THE most popular show on TV right now is HBO’s The Last of Us — the story of two survivors making their way through a zombie apocalypse. In the world of The Last of Us, to avoid becoming a zombie you need to avoid getting bit. In the world of today’s financial system, a zombie bite is when depositors (us!) withdraw money from the banks. Silicon Valley Bank got bit, and went down. You see, banks are nothing like Harry Potter — our modern banks don’t put your money into a big sealed underground vault with a scary Dragon protecting it. Instead, the money you store in your bank is given to someone else, in the form of a loan. So, if everyone asks for their money at the same time, the banks quite literally will not have that cash in their vaults1. They will have a series of ‘assets’ (i.e. loans that are presumably worth more than your deposit), but they won’t have cash. Last week, our Government attempted to contain this withdrawal contagion through a series of actions to quell panic. A week has gone by and so far, zombies are still biting. As we speak, investors and regulators are poring through every bank’s financial statements, meticulously stripping down and searching each one for bite marks.

Eight days ago, I noted that I was confident that First Republic’s depositors would be fine. I know a few of you reading this have funds in FRB so I did not make that statement lightly. Today, I still have confidence deposits will be fine2, but I’m not confident in FRB’s health or stock. To me, First Republic looks like it’s walking dead.

Using the year end filings from FRB, here’s a basic picture of the bank:

• At year end 2022, FRB had ~$175B in customer deposits, ~$166B of loans, and about $4B in cash.

• Those loans generated about 2.8% of interest income, totaling around ~$4.7B

• FRB’s total net worth (all the things they own minus all the things they owe) is ~$17B

How about now? According to the WSJ, over the past two weeks FRB’s depositors have withdrawn a whopping $70B. We don’t know the full extent of the damage, but that would imply four out of every ten dollars has been pulled from FRB. Given that they had only $4B in cash, FRB has been frenetically searching for ways to fill that $64B hole, including getting a $30B infusion from their fellow banks. So far, the infusions have worked and cash withdrawals have been satisfied. But, now the question turns to something else: if they survive the zombie bites of withdrawal, does this reduced position of having $70b less in deposits even leave them with a viable business? It just does not seem so. When I map the implications of the deposit loss over to the loan book, FRB will be losing $100m dollars…a month3. And this is a rosy view. This assumes that: 1) FRB has stemmed the depositor withdrawals and 2) Their $166B of loans are actually worth $166B4.

In conclusion, when SVB was crashing down, the first question for any bank was: did banks have enough cash (or stuff to sell for cash) to satisfy the wave of withdrawals that would hit them? Now, the question is: even if a bank avoids collapsing from withdrawals, is the resulting bank so beaten up that it’s no longer a viable business? I know many of you stock pickers would love to buy some bank stocks at dirt cheap prices — but the second question is just as important as the first.

In my evaluation of their financials, First Republic Bank may seem alive today, but lift up their shirt and their flesh is covered in bites. It’s still standing, but for me, it’s only a matter of time5. This bank is a zombie.

Thanks for reading, feel free to add questions in the comments or message me!

This is not that.

All managers, executives, and stockholders of Silicon Valley Bank are fired and zeroed. Any money the Government spends will be to save depositors, and depositors only.

There were two other critical pieces in the statement:

1. Signature Bank was also shuttered, with deposits similarly guaranteed by the Government. This makes two bank failures in 48 hours.

2. The Government opened a new line of money to all banks. The goal is to make sure every bank in the country has appropriate cash on hand in case depositors pull out. This is also their way of telling every person in the country, “you can leave your money in your bank without fear.”

I’m pleased with this outcome. Taxpayers won’t lose any money, despite the ‘bailout’1. Depositors who were staring at no-fault losses will be made whole. The overall financial system is now injected with confidence that no other bank will go down.

People who were concerned about First Republic Bank or Schwab or any other can rest easy tonight.2

Now, personally, I’d like to put in rules to prevent a situation like this again. Ideally, let’s align risk with incentives. My solution: if a bank fails, the Government will legally claw back all of the last 3 years of Executive compensation. I guess I’ll leave that one to the politicians — for now, I’ll settle for an exhale of relief.

Collapse

Today we witnessed the second largest bank failure in US history. Silicon Valley Bank (SVB) is not a household name to the country, but it is one to Tech. Startups raising bags of money from Venture Capitalists overwhelmingly put that cash into bank accounts with SVB. Wealthy techies put their nest eggs into managed accounts with the bank. They even facilitated payroll activities for the Valley, playing a critical role in recurring employee checks. SVB held nearly $200B of customer deposits. And now, it’s gone. Over the next few days this story will continue to unfold. I’d like to provide an easy companion piece for understanding where we are, and how we got here.

What Happened

Banking in a nutshell

A quick (and hopefully not boring) primer on banking: the banking business is a simple model. You give your money to a bank and then the bank takes that money and loans it out for a fee. For banks, accepting your deposit has a cost — it’s expensive to have physical locations, employees, mobile apps and more. Banks thus need to earn money from your deposits by loaning your money out at a higher rate than it cost them to acquire your money. If they’re successful, the difference between their lending rate and their deposit cost is their profit.

Backdrop of SVB’s deposit deluge

During COVID, the US Government pumped the economy with stimulus money. Across the US, banks were flooded with new deposits. Money came in to the tune of $5.5T (trillion!) new deposits to US banks. Starting from a base of $13T, this ~50% injection of deposits created an unprecedented amount of new funds. Silicon Valley Bank captured an inordinate amount — their deposits tripled, reflecting not just stimulus money, but also the booming startup ecosystem. Venture Capital firms dispensed gobs of money into Silicon Valley startups, who then put that money into SVB. At the start of 2019, SVB had ~$50B in deposits. By the beginning of 2022, their deposits swelled by four times to ~$200B. SVB had an imperative to put that money to work. They must not have known it at the time, but they were about to resemble the snake that suffocates itself by taking too big of a bite.

Managing time

Banks put money to work through loans. Loans, however, are not uniform. They carry with them different durations, in other words, some loans need to be paid back right away, and others can be paid back a long time from now. When you use a credit card, you’re receiving a short-term loan that you (hopefully for your credit-score’s sake) pay back within a month. That’s a short loan duration. When you borrow money to buy a house, you’re accepting a long-term loan — commonly home mortgages are as long as 30 years! From the bank’s perspective, a general principle is that the longer the loan, the higher the rate is. The higher rate is compensation for the time it takes to get their money back.

If a bank’s profit is their lending rate minus their deposit rate, they’re incentivized to seek the highest rate loans, i.e. the longer-term ones. However, there’s a counterbalance. Banks also know that you as a depositor can need your cash back at any time. This means a critical part of a banks job is to come up with the right lending mix. A bank wants to maximize lending that has the highest rates (often longer term loans) while also having enough short-term loans and sidelined cash to make available to you when you need to withdraw. If their mix is too much cash and low paying short-term loans, they lose money. If the mix is too much long-term loans, their earnings go up, but they introduce a crippling risk that too many depositors may want their cash back at the same time.

The mismatch

SVB got their lending mix wrong. Dead wrong. We don’t have to get into every number, but in 2021 SVB put $91B of depositor money into long-term mortgage loans that paid them an average rate of 1.66%. If you know that rates today are 4.5%, I’m sure you’re cringing and I am too. Locking in long-term loans at 1.66% seems crazy! In their defense, in 2021 interest rates were near zero. Being paid 1.66% on $91B of deposits becomes an extra $1.5B of very real income in their pockets. You can see the temptation to overdo it on long-term loans.

But then, SVB got hit by a one-two punch:

1. The Federal Reserve raised interest rates 8 times in under 12 months. Now, the value of mortgages that pay 1.66% are worth significantly less when the Government will pay you 4x more.

2. The tech ecosystem experienced a major contraction. SVB’s customers were tech companies! In 2022, as tech experienced economic pain, and startups, a majority of which are famously unprofitable, burned cash. Each dollar of cash burn gets withdrawn from SVB accounts. Further, VC funding began to fall off a cliff — SVB didn’t have enough startups getting new money to replenish that cash burn. Deposits reached a precipitous point.

All in a blink of an eye

On Wednesday, March 8th, SVB quietly looked to shore up their short-term cash position. There was no indication they were in major trouble, but they wanted some extra padding. As a public company, one way to raise funds is to sell some of your own stock. They attempted to raise $2B through a stock sale. By Thursday, March 9th, in the famously tight-knit Silicon Valley, everyone’s texts and Slack messages started blowing up that maybe SVB didn’t have enough cash. Word-of-mouth spread like wildfire, and tech startups everywhere started to pull cash out. With each dollar that was pulled, the lending mix of SVB worsened — they had to continue to sell short-term loans at pennies on the dollar to get cash. This gave them cash, but left them with a higher and higher percentage of long-term loans in their lending mix. Each dollar pulled out became a self-fulfilling prophecy. If they were not insolvent before, the continued panic and subsequent withdrawal on deposits led to insolvency. It was a true run on the bank. SVB started Thursday at nearly $300/share. By Thursday’s close, it was nearly $100/share. By this morning, the stock had dropped to $30/share. By 11AM PT today, it was over. The withdrawals were too strong, and the company had no more options — SVB was taken over by the Government and the company is done.

What’s next

SVB was taken over by the FDIC - a government institution that helps protect depositor money. The FDIC insures up to $250,000 of depositor money. By Monday, anyone who still has money in the bank will be able to retrieve that initial $250,000 from the government. Now, the question is: will someone bail out the rest of the bank? Some Silicon Valley VCs are begging the Government to step in with bailouts. Others are confident another bank will come in. SVB had real loans, real assets, and real relationships. My read is that there’s something of value still for a larger bank to step in and buy out those assets and make customers whole. We don’t know what will happen yet but I’ll be watching closely.

It’s been a stunning 48 hours of events. There’s a variety of common questions folks have, that I’ve added to an FAQ. Feel free to comment with any other questions and I’ll update the post accordingly!

FAQs

I heard this is just one of MANY banks that will fail! Are other banks affected? Should I be scared of a systemic collapse? I heard First Republic is next!

I mentioned SVB got hit with the one-two punch of the rapid rise of interest rates and having a unique depositor base of Silicon Valley tech. They are not alone with the rapid rise of interest rate pain. The entire industry is feeling it. However, with a wider depositor base that isn’t pulling deposits fast — I don’t think there’s a systemic failure risk in banks generally. Today we did see other Silicon Valley adjacent banks who may have tech exposure get hit hard: First Republic Bank (-15%), Signature Bank (-22%), PacWest Bancorp (-37%), and Western Alliance (-21%) felt it in the market. First Republic Bank made a point to release a statement that only 4% of their deposit base is tech, reassuring investors that despite also having a bad lending mix, they won’t have a depositor base that initiates a run on the bank. My take is that things are stabilizing and this is likely contained to SVB, but it’s not a 100% confident take. Banks with specialized depositor bases such as regional banks are not out of the woods yet.

Should I take my money out of First Republic or other smaller banks anyway?

I don’t want to cause unnecessary panic — per First Republic’s statement today and my read of the situation, I think they are fine. HOWEVER, this sort of thing is a strange game theory. If you pull money out and the bank is fine, you haven’t lost anything. If you leave your money in and the bank gets routed, you lose a lot. I don’t like playing games where heads you win nothing, tails you lose a lot. I reiterate that I believe First Republic is fine, but I don’t begrudge anyone for being prudent and withdrawing excess money above $250,000 on Monday.

I heard SVB was raising money though, so how did they fail?

SVB attempted to raise ~$2B on Wednesday and Thursday. With the stock near $300, analysts estimated that even with fears and a depressed price, they could finalize the raise at ~$200/sh. However, by Thursday the rapidity of the stock falling to $100/sh spooked prospective investors. The fundraise failed.

You told me SVB had $91B in mortgage loans. Surely they could have sold some of those to get cash, right? How did they go fully out of business?

This is a quirk of banking, best explained by this wonderful piece. In a nutshell, whenever a bank makes a loan, the government requires you to classify the loan as HTM (hold-to-maturity) or AFS (available-for-sale). If you classify it as HTM you do not get penalized if the loan loses value. Imagine in 2021, I loaned $100,000 for 1%. Now, with today’s interest rates someone can hold a loan to the US government for 5%. If I try to sell my $100,000 loan to you, you wouldn’t buy it for $100,000, in fact you wouldn’t buy it for $50,000. The $91B of HTM loans SVB had were worth a lot less than $91B but because they were held as HTM loans, SVB doesn’t get penalized for the loan losing value. However, the government says the moment you sell any HTM loan, the entire HTM book of loans gets marked-to-market. Trying to sell just $1 of the $91B would have wiped out the entire company. Unfortunately, that was the result anyway.

Will this effect the Federal Reserve’s interest rate policy?

Potentially. The rapid rises of interest rates have caught all banks in a pickle. Every bank I look at, from JP Morgan to Wells Fargo to Charles Schwab hold a lot of HTM loans at very low rates. This is disproportionately hurting regional banks. If more regional banks fail, the Federal Reserve may be caught between a rock and a hard place. Either they keep raising rates to battle inflation while potentially killing banks, or, save banks and pause the inflation fight. That’s not the conundrum yet, but if another regional bank goes down - expect very hard decisions.

Is this like Lehman Brothers and 2008?

No. Not at all. In 2008, the crime was carrying bad loans while having far, far too much leverage. As far as we know, SVB’s loans aren’t bad. Whoever takes them over will get legitimate assets. Their issue was a management issue, they got greedy and mistimed their short-term vs. long-term loans without taking into account that maybe, just maybe, the tech deposits could dry up.

Are startups screwed?

Maybe. Many companies were able to pull their money out. But SVB also provided corporate loans to many startups, in which the debt requirements of those loans were that the cash was kept in SVB bank accounts. You couldn’t borrow money to run your business from SVB and then hold that cash in Wells Fargo. Those companies could not pull money out. Other issues in startup land include: Rippling, which is a popular payroll tool, leveraging SVB to run payroll. Startups who had no money in SVB but ran payroll through Rippling got caught in the storm today if they tried to send payroll checks to their employees. I ultimately believe this will get sorted and that startups who had money in SVB will get it back — but there may be a timing issue where payrolls don’t get paid on time, and other second and third order effects throughout the next couple of weeks. I predict the short term will be ugly and the medium term will be fine. I hope this prediction does not age like milk.

if we rewind the clock to 1999, we could not have been more excited about the internet. groceries online? instant communication? beanie babies? it all felt so exciting. and perhaps against the odds, it also all became true. nearly everything we imagined back then is now available to us at the tap of a finger. however, something else happened too. the internet became a place of virality. and now, we intuitively know what becomes viral is often not fun — and it’s been proven that internet virality drives tribalism and anger. we also know that the rise of social media platforms like fb, twitter, and reddit have turned every person into a worldwide publisher. publishing used to be gated by large institutions who ran the newspapers, magazines, tv, and books. there are numerous benefits to bypassing these gatekeepers — democratizing speech and giving us all the opportunity to reach the masses. however, it’d be foolish to ignore the negatives of removing gatekeepers who were paid to confirm facts and were incentivized to maintain fairness. now, the built-in incentives are often the exact opposite. in an internet world, publishers (both companies and us) are rewarded for furthest reach, we get likes and upvotes, and our ideas spread. we get the furthest reach when we inspire strong reactions, with anger being one of the strongest. thus, we live in a society where (1) you’re rewarded for being angry, (2) your anger can spread instantly around the world, and (3) as you play the dual role of publisher and consumer you are bombarded every moment of every day with something new in the world to be angry about, either news, or perhaps more critically, the reaction to the news. any information that comes into the world is simply a starter gun in the race for a viral, and typically angry reply.

further, in order for the public to grasp new information quickly (quick and simple are keys to virality), it works best if new information is presented to us in a way that can easily fit into our existing world view. it can't be a net new idea, it has to be in some way related or attached. It’s no wonder that nearly every story is reshaped through a lens of popular discussion, in this moment, that might be racism or capitalism or scandal or whatever idea we already feel deeply about -- it allows the reader to immediately feel apart of the discussion without having to do any work. for example, i'd guess it's not likely that there will be a story that discusses animals in a vacuum. any viral story about animals would have to tie into a broader framework such as climate change or factory farming or another hot button issue. the story needs to affirm our worldview or enflame it. the story has to get us going to keep us engaged. we win when we're entertained. in fact, even when we're made angry (you'd think something we'd get tired of), we still feel like we're winning -- the anger merely increases our certainty of how informed we are and how wrong they are. on the internet, the individual 'wins', but collectively the society loses: it's the simpson's paradox in action.

and so why is politics eating the world? politics is universal and in the ever expanding reach of a now-fully-viral internet, the firehose of new information is guided by the invisible hand of virality to be tortured into the pre-organized buckets that match our existing mental frameworks and world views. red and blue are perhaps the widest and easiest buckets to put new information into. every subject is summoned by the invisible hand of virality towards politics. this might be fine if we knew how to talk with each other, but, political discussions turn our logic centers off and our tribal instincts on. i now believe that to the extent any subject becomes political is the extent to which we become incapable of discussing it, and thus solving it. politics is eating the world, and i don't know how to stop it.

Intro

I love magic.

Any magic.

Harry Potter, Magic the Gathering, David Blaine...Stephen Curry. Out of all the varied types of magic, card tricks remain my favorite. Hand me a deck of cards and I’ll rifle through on autopilot, removing the Jacks while I ready a trick called the 4 Thieves. The best part about card magic? It happens right before your eyes. Through sleight of hand, memory games, and the power of suggestion, a proper magician leaves you in a state of wonder. These days, after endless YouTube rabbit holes I (mostly) know how any card trick you show me is done. I’ll admit, sometimes I do stare at the left hand instead of the right and ‘catch’ the performer. But mostly, I find myself elsewhere — I find myself fully, willingly suspending my disbelief — I inhabit the unknowing, marveling spectator. You see, even when you know something is happening in the background, it’s no fun to miss the trick. To miss the magic. 

Today, we’re bombarded by the issues of our time. Pouring out of every device is evergreen Covid news. The march for racial justice leaps out of our screens. The tantalizing stock market begs for attention and our upcoming Presidential Election is itching to be center stage. The media feeds on our eyeballs and we stare back unblinkingly. I want to be clear — there is no fault with taking in and acting upon the news du jour, there are plenty of current trends that I wholeheartedly support. But I would suggest this torrent of popular news can serve as a distracting function from several large trends that don’t punchily fit into a headline. These background waves will shape our lives over the next decade — so while we marvel at, act upon, blood boil for the nightly news, I want us to pay attention elsewhere. I want us to watch the other hand. 

Over the next set of letters, I’ll be releasing one trend at a time that I believe we should watch. 

I. The End (or failure) of Globalization

Political news often feels like a souped up ESPN. The highlight tapes don’t show Mike Tyson placing well-worn fists into Buster Douglas, but there’s still plenty of punches -- “Biden’s calling Trump a liar and just wait until you see what Trump said next”. This never-ending cage match displays two sides, ever disagreeing with each other on, well, everything. But do they disagree on everything?

The French musician Claude Debussy once said “music is the space between the notes”. I’d argue politics is quite similar — in some ways what shapes our country isn’t what’s being vehemently fought over, it’s the silent agreement, the space between the arguments. To illustrate, from 1980 to 2016 both major political parties agreed upon:

1. Bailing out Wall Street

2. Endless Middle East Wars

3. Immigration

4. Wealthy Political Donors

5. Income Taxes instead of Wealth Taxes

6. No Term Limits on Congress

Our last two President’s track records speak volumes. Bush and Obama dropped unprecedented amounts of bombs on foreign countries. Bush and Obama massively fundraised from wealthy political donors and corporations. Bush and Obama used taxpayer money to bail out private corporations who had grossly overextended themselves. Whether you advocate for or against the above is for a different discussion — but it’s clear that the space between the political arguments, the shared ideas are societally defining.

The two-party agreement that perhaps most singularly seeped into the American mindset is the idea that free trade is a universal good. We applauded NAFTA, we loved our ‘Made in China’ goods, and we actually believed in the Golden Arches theory — the idea that no two countries with McDonald’s could ever go to war. Once two countries were trading with each other there would be no incentive to ever fight again. Free trade soon evolved to a broader term — Globalization — and became an untouchable hero, a hopeful one. It no longer mattered how or where goods were produced, as long as it was done as cheaply as possible, with a side effect of peace.

Today, this narrative is slipping. Many countries have gone to war with each other, Big Macs notwithstanding. While our abodes are filled with wallet-saving goods that might startle you should you find a ‘Made in the USA’ tag on it, we’re not quite sure if the bargain is worth it. It’s not uncommon to hear “when did everything become such poor quality?” A fair reading of Globalization would also include the powerful supercomputers in our pockets to pair with our houses full of cheap trinkets. But the impact goes beyond this array of varied quality goods — coming out of World War II, manufacturing wasn’t just about quality produced goods, it was the backbone of the rising middle class in America. Globalization has driven millions of these jobs overseas, and with it, destroyed the wealth of an entire class of Americans. Free trade has minted many winners in technology, finance, and service roles — but millions of fed up, left-behind Americans no longer feel like a rising tide has lifted all boats. There’s a tangible feel that we are no longer one America with one national economy — we are two Americas, the winning Coastal, college educated service industries and the languishing Center, rural and manufacturing industries.

On the backdrop of this growing American anguish Covid-19 arrived. If Globalization’s promise was showing cracks, Covid’s an earthquake. Free trade relies upon a simple premise, one party trades something of abundance for another party’s something of abundance. Yet, a global pandemic means that all parties want the exact same resources -- and those resources are not abundant. When two want the same thing he who does not produce loses. We’re watching a sprint to produce the first vaccine, and while there’s global pressure to share scientific progress, there’s whiffs of competition in the air -- the not-so-subtle understanding that the country that produces a Covid-19 vaccine first will administer it to their people before all else. The US Federal Government has already granted over 9 Billion dollars to the end of helping America first. Covid’s impact has reached much beyond vaccines. We’ve learned in the past few months that we not only don’t manufacture, but don’t have the capability to manufacture our own PPE at scale -- ventilators, masks, and even antibacterial sanitizer come from our overseas manufacturers. Reminiscent of the 2003/2004 US soldiers being shipped off to Iraq with inadequately armored Humvees, we’ve seen pockets of frontline hospital workers being forced to reuse masks and ration protective equipment. Worse, we learned 90% of US antibiotics, and key intakes such as ibuprofen, vitamin C, and hydrocortisone are produced in China. As the virus brought supply chains to a halt, it’s dangerously clear just how vulnerable the cult of Globalization has made us. 

Globalization is the era of efficiency; where cost savings is the primary imperative. When combined with the Wall Street-ification of America wherein our collective Pensions, 401ks, and savings are placed in the Stock Market, an implicit thinking has set in that anything that drives the stock market up is morally good. Globalization drives costs down, which drives corporate profits up, corporate stocks up, and theoretically our collective wealth grows.

This thinking has failed.

This cut-costs-at-all-costs mentality led to overrun hospitals in New York for it would have been inefficient to carry excess capacity. When constructing a bridge that’s meant to support 10,000 pounds engineering students are taught margins of safety, you want to build the bridge as if it needed to support 30,000 pounds. Yet, our drive for efficiency has thrown this idea away in vast swaths of our economy. Over-efficiency gives us explosive Wall Street metrics but crippled underlying structures — it’s how we have all-time highs in the stock market while we carry the highest unemployment rate since the Depression. Americans are waking up en masse — Globalization is not an evil, but is much more complex and nuanced than a universal positive. We want our goods to be efficiently produced and made, but are we comfortable as a nation relying on others for our most basic fundamentals? Our hospital equipment? The drugs we most rely upon? Should those supply chains ever falter, either through confrontation or a crippling virus, are we comfortable being left without? 

The USA is entering a new era, one where economic efficiency can no longer be our singular king. I’ll suggest that a new crown is being placed on the head of self-sufficiency. This will cause large shifts in our foundation. What does this all mean? That is harder to say — but as an author’s attempt, I will leave you with four predictions that I believe will occur — and a bonus prediction that would be more aptly termed a ‘personal hope’:

1/ Both the political left and right will advocate for the on-shoring of manufacturing to our hemisphere or the US itself.

2/ Giant multinational companies will once again become ‘American’. Expect pro-America advertising, commitments to build in America, and a social sheen placed upon the never-ending pursuit of profit. Just as corporations tout Corporate Social Responsibility and Environmental Sustainability, they will tout their American Resiliency.

3/ The 4-year college degree will lose importance. The United States will return to building, and in doing so, will emphasize trade schools and community college. No longer can it be expected of all teenagers to take on 6 figures of student debt to receive a liberal arts degree.

4/ TSMC (Taiwan Semiconductor Manufacturing Company) will become a household name. Intel recently announced it is once again failing with massive delays in producing the newest cutting edge 7nm CPU. The semiconductor industry drives computer technology which is at the heart of all military technology. Intel is America’s last semiconductor that builds here and after the latest failure will find themselves contracting third party foundries (most likely in Asia) to fabricate these chips. Taiwan is firmly within China’s hemisphere, and the United States military will desperately do what it can to ensure that TSMC, and their ability to do what Intel can no longer do, is in effect an American entity. More on this in future posts.

5, A Personal Hope/ America will dream again. In a de-globalized world, the United States will need to remember that lowering costs has another lever beyond finding cheaper labor. We can lower costs by building in new ways. Clean energy sources, biomanufacturing, 3d printing, and a new space race will inspire millions of young minds to build once more. I’d argue that since 2000, Silicon Valley has been the area of most pronounced energy in all of America. That hasn’t mean all positive things have come out of Silicon Valley, but it has been a place where new things can turn from dreams to being built. If the US is to maintain its worldwide status, I dearly hope we learn to build new things in more than one region. I hope we can build things in the physical world, not just the digital one too.

Welcome to the new world — coming up next, we’ll dive into a second trend that will fundamentally shape our next decade.

Today, more than ever, we need to be ruthlessly discerning with investment ‘facts’. No, this isn’t a Fake News post. And no, even if you protest to not watch CNBC or study Bloomberg, I assure you you are still consuming financial information. It could be from a parent, a friend, Reddit, or some other whisper that percolates through our brain until it sets. But you need to pay close attention to that whisper.

Have you ever experienced the following phenomena: someone you barely know mentions a movie they loved. Months later the same movie is brought up. You exclaim, ‘yes let’s watch that one…I heard it was good!’ I find this odd — how do I know that person’s taste was good? How do I know their style of movie matches what I’d enjoy? Movies are inconsequential, but our investor brains aren’t immune to this same style of inception.

“I heard Shopify is going to explode”…“Oh, Disney is turned around now”…“Did you hear about Netflix’s plan in China? Imagine how much higher they’ll go when they expand into Asia!”

Exacerbating this, many whispers are coming from people who have been highly successful. Over the past ten years, the market’s rising tides have lifted many boats. I ask you to re-imagine the movie scenario. This time, instead of the recommendation coming from a person you barely know, it turns out the person providing the thumbs up is famed movie critic Roger Ebert. It makes perfect sense to accept his advice, right?

In today’s Bull Market, there’s a lot of folks who look like their professions’ Ebert.

I’d like you to consider the returns of the S&P 500 from January 2010 to January 2020:

Annualized, the S&P 500 returned ~11.3%. To put that into real numbers, $10,000 put into the S&P 500 would be $29,176.

Let’s go further. How about the popular acronym FAANG? Facebook, Apple, Amazon, Netflix, and Google. Plenty of people put money into these stocks — I won’t go so far as to say they were obvious, but these aren’t far flung international stocks or niche biotech companies — these are companies that all of us saw every single day. Over the past decade, it was clear more people were streaming tv, getting 2 day Prime delivery, and updating their News Feed. And they were doing it from an iPhone.

Examine the change in price of the 5 FAANG stocks (note: Facebook went public in May of 2012, so I used the price of their infamous IPO failure):

Averaged, FAANG returned 32% a year. That same $10,000 put into FAANG would be $160,843.

These returns are astronomical. Buffett became the world’s richest man by annualizing at 20%.

When the market’s have roared, there’s plenty of investment professionals who look like geniuses. Friends and co-workers tout the untold sums they made on their brilliant stock pick. Even worse, we might even start to think that we ourselves are genius. “My portfolio doesn’t miss!”

Now, more than ever is the time to pierce through these narratives. Avoid the whispers from others and yourself like the plague. Ask yourself, did they do better than the S&P 500? Did they do better than FAANG?

If the answer is isn’t an obvious yes, don’t listen to them. Don’t feel jealous. Don’t chase what they’re doing. In times like this, it’s important to return to the fundamentals. If you want a guide, seek out those who have succeeded over multiple bull and bear markets. The Warren Buffett’s, the Howard Marks’, the Seth Klarman’s of the world. If you’re anti-guide, reaffirm your understanding of what you’re investing in and why. Be sure you can summarize in two clear sentences about why your company has an edge moving forward. Don’t chase what you hear and avoid the voice in your head looking for the easy money.

There’s only one Roger Ebert — so Charlatans, Beware.

This wasn’t the plan. Berkeley had budget holes throughout campus. When the renovation was announced, the Athletic Department fought for approval by emphatically answering questions about the financing with notes that the entire project would be paid for by the ‘athletic endeavors of Berkeley’. Ticket sales and media dollars, they argued, provided more than enough revenue to cover a fancy renovation and a state-of-the-art new performance center.

Additionally curious, it was unclear where the $20 million was coming from. It appeared to be directly from the Chancellor’s office — was there an unaudited pool of money the Chancellor could dictate at any point in time? Whispers of ‘slush fund’ abounded. Professor Efron was furious.

As an avid Cal Football fan and Berkeley student myself, I was quick to tighten my stomach in protest. I started spouting back silent arguments in my head and lamented the lack of school spirit Professor Efron displayed. What does he care? We need that money — have you seen the football recruits that Stanford and USC are taking from us? Our program needs better facilities and if the Chancellor is willing to help, that’s a great Chancellor in my book.

But, as if to rebut my silent invectives, he then added:

I’ll be in the stadium on Saturday cheering on our Bears, but as an institution we have to ask ourselves an important question: are we a classroom with a gym attached to it, or a gym with a classroom attached to it?

Hmm. When placed against the backdrop of a 94.5% increase in tuition on students in under 6 years, regular 400+ people classes, a shortage of professors, and not one single personal relationship developed with an educator in my time at Berkeley — it begged some questions. Why wasn’t that slush fund, or the $321 million dollar renovation going towards, well, learning? Where were our priorities? Maybe the Ivy League model made more sense. Harvard, Yale, and the rest played sports but didn’t feel the need to compete in the billion dollar NCAA arms race against the Gators, Longhorns, or Buckeyes. Was I going to be more proud of my school for winning the Pac-12 or producing more Nobel Prize winners? I left class that day unsure.

Those thoughts came and went and life moved on. 6 years after Professor Efron’s comments, it was announced UC Berkeley had to in fact take on $238M more funding to help the athletic program finance the renovations. So much for it being paid entirely by athletic revenue. But Berkeley wasn’t, and isn’t, alone — if you look at the top 10 NCAA football or basketball teams, you’ll see improper funding. Take a deeper look, and you’ll notice so many of them, whether it’s U of Florida or U of Texas or UNC and on, and on — aren’t private schools. These are schools that receive a majority of their funding from taxpayer dollars. You’ll also note that the highest paid public employee in almost all of those states, are the Head Football coach. Now, I love football. But if I, and millions of people who may or may not even watch football, am funding these schools, shouldn’t we have the choice to determine if athletics is where the money should go? At the very least, shouldn’t ticket prices be a little cheaper?

Today, coronavirus is sweeping the world. The US Government is taking massive action to provide funding not just to corporations and individuals, but also to the institutions, like universities, we think fundamental to society. Arizona St. University received $63 million dollars. Penn St. University received $54 million. Stanford received $7.4 million before announcing they’d return the money out of backlash. These enormous injections of taxpayer dollars are to ensure our institutions are funded while they desperately need cash.

But do they need cash? A quick google search shows that Stanford University has a $28 Billion dollar endowment. To be clear, that number starts with a ‘B’ not an ‘M’. But how about Penn St.? That’s not a fancy froo-froo school. Their endowment is $4.55 Billion. My school? $4.79 Billion. The ‘B’s are capitalized on purpose.

A little digging into endowments and you’ll notice that these Billions of dollars are a special, non-taxed fund. And their operators? Paid handsomely. Famed investor, David Swensen, who has run Yale’s endowment since 1985, was paid $5.3 million in 2008. His second in command earned $3.5 million. For context, the average CEO salary in 2020 is $813,993.

Now, I recognize using the most famous of endowment operators is a bit unfair — he may be the exception to the rule. So I dug some more. It turns out it’s very rare for Universities, public or private, to disclose how much they pay their investment officers. When the Detroit Free Press sued to gain access to the endowment records of the University of Michigan, it found that Erik Lundberg, their endowment manager, was paid more than $2,000,000 in 2016. The same University of Michigan that just received $25.2 million dollars from the federal government’s covid CARES Act.

These endowment funds are university savings accounts, granted by the government an unlimited tax advantage precisely because our institutions are important. And should a rainy day ever come — these funds should ensure these institutions survive. But the rainy day has come. And the endowment funds stack their Billions, while the universities furlough employees and the the taxpayer foots the operating costs.

It took me 8 years to see eye-to-eye with Professor Efron. He taught a fantastic history class, but his attack on Cal sports never fully unstuck from my craw. But, Professor, I think it’s time I let you know you were right. And we need to take it one step further. If endowment funds have billions of dollars that are tax free, pay their investment managers Wall St. salaries, and aren’t being used for their stated purpose in times of crisis — what are they for, really?

The question I think we need to ask isn’t are we a gym with a classroom attached to it. It’s:

Are we a hedge fund with a gym attached to it?