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If that happens, we will have a severe economic recession . Kathy explains what needs to happen for a severe economic recession to begin, and whether the recent collapse of America's 16th largest bank could be the start of the next market crash . Okay, let's take a look . I like Kathy Wood, so I want to hear what she has to say .
Everyone will remember the massive stimulus in 2020 , with many banks receiving excellent deposits; Silver Gate and Silicon Valley Bank are both the same . Now, what do they do? Silver Gate does not actually make loans. It does not provide loans. So, it bought securities ; Despite liquidity, there was a shift towards long-term securities and fixed income .
You may notice that Silicon Valley Bank did the same thing. The bankrupt Silicon Valley bank took all that money ; As far as I remember it was between 70 and 90 billion dollars . The Silicon Valley bank had more than $ 60 billion in deposits at the end of the first quarter of 2020, according to the Wall Street Journal.
That grew to nearly $200 billion by the end of the first quarter of 2022. So, a sudden huge increase, something has to be done with that money . You can't just leave it like that and do nothing. These are invested in long-term instruments for higher returns than money markets . At that time, money markets were paying perhaps only 0.5% .
They earned an average of 1.6% on that money. That seemed like a great deal . They are earning three times more than usual . Who would give up on that deal? Many banks give up, but not Silicon Valley Bank. They predicted that interest rates wouldn't go anywhere anytime soon. And it was proven wrong.
That was a disastrous mistake. It is completely irresponsible to bet on such high bank interest rates . I think interest rates have increased 20 times in less than a year . This has never happened. I remember 1981 . Then Volcker was trying to reduce inflation from the system . He increased interest rates from 10% to 20%, that is, twice .
That's true, a high level, but people have already become accustomed to rising interest rates . So they are ready for it . I have to condemn it . Okay. Let's keep an eye on interest rates throughout 2021. They have basically stayed near zero all year long . But if I look specifically at the average 30-year fixed mortgage rates for 2021, in the US it was 2.65% and for 2023 it was 6.5% .
The average price of a home right now is around $350,000. If you take out a mortgage on a $350,000 home with a 20% down payment at 2.65% interest . Your monthly payment will be approximately $1,100 . Now let's take 6.48% . The same house would now cost us $1,766 and that would be an additional 56.5% .
But for example, if you go from a 10% interest rate, you would now pay $2450 for the same house if we went from 10% to 20% . In this case you are paying around 4700 . When interest rates double from 10% to 20%, you pay 90% more , which is about 2.5 times more for consumers than when interest rates increase from 2.65% to 6.5% .
But you're only paying an additional 56.5% on your 30- year mortgage, rather than more than 90% . Only the final number matters . How much are you actually paying ? I don't believe Cathy's argument at all that the recent 20- fold increase in interest rates is much worse than past interest rate increases .
That's it. When I look at the numbers , it seems meaningless. For the end user and for most people the actual difference will be minimal. Of course, this is unexpected for many people , although it is minor. Yes, that's right. Looking back to the 1980s, the rates were terrible. So, the shock of going from 10 to 20 had some shock value , but nothing compared to what we're seeing now .
Unless you are irresponsible in your bets. And here are some consequences . Many people are now comparing it to 1981 and saying that the yield curve is the same now as it was then. My answer to that is that there is an inverted yield curve of 100 basis points when long-term Treasury yields are 4% or lower.
That's about 25%, which is an inversion if you try to measure it. Understand its size compared to 1981 . Here, I agree that it is more appropriate to look at the percentage, which better represents the probability of a recession, because you are looking at the overall percentage of inversion. In this case it makes more sense to me .
So, 100 basis points is 1/4 of 4%, which is 25%. If you go back to 1981 , that 100 basis point inversion was against 15% interest rates . So it would be around 6 to 7% . So I think it's giving a signal that's four times more powerful than the signal that the inverted yield curve gave in the early 80s .
Looking back, you can almost say for sure when we had a recession. If you notice that investments with shorter maturity bonds pay more than those with longer maturity bonds, it may seem strange, but it makes sense when you look at it closely. Yes, recession here, recession there, it works pretty well.
But it's not that easy. Because if it were that easy, Bridgewater, the largest hedge fund run by Ray Dalio, would easily outperform the S&P 500 market. As you can see the end result is basically zero difference, except you pay a lot in fees . The only real difference is that you will have a much smoother ride than the market .
That's it. What happened? Deposits were withdrawn and securities had to be sold at a loss . And these are securities that are to be held until maturity, and those losses are not realized unless they are converted into cash. And they had to sell them at a low price , and that's when the whole system started to collapse.
The bank tried to issue more shares to raise capital , but the market completely rejected it . No, the market says. You're going out of business , and that's where the bank run started. We are seeing banking failures like Silvergate Bank, Silicon Valley Bank, and maybe some other regional banks , but we do n't think this is a systemic banking problem.
We think this will lead to a different discussion at the Federal Reserve . So that would be good news if you believe Kathy Wood . There shouldn't be a massive chain reaction from a Silicon Valley bank that takes down the entire economy . This seems like just an isolated incident. Maybe some smaller banks have similar problems , but it doesn't seem like a systemic problem.
That's Kathy's opinion. But she shared some thoughts on what could be causing the recession . So let's take a look at them . The collapse of the Silicon Valley bank, for Cathy, appears to be a positive , as there is now a greater chance of interest rate cuts . If these decline, then growth stocks and technology stocks will all rebound.
In other words , the bad news here might actually be good news. And that's exactly what the reaction from the market was on Friday. Tesla stock actually rose a bit, because it's a growth stock. Although most other stocks, including technology stocks, did not rise. But it also gives a sign that Tesla may be too resilient to withstand a recession.
Not just the company, but probably the stock as well, although the stock may not be as resilient to the downturn , but I believe the business will definitely be very resilient . If money growth is negative on an annual basis, there is an equation in economics called MV = PQ , which means money into velocity equals price into volume, meaning money and price into volume equals nominal GDP.
So what happens if money is running out ? What is keeping nominal GDP from falling ? This is an acceleration in the circulation of money and it usually happens in situations of risk taking when self-confidence is very high. And this sometimes happens out of necessity, as happened very recently. Now the concern here is that this banking crisis, which I call a mini-crisis, is that with the memories of the 2008-09 crisis, individuals and corporations will slow things down a bit and avoid taking on additional risks .
They need to ensure that they have sufficient capital reserves . I've been doing the same with my businesses, except when Tesla stock fell in December. I made an exception . I bought some more Tesla stock. But overall, yes, what she's saying is really happening. But I am very careful and there are many people who are not so careful .
They like to live on the edge. I don't like that . I won't do that. So, I don't think this applies to everyone, but you'll definitely see that there are many who are more cautious, like Elon Musk. He laid off some people in June itself, and GM is only now starting to lay off more . And there is another thing that causes this .
The student loan moratorium looks set to end in June. So in July or August, consumers experiencing that moratorium will have to start repaying those loans , and they may cut back on purchases to prepare for that . That makes sense . But most student loans are on young people, or at least a good portion of them.
Here are the 25 to 34 year olds, and here are the 35 to 49 year olds. I think adults are usually more responsible and will actually do and prepare as Kathy said . But as for young people , they are more inclined to live in the present . And 70% of millennials live on their monthly salary . The report says.
So if you are living on a salary basis, I do n't think we can save money. But I think there's truth to what Kathy said here . That is, what she meant was what would be the impact if the velocity of money decreased. The rate of money supply decreases as people become more cautious and want to increase their cash reserves.
If that happens, we will face a severe economic recession . Here I will tell you what I feel when I see all this chaos. I also want to save more money . I want to have more cash , but at the same time, when I see a bank closing , I'm afraid to keep more cash in that bank because there's a risk that the money will disappear .
If you are an individual, it is not a big problem because you may not have that much cash . But if you are doing business, only a very small amount of your money is insured by the government. So, it's a little difficult to secure cash. On the one hand, you want to be cautious and increase your cash reserves.
On the other hand, if you do that and there is another bank run ( shortage of cash in the bank) , you will lose all or most of your cash, at least the uninsured portion . Or another alternative is to open more accounts at different banks and pay higher fees, which will reduce your profits . Usually when you do business , you transact with the same bank because they offer you better terms, but they make you sign some documents .
This means that you are required to transact only with our bank . That's why you have to face this dilemma . Overall , Kathy Wood doesn't seem to be worried about the economic downturn . She thinks, "I think the chances of interest rate cuts are now higher because of the collapse of the Silicon Valley bank ; because high interest rates have already hurt one, she thinks other regional banks could face a similar situation or problem." What am I supposed to understand from all this ?
Will everything really go smoothly and will this bank failure not affect anything? Maybe something has already started without us knowing . A chain reaction. Maybe we don't know yet . If a major financial crisis comes soon, I am ready. If we don't, I'll be happy for everyone because many will keep their jobs and life will go on .
So no matter what , I'm prepared for the worst , but hoping for the best . And this is the Tesla stock buying opportunity described by Elon Musk. My name is Matt Postus. Like and subscribe if you haven't already, I'll see you in the next video. Thank you very much for watching.
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