math”? While the term “girl math” is seemingly everywhere right now poking fun at the stereotype that women aren't good with money, we’d like to point out that studies show women are actually better investors than men.

🚫 NYC bans TikTok. As if you needed another reason to be worried about what your kids are doing on social media, New York City just banned the use of TikTok on all government owned devices, citing security concerns with the app.

👔 Get UNSTUCK. Starting and growing a business can be hard, and sometimes you might feel stuck. That’s where Pat Flynn’s UNSTUCK gives free advice on how to succeed. Subscribe here!*

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🗓️ The Week Ahead

August 24th-26th

The 2023 Economic Policy Symposium takes place in Jackson Hole, WY. Here we will get the latest thoughts from Fed officials on interest rates (Chairman Powell will make a speech on Friday).

We think the Fed is probably done raising rates but the bigger question is how long they keep them elevated for.

August 27th

Today is the Little League World Series Championship game. We love this event each year and salute all the young athletes out there working so hard to achieve their dreams!

🍨 Dessert

This Week’s Deals For Families

Help your family save and spend smarter*

🧳 Away is offering up to 35% off all luggage through September 4th.

🛋️ Cozy Earth is offering 30% off sitewide with the code BUYSIDE. 

💤 Luna is offering 20% off for their Labor Day Sale with the code LABORDAY20.  

*we won’t earn on any of the deals above this week - just thought they were the best ones we found and wanted to share them anyway!

Dinner Discussion ❓

Answer: U.S. Stocks have been the best performing asset class of the group over the last 10 years returning an average of 12.6% per year.