December 19, 2022
We hope you enjoy our outlook for 2023 and are well prepared for things to come.
It's Matt here. It's great to be talking to you all again. This message is for clients, and I hope you're enjoying some of the last snowfall. Right? It always snows around St. Patrick's Day, it seems like. But, um, I'm excited about spring around the corner. I hope you are too.
I wanted to check in on a couple of things. One, you know there's been a little bit of craziness in the marketplace here recently with the banks, so I wanted to touch on that. Not that I think it's super, um, topical for us here locally; a lot of people don't have familiarity with some of the banks that are struggling, but I'll talk about it for a moment.
You know what's happening right now is the banks are seeing the collateral that they have against people's deposits. So, when you go to the bank and you deposit your money, okay, you're actually lending to the bank, right? It's not actually that they're taking your money and putting it into some type of account and it's just sitting there across the table. They actually take your money and invest it in certain types of securities. That's what banks have always done; it's standard practice.
But what you're seeing happen is banks' collateral—banks' investments that they put in accounts to try to increase the amount of money that they're making on the money that you give them to deposit—is declining in value to a point where you get a bunch of people trying to pull their money out at once. All of a sudden, they look at their asset sheet and say, “Oh, okay, these assets have declined in value so much that we don't have enough asset value to now cover our deposit base,” and we call that insolvency. It is, like what people are saying, a classic bank run.
So, there are some issues with this. I've seen a lot of data, a lot of reports of various banks throughout the country. There's three or four really bad actors that, you know, have held too many assets that are too low quality and are going down too much because of the raising of interest rates. But, um, it looks like something that's going to be resolved. That doesn't say anything about the long-term consequences of, you know, backstopping these depositors and not letting them go bankrupt.
So, it's not as though what's happening in the banking system I think is cause for you to be worried about, you know, your bank accounts. I don't think it's anything really to associate with a problem, you know, with your investment portfolio or maybe the, you know, do we own any of those things? Because the answer is no, you don't own any of these banking stocks.
Okay? Um, but the point here is—and this is really what I wanted to set up with—is we're moving into a period of more volatility. You know, we got off to this easy, slow start here at the beginning of the year. But if you remember what I wrote back in January first when I wrote my annual letter, I said back in 2020 and 2021, they cut rates to zero and stimulated to the point, but they didn't think they had a problem until all of a sudden they had a huge inflation problem.
Okay? And now, you know, we're seeing—we're gonna see the opposite take place, where they're raising interest rates, they're pulling money out of the market. They don't think there's going to be any problems associated with it, and boom, we start having problems. So, from the beginning of the year, I've been of the mindset that we're gonna have economic issues, financial system issues, and to me, this is just the beginning of the end really.
And, you know my style; I want to be very transparent with you about that. But you can expect increasing volatility. There'll be days when the stock market will bounce and go up five percent, people being like, “Oh, everything's fine.” But, you know, unless we—there's two really difficult options from here.
Okay? The Federal Reserve can, you know, continue to raise rates or keep rates high and put a lot of pressure on the economy and cause deflation, cause asset prices to fall down, or they can reverse course and start cutting rates again and printing money to ease up on the system, and then you have this inflation problem. But, so, you have these two competing difficulties: you're over-tightening and you're creating deflation, or you're giving up on battling inflation and it re-emerges.
So, that is where I think we see ourselves today, and it's a very difficult spot for investors. But I just want you to know and I want you to feel confident, okay, that I have you in the most conservative place right now that I feel comfortable, you know, putting you in. So, and I've been there for a while, so it's not like I'm seeing what's happening now and feeling like we need to get more conservative. We're already there.
You saw on the really big down day when they were announcing these bailouts, you saw gold and silver shoot through the moon. You saw high-quality treasury bonds go up in value. Those two things are what we own. I also own, you know, short-term cash positions paying us four or five percent right now. So, I've already moved everything into the highest quality and safest place it can be.
Okay? Now, there are still portions of the portfolio that I leave invested for the long term in the stock market, and yes, if there's a big stock market decline, you know, account values will decline. But, you know, as we said, we're not trying to pull everything out of the market and time and get back in and out.
But I have everybody's account positioned really as conservatively as I'm comfortable with without taking off—taking out all of the potential for growth going forward. So, I want everybody to feel comfortable that that's where we are right now.
Um, you're already positioned. You know, if you're a 20-year-old that I might usually be a hundred percent in the stock market, you own some gold and silver, you own some treasury bonds, you might even own some US dollars. That's a very conservative position for a 20-year-old. But they still might be 70 or 80 percent invested in the stock market.
And then, as you move down the line and get more and more conservative, you know, to my retiree, well, now the majority of your portfolio is gold and silver, treasury bonds, short-term treasuries, things like that. Even, yeah, you still own 30, 40, 50 percent in the stock market, but it's a much lower, much more controlled rate, so to mitigate any type of losses that come in the future.
So, I want everybody to have a sense of confidence about that, and we're just gonna have to, you know, ride through. And, you know, that, like I said, and I've been saying, the next opportunity is going to come when we can get more aggressive. You know, we've already gotten into our conservative spot right now. I feel like it's the right place to be.
Um, and in the future, it's going to be all right. When do we scale up risk? When do we think things have gotten so bad that they're not going to get any worse anymore, and we can scale back up risk? But right now, we're slow and steady, holding where we're at.
And I just wanted to reach out to you guys before you had, you know, a lot of questions for me and try to answer some questions ahead of time. So, that's all I have for you guys right now. Um, I'll talk to you in a few weeks here at the end of the quarter, and I wish you all very well. Thank you. Bye-bye.
