Rates, Banks, Poker

Rates and Banks

The 20 and 30-year treasury rates are now a hair under 5%, the highest level in 15+ years. TLT is the ETF that tracks the performance of the long-duration treasury bond market. It’s a decent proxy to see the impact of these rate hikes on current outstanding treasury assets. Treasury assets and long-duration bonds have a market value that falls when rates rise, and, in this case, long-duration bonds have lost -50% of their value over the past two years. 

I mention this because the media focuses on the S&P 500. Still, the US treasury market is a $20 trillion+ market, and its decline in value was the core reason Silicon Valley Bank ultimately failed, along with First Republic and many other banking institutions since then. While there might not be another bank failure, the conditions that caused it continue to get worse.

Savvy consumers continue to move their deposits from .01% interest checking accounts to brokerage accounts earning 5%, reducing the customer deposit base used to create loans. Private credit (aka shadow banking) is taking market share of the loan market as regulations and capital requirements get in the way. It’s hard to envision a worse environment for banks. 

In 2024, the Treasury plans to buy back its bonds for the first time in two decades. I mentioned last week that we are in a whack-a-mole environment regarding financial responsibility (austerity). While implementing programs to tighten economic conditions, we add liquidity to the system in other areas. 

With the cost of borrowing high for businesses, the real estate sector and the consumer, the gap between the “haves” and the “have-nots” is extreme. These conditions make for a bumpy road over the next year as the have-nots struggle to cover their interest payments. This partly explains why the FANG cohort of stocks is performing so well this year. Yes, they have the advantage regarding AI, but they are also financially in the “haves” bracket.


Elon’s poker game

In Walter Isaacson’s new biography of Elon Musk, there is a story about Elon’s poker strategy.

“Although Musk was not a card player, he pulled up to the table. “There were all these nerds and sharpsters who were good at memorizing cards and calculating odds,” Levchin says. “Elon just proceeded to go all in on every hand and lose. Then he would buy more chips and double down. Eventually, after losing many hands, he went all in and won. Then he said “Right, fine, I’m done.” It would be a theme in his life: avoid taking chips off the table; keep risking them.

That would turn out to be a good strategy.”

You can afford to go all in many times when you have unlimited access to capital. What’s more interesting here is that Elon often chooses games where he is mostly the only player at the table or, to be more fair, the only player with infinite resources. NeuraLink, rockets, satellites, electric cars, and co-founding Open-AI are extremely high-risk ventures that require unreasonable confidence. These bets frustrate the sophisticated technicians (pro-poker players and short sellers) and inspire those who want to see the boundaries pushed by those with the means to do so.


Open-AI Again

On Monday, they released yet another feature that brings eyesight and voice features to their iPhone app. For example, you could take a picture of a bike and ask for help changing a tire. I don’t have access to it yet, so I haven’t test-driven it personally. Conceptually, it’s a big step forward from on-the-job training to education to home DIY repairs. How is it that a team this small continues to lead the crowd with so many groundbreaking features? Progress like this eventually overpowers harsh economic conditions.

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