Bank Stocks

[chasesfish]

Wells Fargo actually found a credible CEO.  Really solid choice in my opinion.

I'm sure whatever they had to pay him is going to become a political pinata, but I might be a buyer today.  New CEO is known to spend on technology and is a Microsoft board member.

I might pickup a few shares today

[Buffaloski Boris]

Wells Fargo actually found a credible CEO.  Really solid choice in my opinion.

I'm sure whatever they had to pay him is going to become a political pinata, but I might be a buyer today.  New CEO is known to spend on technology and is a Microsoft board member.

I might pickup a few shares today

I agree that they made a great choice.

I have the misfortune of being one of their retail customers. It’s been a real education. At a PE of 5 or 6, I might think about picking some up. Maybe. 😆

[FIRE@50]

I would be really surprised if you ever got the chance to buy at a PE of 5 or 6. I'm still happy to collect the dividend regardless of the PE.

[Buffaloski Boris]

I would be really surprised if you ever got the chance to buy at a PE of 5 or 6. I'm still happy to collect the dividend regardless of the PE.

I was more referring to their customer service. But you bring up a good point. I do expect PE ratios for banks to go down as interest rates drop further. Look at PE ratios in UK banks for example. If the numbers I’m seeing are correct it’s .75 for HSBC and around 7 for Barclays.

[chasesfish]

Picked up some WFC yesterday, the entire sector bounced nicely and its the first time it happened without some big move in interest rates.

Now I'm completely sitting on my hands at a 1.7% 10 year treasury.

If we see 1.5% again, its time to buy banks.  If we get 1.9% again, buy 30year zero coupon treasuries or TLT.  Both are good buys long term right now with some price volatility allowing you to  make some money on in the short run trading these assets back and forth.

Both are good to own long term.  Long term rates have another 50-100bps to decline and you'll see price increases as rates decline on bonds.   Banks are buying back stock faster than this decline will hurt them, so also a good buy.

[CorpRaider]

Probably being too cute, but I suspect Scharf will come in and have a tank quarter or two.  He for sure has cover to list a ton of cockroaches and "clear the deck."

[ChpBstrd]

I hope those of you buying individual bank stocks understand what will happen if ANY of the following occur (and why):

1) The US escapes the Japan-style deflationary trap. Interest rates rise 3%.
2) Real estate drops 20%, again.
3) A big liquidity scare occurs in the repo market or some other market.
4) Another “rogue trader” hits your bank of choice, or its probable counter parties.
5) Banking regulation increases.
6) Privatization of mortgage lenders leads to a panic or credit freeze.
7) The US falls into European-style negative interest rates and lending margins.
8) The president orders the immediate seizure of potentially Chinese assets, leading to banking chaos.
9) A routine recession occurs.
10) Online startups start seizing significant market share.

[Buffaloski Boris]

I hope those of you buying individual bank stocks understand what will happen if ANY of the following occur (and why):

1) The US escapes the Japan-style deflationary trap. Interest rates rise 3%.
2) Real estate drops 20%, again.
3) A big liquidity scare occurs in the repo market or some other market.
4) Another “rogue trader” hits your bank of choice, or its probable counter parties.
5) Banking regulation increases.
6) Privatization of mortgage lenders leads to a panic or credit freeze.
7) The US falls into European-style negative interest rates and lending margins.
8) The president orders the immediate seizure of potentially Chinese assets, leading to banking chaos.
9) A routine recession occurs.
10) Online startups start seizing significant market share.

Is this a quiz? 

OK.  I think I know the answer.  They'll be bailed out? 

[CorpRaider]

If any of that stuff really mattered I would not be interested.

[chasesfish]

I hope those of you buying individual bank stocks understand what will happen if ANY of the following occur (and why):

1) The US escapes the Japan-style deflationary trap. Interest rates rise 3%.
2) Real estate drops 20%, again.
3) A big liquidity scare occurs in the repo market or some other market.
4) Another “rogue trader” hits your bank of choice, or its probable counter parties.
5) Banking regulation increases.
6) Privatization of mortgage lenders leads to a panic or credit freeze.
7) The US falls into European-style negative interest rates and lending margins.
8) The president orders the immediate seizure of potentially Chinese assets, leading to banking chaos.
9) A routine recession occurs.
10) Online startups start seizing significant market share.

I appreciate this.  When I was running a lending team, I would get my bankers together to go through a deal and I would want them to beat the living hell out of the deal.  Tell us every possible thing that could go wrong and why we shouldn't do it.  That way afterwards, if we said yes, we were deciding that it was still an effective risk-adjusted return.

All of these things are possible.  I also think all of these things are what caused a bank like Regions to go from a PE of 20 in early 2018 to 9.5x today.  Is that the appropriate discount?  Only time will tell but I like my probabilities here

[chasesfish]

Picked up some WFC yesterday, the entire sector bounced nicely and its the first time it happened without some big move in interest rates.

Now I'm completely sitting on my hands at a 1.7% 10 year treasury.

If we see 1.5% again, its time to buy banks.  If we get 1.9% again, buy 30year zero coupon treasuries or TLT.  Both are good buys long term right now with some price volatility allowing you to  make some money on in the short run trading these assets back and forth.

Both are good to own long term.  Long term rates have another 50-100bps to decline and you'll see price increases as rates decline on bonds.   Banks are buying back stock faster than this decline will hurt them, so also a good buy.

I sold some of my long term treasury positions this week.  Put about $200,000 into long term bonds when the rates spiked, sold some of it as they headed towards a 1.50% 10-year.   Bank stocks didn't quite get cheap enough to hit my limit orders this week, so I wait.

[ctuser1]

Picked up some WFC yesterday, the entire sector bounced nicely and its the first time it happened without some big move in interest rates.

Now I'm completely sitting on my hands at a 1.7% 10 year treasury.

If we see 1.5% again, its time to buy banks.  If we get 1.9% again, buy 30year zero coupon treasuries or TLT.  Both are good buys long term right now with some price volatility allowing you to  make some money on in the short run trading these assets back and forth.

Both are good to own long term.  Long term rates have another 50-100bps to decline and you'll see price increases as rates decline on bonds.   Banks are buying back stock faster than this decline will hurt them, so also a good buy.

I sold some of my long term treasury positions this week.  Put about $200,000 into long term bonds when the rates spiked, sold some of it as they headed towards a 1.50% 10-year.   Bank stocks didn't quite get cheap enough to hit my limit orders this week, so I wait.

I have about 6% of my networth in banks. This includes the <$20k in WFC that has basically done nothing in 6 years, and a BAC position that has served me well.
I've not done the calculation of how much more exposure I have to banks via the index funds.

This degree of exposure seems appropriate to me for my portfolio.

I am curious how you figure on trading in and out of slow moving battleships that are banks!! I mean I understand the CEO, and it is a part of a long term narrative that seems to be looking up. To me, however, the long term intrinsic value depends a lot more on the internal culture - which is very difficult to turn around, and gains it's own positive momentum once turned around - than a single CEO pick who may or may not be able to influence the culture!!

Even when I was used to trade individual stocks - the max I have ever done was 5 trades in a year (that was the first year I had some money and went crazy and trigger happy). Usually it is more like 6mo-1year research before initiating a position - leading to 1 trade in a year or maybe 2 in some.

How do you keep your head steady with frequent trading? Aren't you ripe for being picked on by HFT's that way?

[chasesfish]

@ctuser1 - I think I keep my head straight by having an overall asset allocation target between equities and stocks/bond.   Even with the moves I haven't gotten too far outside of my target (maybe 6% overweight/underweight).  I check my portfolio at every month-end to see where I'm at.

The long-term bond deal was mostly exchanging cash for bonds.

The I've added and trimmed the banks depending on value.  I'm bullish on both long term - I think we're in a lower return for longer environment, I don't expect the Banks to give me 15-20% per year.  I do expect a steady high single digit return, split evenly between dividend payments and share price appreciation from buybacks.   Eventually this industry will consolidate again, but I'm not holding my breath for that.

The only thing I think I've done "risky' is I went into margin buying banks in December of 2018 and I did it again buying long-term treasuries in mid-September (and finished unwinding that last week).   I just look for opportunities where I think the return outweighs the risk I'm taking, then I never bet the farm.   I can't risk so much that I risk having to go back into banking for income

[Grafter]

Is anyone planning on making any buys before earnings season (which looks like it starts next week)? 

As I'm tempted to trade back in and out of WFC again, especially with the dividend coming up latter this month, and then using some covered calls to juice my return.

[UnleashHell]

I'm just hanging on to my BAC shares bought at 7.5
the increase so far has covered the cost of my divorce and the dividends will be covering my original purchase.
I see no reason to sell but I'm not rushing in with new money either (although WFC looks tempting).

[chasesfish]

Is anyone planning on making any buys before earnings season (which looks like it starts next week)? 

As I'm tempted to trade back in and out of WFC again, especially with the dividend coming up latter this month, and then using some covered calls to juice my return.

I was hoping for another five percent off before adding some shares.  I think its doubtful unless some macro event in the US/World spooks the market.  The 10-year treasury went down to 1.54% and banks only retreated a little.   My guess is earnings will be uneventful - Total revenue/earnings will be flat to down 0% to -2% while EPS should be up high single digits from buybacks.

I'll be curious how far we are from problem loans starting to tick up a little.  Auto is a complete mess, but these are all collateralized loans on short terms.  Commercial real estate isn't cracking yet.  The only risk I see is some leveraged lending/commercial & industrial loans made to private equity back industrial/manufacturing firms.   Eventually this will cause some EPS decline and the buyback pace to slow.

The entire investment thesis for me is banks historically are worth 14-18x earnings.  They are all trading between 8-12% now.  That is 50% upside and I think they eventually return to that level.  Until then we get paid nicely to wait.

[chasesfish]

Of course I post this and see Fifth Third drop down to an 8.7x PE.   Bought some at 25.50 and immediately put a sell order in to sit when it gains 10%.   In the meantime they'll pay me 3.65% to wait at a sub 40% payout ratio

[chasesfish]

JPM released earnings.

I saw a flat balance sheet, an increase of $350mil in loss reserves, yet they still retired 1.9% in outstanding stock this quarter even after the increase in their loss reserves.  Not a huge increase in reserves, but an increase none the less when the balance sheet didn't grow

[talltexan]

That should be a place in which Varoufakis agrees with conservative/Austrian/Libertarian economists in the US (who still believe that the money supply doesn't really affect long-term economic growth).

I don't follow.

In great depression money supply was inelastic due to gold standard and hence nobody could do anything about decreased money velocity -> deflationary effect -> one of the many reasons why it was so protracted and severe despite relatively dis-joined economies in that day.

On the other hand, breaking the gold standard (which was a good thing to do long term) was immediately followed by a long period of stagflation in the 70's. I haven't done enough reading on this - but seems like sudden change in money supply led to the stagflation.

Wouldn't you think money supply has a major effect on consumer confidence? More so on the deflationary side than inflationary - but present on both ends? So it would be a major factor - no?

Or are you alluding to some left-wing dogma that I might be missing.

US also went off of the gold standard briefuly during the 1930's (instead of stagflation, this basically saved the economy). It was re-instituted as part of Bretton woods.

But my original comment was more about YV having to acknowledge that the US economy will grow faster because its population will grow faster.

[chasesfish]

WFC was anywhere from mixed to bloody.

Hard to make sense of the quarter's EPS with a $1.6bil reserve for retail sales practices litigation (this may be fun that doesn't end for years).

Nice that they repurchased 3.3% of outstanding stock for the quarter, kept EPS from being pounded too badly.  Own a little but not wanting to add more

[ctuser1]

But my original comment was more about YV having to acknowledge that the US economy will grow faster because its population will grow faster.

I have noticed that he is strangely resistant to acknowledging the effect of demographics.

He does sometimes acknowledge that Europe needs immigrants (which would be close to the standard left-wing dogma), but then turns around and discounts the role of demographics in Greece's (and rest of Europe's) economic problems. He went as far as to say "GDP per-capita is what matters, not total GDP".

Suffice to say I did not find his POV on this topic (demographics' effect on economics) to be as persuasive and well thought out as the fiscal/monetary policy issues.

[ctuser1]

BAC released results. YoY profits are down, probably because of lower interest rates.

But stock jumped up 2.24% anyway!

Mr. Market sure is weird!

[chasesfish]

BAC released results. YoY profits are down, probably because of lower interest rates.

But stock jumped up 2.24% anyway!

Mr. Market sure is weird!

BofA had a great quarter IMO.  Headline earnings are off because of an impairment to goodwill they're taking based on an old joint venture with First Data, the slow legacy behemoth being eaten alive by Paypal and Square. 

Bought back 2.78% of total stock while net interest margins only declined 1.6%.  Total loan portfolio is up a little bit, credit quality/chargeoffs are stable, total income up slightly.   

Moynihan is running a good ship over there.  Disclaimer:  I bought close to $60k of their stock on the last drop, in hindsight I was a little greedy on my lower limit prices.  I don't know if it sees those prices at this buyback pace. 

[ChpBstrd]

Seems a bit late in the business cycle to be loading up on financials, which work best after writing off the dumb loans they made during the past bull market.

[chasesfish]

100% agree.

The question is where are *banks* in their stock price relative to the market cycle.   Nobody has wanted to touch them for years, PEs fell from averaging 16-17 to 8-10.  We might be closer to the bottom now.

I could be wrong too, the market cycle rhymes but it doesn't repeat.  My prediction is banks have a pretty soft bottom in this recession, so much has been risked out of their lending.  Margin compression is going to stink though

[ChpBstrd]

I like the idea of single-digit PE’s and high dividends. However, as an observer of 2000 and 2008, I also recall that the conversations back then turned to value metrics and dividends near the inflection points and all the way through the trough. It’s as if everyone knew the cycle would soon turn, and yet imagined themselves sailing through it because they had virtuously purchased an intrinsically valuable income stream. There was even talk of the dividends covering any market fluctuations.

As it turns out, they had purchased garbage on a lever. The dividends were cut, the PEs went negative, and former cash cows like C, AIG, and UBS were reduced to penury.

The apparent cheapness of banks reflects a discount for their very high leverage and economic sensitivity. It’s a value trap.

[chasesfish]

@ChpBstrd - Your premise isn't wrong, I can only give you my opinion on why this existing/pending slowdown will not hurt banks at the same level as 1991 or 2008.

Banks did okay in 2000, it was the 1991 recession that crushed them with commercial real estate exposure plus the investment banks cleaning up the junk bond / LBO era.  Then 2008 was so deep in housing it crushed all of those who even did things right.  I worked at one of the few banks that remained profitable and didn't participate in the garbage, but our book of business at the time included loaning to homebuilders, residential developers, and suppliers.  It was so deep for so long eventually they all shut down.

Our modern "bank" setup has only had three recessions, twice they got crushed and once were fine.  From living inside there, my opinion is the regulatory cycle on credit risk is closer to twenty years.  It takes a generation of bankers and regulators aging out before mistakes are repeated, then its slightly different mistakes.   It may take longer for the credit risk cycle to change this time, given that all of congress was called in by the treasury secretary and said "approve this bailout or else".   They don't forget.   Heck, there was a perfectly reasonable proposal started in 2013 that said banks with twice the minimum capital required could get reduced oversight and it got watered down in 2017 and ended up at something else. 

There was near zero improvement in risk monitoring through 2016.   The new administration appointed new regulatory heads, they slowly get in there and chip away, but thats a slow process, there will be other appointees, and it'll take a generation before things are forgotten.


It may be a value trap or a value opportunity.  Challenge of being a value investor.  I like emerging markets too at a 12x PE in high growth areas of the world, but they haven't done anything in years too

[ctuser1]

The new administration appointed new regulatory heads, they slowly get in there and chip away, but thats a slow process, ...

From my vantage point the dilution of rules are anything but slow.

Many examples. Most recent one I can dig up:
https://www.federalregister.gov/documents/2019/07/22/2019-15131/regulatory-capital-rule-simplifications-to-the-capital-rule-pursuant-to-the-economic-growth-and

Specifically, the big banks had been preparing for years for the much more stringent "Basel III" rules to start coming into effect from 2019/2020. I'm not sure how all that was legally provisioned, but what I *do* know is that millions of $$ were spent at big banks (and I personally profited from that spending) to ready up systems for the much more stringent rules that were supposed to come into effect in several tiers between 2019 to 2021.

Well, sometime in 2018, all those systems aimed at "future" regulations got quietly shelved!!

Banks are now penalized *comparatively less* for taking high-leveraged derivative positions. From there to full-on proprietary speculation and "privatization of profits and socialization of losses" is not too far!!

The mistake is assuming that the US politicians operate under the regular set of common sense. Follow the money and think what benefits the billionaire investors - and the activities of the far right wing make 100% sense, and "moderate right wing" (a.k.a. modern-day Democrats) make 50% sense.

[chasesfish]

I'll also add this to my comments, if we get a 1.9%+ 10 year treasury again, I'm probably selling my bank stocks and buying long term treasuries.  I'm all about risk adjusted return

[chasesfish]

I was working on my portfolio percentages/concentrations this morning.

Its worth disclosing that only 9.6% of my holdings are in individual bank stocks.  1/3rd of those total holdings sit inside a bank that is really more like owning a bond in Bank of Hawaii.   They are an overcapitalized bank holding a giant bond portfolio in an oligopoly market.  Didn't cut their dividend in the recession.  The next largest is Bank of America, then everything else is small.

[Buffaloski Boris]

I was working on my portfolio percentages/concentrations this morning.

Its worth disclosing that only 9.6% of my holdings are in individual bank stocks.  1/3rd of those total holdings sit inside a bank that is really more like owning a bond in Bank of Hawaii.   They are an overcapitalized bank holding a giant bond portfolio in an oligopoly market.  Didn't cut their dividend in the recession.  The next largest is Bank of America, then everything else is small.

I looked at BOH the last time bank stocks were really on sale and picked BAC instead. I gotta wonder in these days of app driven banking how reliable their moat really is. Seemed quite pricey comparatively speaking. Still does.

Then again, I’m a bottom feeder who is leery of PE ratios above 10. 🤣

[frugal_c]

Sold my PNC yesterday.  It's getting reasonable priced and so I'm moving to a new bank investment.

[chasesfish]

@Buffalo Chip - The comment about app driven banking (retail specifically) is why the Big 4 banks have all of the net new account activity while everyone else has negative net new accounts.

BOH's moat is more about commercial banking.  The state is basically a 4 bank Oligopily between Bank of Hawaii, First Hawaiian (BNB Paribas, who also has another regional US bank sub in Bank of The West), American First, and Central Pacific.

I remember this article around the time I invested in them:

https://money.cnn.com/2012/11/28/pf/banks-hawaii/

BofH is more like a bond.  You made the better stock choice in BofA.

@frugal_c - Would love to hear what you replaced it with.  I can't find any value right now outside of an emerging markets fund

[frugal_c]

A sliver into cfg. Most split between fitb and RF.

[Buffaloski Boris]

@Buffalo Chip - The comment about app driven banking (retail specifically) is why the Big 4 banks have all of the net new account activity while everyone else has negative net new accounts.

BOH's moat is more about commercial banking.  The state is basically a 4 bank Oligopily between Bank of Hawaii, First Hawaiian (BNB Paribas, who also has another regional US bank sub in Bank of The West), American First, and Central Pacific.

I remember this article around the time I invested in them:

https://money.cnn.com/2012/11/28/pf/banks-hawaii/

BofH is more like a bond.  You made the better stock choice in BofA.

@frugal_c - Would love to hear what you replaced it with.  I can't find any value right now outside of an emerging markets fund

Mmmmm. I agree that BAC was the better deal at the time and my thinking has since evolved on banks. I pulled my limit order on RF a few weeks ago and future investments will likely be in the top 4, and probably only a couple of those. Why: this industry, especially the small banks, are crying for a large consolidation and shake out. The small and regional banks can’t compete on tech, and private finance seems to be growing. The small banks aren’t bringing much to the table. So the safe bet is to bet on the obvious survivors. The top 4.

Amongst the big 4, BAC is still my first choice, when on sale. WFC? Uhhh, no.   JPM is a great bank but relatively pricey, and I wonder how much of their success is tied to Jamie Dimon. That leaves C, which in candor I haven’t spent much time looking at. I guess I should at some point.

As to where to find value, I agree that some EMs are probably the place. Domestically, only value I see is in the hated industries like tobacco, coal, mining, and oil/gas. I’m into those for my fun stocks, but those are really speculative any way you slice it.

[chasesfish]

You have to go against the herd to find value.

You can stretch a little bit past the Big 4 with a good investment thesis.

I own a little Pinnacle Financial.

Would consider PNC and USB at the right price.

[frugal_c]

If you are looking for value I would look in the UK. It's got issues but there are some good companies there and dividends can be generous.

[ctuser1]

I don't know about exact places to look for value. However, I read something a year ago (forgot where) and the premise stuck with me.

Technology tends to create one or two behemoths, and a few second tier also-run's. Look at any specific domain:
1. Search - Google, with some also-runs.
2. Cloud - Amazon and Microsoft. Others are also-runs.
etc. etc.

The online part of banking seems ripe for such technology driven consolidation. That will be much slower because of regulatory barriers - but happen it likely will!! 

With this, I am more worried about having that one, or two, winners in my bag when the winnings do happen in the next decade or so. Will it be one of the big four? Or some unknown newcomer (Beal Bank?) that innovates and steals everyone's thunder? That is the question that keeps me awake at night.

UK Banks, yes they look to be good value. But I just don't see a world where *they* are the ones *doing* the taking over.

--------------------------------

There is economic research on this relentless consolidation driven by technology. When I read this piece a year ago, I looked up and found there are some models that show that extreme inequality (one person holds all the wealth, everyone else are serfs at his command - kind of a setup) *is* one possible stable equillibrium (in an economy filled with Home Economicus) that maximizes economic efficiency.

I used to worship efficiency. I now think about caveats first.

[frugal_c]

UK Banks, yes they look to be good value. But I just don't see a world where *they* are the ones *doing* the taking over.

I think this was based on my comments.  I actually don't invest in UK banks (leverage still seems high for those I looked at).  I am investing in other industries.  I don't want to throw any names out here as investing is a part-time thing for me and I rely heavily on diversification.  I would just say if you start looking you will find quite a few companies with decent dividends (3%-7% is fairly normal), growth, low leverage and low pe ratios.

[chasesfish]

I can't touch European banks, at least a while back they classify any EU sovereign debt as a "risk free" asset and not calculated into how much leverage they're allowed to have. 

[Buffaloski Boris]

UK Banks, yes they look to be good value. But I just don't see a world where *they* are the ones *doing* the taking over.

I think this was based on my comments.  I actually don't invest in UK banks (leverage still seems high for those I looked at).  I am investing in other industries.  I don't want to throw any names out here as investing is a part-time thing for me and I rely heavily on diversification.  I would just say if you start looking you will find quite a few companies with decent dividends (3%-7% is fairly normal), growth, low leverage and low pe ratios.

I’m also into UK equities right now, although through a UK specific index fund. I think that they’re a pretty good deal right now.

I’m mostly dividend agnostic, except I do think companies in mature industries should pay them. Not a big fan of stock buybacks except in banking where regulation pushes that.

[Buffaloski Boris]

Here’s an interesting opinion piece comparing C to BAC.
https://seekingalpha.com/article/4298282-citi-today-bac-tomorrow?source=2800:read_now&dr=1#alt2

[chasesfish]

I sold down a few hundred shares of BAC and put a limit order in to buy it back if it falls by 10%.   

Market doesn't seem to have much volatility right now, not a lot of fun to be had.  Bought a little more in long-term treasuries a few days ago when the 30-year got near 2.3%

[talltexan]

Indeed $BAC has had a nice run. I live in Charlotte, NC, so I feel like my house is already basically a bank stock, as they and Wells Fargo are the two largest employers.

[chasesfish]

Indeed $BAC has had a nice run. I live in Charlotte, NC, so I feel like my house is already basically a bank stock, as they and Wells Fargo are the two largest employers.

The combined BB&T/SunTrust entity is about to become a top 10 employer in the city too...

[talltexan]

truth

[Katmandew]

Greetings everyone.  I am a banker at a community bank and I was drawn to this subject a while back and have been reading it fairly regularly with some interest.  I am also a new member to the 2020 FIRE Cohort, so my nerves are twitchy.  Any reason the issues articulated in this article should make me (or any of us) nervous?  Should I just tune out this type of stuff?  Truth is, there are some weird things going on in the over-night markets, and no one I talk to seems to really understand it.  Thoughts?

https://www.realclearmarkets.com/2019/10/26/the_federal_reserve_is_in_stealth_intervention_mode_227652.html

[TreeTired]

I remember thinking BAC was simply a cash/profit producing machine, borrowing cheap, lending rich, producing nonstop profits. I bought in at around $45/share in 2007.

[chasesfish]

Greetings everyone.  I am a banker at a community bank and I was drawn to this subject a while back and have been reading it fairly regularly with some interest.  I am also a new member to the 2020 FIRE Cohort, so my nerves are twitchy.  Any reason the issues articulated in this article should make me (or any of us) nervous?  Should I just tune out this type of stuff?  Truth is, there are some weird things going on in the over-night markets, and no one I talk to seems to really understand it.  Thoughts?

https://www.realclearmarkets.com/2019/10/26/the_federal_reserve_is_in_stealth_intervention_mode_227652.html

There's some truth to this, but people have also been pointing to the fed and predicting a crash for years because of it.  Instead I think we end up with economic malaise like Europe and Japan dealt with.  Eventually there's a chance of deflation, but I think the fed (like the ECB) will print money at all costs to prevent it. 

What does your portfolio look like going into retirement?  I set mine up for a lower than market return in exchange for lower volatility.  Its really beta that crushes most investors - Have something really bad happen, then make an unfortunate mistake of selling to stop the pain.  You also don't have work to distract you and you can look at your portfolio all day.

What that looks like for everyone is different.  For me, I dialed back equities to 60-65% when I left my job and put the remainder in cash and longer term treasuries.  I also am shying away from VTSAX in favor of value stocks.  I'm fine if I don't own the upside of next Amazon if that keeps me out of a tech crash.  Give me real companies with real cash flow.  They'll go down in a crash too, but at least there's an intrinsic value and cash coming to me while I wait it out.   I've also chosen treasuries over a bond fund - I just don't think I get enough return right now to take credit risk.  The worse that happens with some of my 10 and 30 year treasuries is the economy does really well and rates go up.  My low risk investment under performs while the 65% stocks do really well.  I can accept that lower return to not risk going back into banking.

[Buffaloski Boris]

Greetings everyone.  I am a banker at a community bank and I was drawn to this subject a while back and have been reading it fairly regularly with some interest.  I am also a new member to the 2020 FIRE Cohort, so my nerves are twitchy.  Any reason the issues articulated in this article should make me (or any of us) nervous?  Should I just tune out this type of stuff?  Truth is, there are some weird things going on in the over-night markets, and no one I talk to seems to really understand it.  Thoughts?

https://www.realclearmarkets.com/2019/10/26/the_federal_reserve_is_in_stealth_intervention_mode_227652.html

My crystal ball isn’t working. But I can tell what I remember of the GFC. It hit fast and it hit hard and we did not have advance warning necessary to take action to protect our assets. Anything happening along those lines today would probably play out even faster. Upshot: we will probably not see the truck coming at us.

I don’t pretend to know what is causing the surge in overnight rates, but I can make a wild guess: overseas banks. US banks generally speaking are in pretty good shape. However a lot of overseas banks are zombies. As interest rates go down I think these banks are being further squeezed. I question whether it’s possible for banks to make money doing commercial lending in a negative interest rate environment. 

In the end, though, I think it’s all sort of academic. Bad things are going to happen at some time given a long enough horizon. The question is what to do about it? I agree with chasesfish for the most part. Keeping equities exposure to 40-70 percent is prudent. I’m not a fan of corporate debt right now. Too much risk for too little potential gain.  I think cash is a fine place to be for significant portion of my asset allocation. Within equities, where I depart the from many in the FI community is in pointing out that US equities are expensive both historically and as compared to other countries. Long term, I think that the US market overall will prove relatively unattractive as compared to some international markets.  In a word, the thing I’m looking for long term is diversification.