NEV

Net Economic Value refers to the current market value of a bond portfolio. Virtually all banks and credit unions closely monitor this calculation as part of their risk management program. NEV is important because it reveals how much cash their retained earnings (capital) can generate in case of the need to raise money for necessary expenses. I am familiar with this because of my volunteer gig on the Board of Directors at a local credit union over the last 8 years. Banks and credit unions are deep in the red on their investment portfolio because of the recent unprecedented increase in interest rates over the last year. The implication is that if deposits decrease dramatically (and they have) then investments must be sold at a loss to raise money. Most fixed income investments held by banks are intended to be held to maturity, therefore, they were not overly worried about the NEV until deposits dried-up. To compound the problem, the banks' loan portfolio also holds lower yielding loans on the books which would also have to be sold at a loss. Bankers just hate to lose money but economic conditions have made life hard for CFO's recently. So where has all the money gone? As I've been saying for over a year now, investors are hungry for yield on their money. Local banks and other financial institutions have not satisfied the need for a return that compensates for inflation. Money has flowed into treasury bills like the inflation hedged I bond and the 2 year T bill. Some banks with low overhead have offered high yields on CD's to raise their deposits. Money has also flowed into money market funds that offer a better yield than the average bank savings account. The money left over from the stimulus payments has been withdrawn to fund living expenses which have increased due to inflation. All these factors have created a liquidity crunch for banks at a time when suprisingly, loan demand remains strong. Some banks have borrowed money to satisify new loan demand because deposits just won't keep up. Along with borrowings come future interest payments which increases costs for banks. There is currently a lot of blame being focused on banks, the fed, crypto currencies, the Biden administration, venture capital, and lenders in Silicon Valley. I think they are all to blame. The failure of Silicon Valley Bank has just revealed the dirty little secret that banks have known all along, their balance sheets are extremely stressed. The Fed has declared that it will raise interest rates until something breaks. Well, I think that has happened. The Biden administration's answer to this banking crisis is to increase regulation on banks even though insiders know that is part of the cause of the problem. Banks should not be invested in crypto currencies, at least with any of my money. Diversification is important for bank portfolio's just like for indivual's portfolios. Any bank that holds only risky loans of start-up companies is inherently risky. My feeling about banks and many credit unions is that their expenses are too high. The greed at the top does not trickle down to lower level employees. Directors are resigned to pay exorbitant salaries just to fill corner offices. Depositors also suffer due to below market interest rates for savings accounts. It's no wonder money is flowing out the door and into higher yields. If there is a silver lining to this banking crisis it is that, interest rates will probablly stabilize or decline, the stock market will respond favorbly to lower rates, banks will derisk their balance sheets, lower market rates will shore-up bank investment portfolios, and banks will realize that deposits are not all that "sticky".

WE ARE THE CHAMPIONS

The song "We are the Champions" was recorded by Queen in 1977 on their sixth album "News of the World". Written by lead singer Freddy Mercury, the song reached #2 on the UK singles chart and #4 on the Billboard Hot 100 chart. The song remains as an anthem for sports teams and is still one of the most recognizable rock songs of all time. The song is famous for being performed at the Live Aid Concert at Wembely Stadium in 1985. The song reminds me of the current global economic situation because of the cooling relations between the U.S. and China. Its no secret that the American economy and China's economy are deeply entwined. We have become very dependent on inexpensive Chinese imports of tens of thousands of categories of products. This helps to explain the low rate of inflation we enjoyed for many years prior to 2020. When then President Trump increased tariffs on some Chinese imports, retalitory tariffs were placed on American exports to China. Combine this with sanctions placed on Russian energy exports and a new global trading paradigm is forming. There will be winners and losers as a result of these changes in the flow of money and goods worldwide. The biggest loser will most likely be the American consumer who is used to the cheap and readily available imports from China. We will also continue to experience inflation despite the Feds effort to slow it by raising rates in a vain attempt to slow our economy. While the economy has slowed slightly, the Fed has targeted our labor market in an attempt to put people out of work, thereby decreasing demand of goods and services. I would argue that job creation here will remain strong to replace Chinese manufacturing for necessary goods. Chinese trade policy has been one sided for many years and I agree that action was necessary but we must recognize that a trade war will bring pain to the U.S. So who are the winners in this escalating trade war? I think Mexico will be the first to benefit from our sour relations with China. America is already utilizing cheap Mexican labor to make autos, electronics, and many other goods we need. Just this week, Tesla announced a 10 billion investment in Mexico. U.S. companies are looking for a source of cheap labor and loose regulation for their competitive advantage. Other third world countries with stable politics will surely lobby American companies for a piece of the economic action. Hopefully, American workers will also get a piece of the onshoring of good paying manufacturing jobs. It only makes sense to employ the best educated workforce in the world right here in our own markets. I recently took a look at my portfolio for any exposure to Chinese stocks and was suprised that my emerging market funds were almost exclusivily invested in China. I plan to divest these funds in the near future because of the political tension between us. I'm sure I'm not alone in feeling this way. With all the risk involved in investing, political risk is one I choose to avoid if possible. For the time being, I am satisified to keep my money invested right here at home in safe and sound CD's, Treasuries, and income generating stocks with limited foreign exposure. While it may be too early to tell who the new champions will be, someone will benefit from the decades of bad behavior by China.