Black Coffee: Banking On Trust

It’s time to sit back, relax and enjoy a little joe …

Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.

I’ve got another busy weekend ahead of me, so let’s get right to this week’s commentary …

The first duty of a man is to think for himself.

– Jose Marti

The last duty of a … banker is to tell the public the truth.

– Alan Blinder

Credits and Debits

Debit: Did you see this? Since 2020, Americans’ personal savings have plunged almost 90% from $4.85 trillion to just $626 billion. That is an astounding figure and one that dovetails with additional data that shows rising credit card debt over the same period. If these two data points are the result of Americans trying to maintain their standard of living in the current economic environment during the last two years – and it almost certainly is – then many households may be in for an extremely rough ride in 2023 … in more ways than one:

 

Debit: Maybe the drawdown in personal savings explains why the rush for Black Friday deals and discounts was a complete failure this year. And the number of holiday shoppers is noticeably less from previous years. In fact, shopping mall parking lots are nearly empty in most places. Then again, when you consider it costs twice as much to fill up your tank than it did two years ago, or that grocery bills are up 50% for many people, I guess the lack of holiday shoppers fighting to save a few hundred bucks on a big screen TV really shouldn’t be so surprising. And neither should this:

Debit: Speaking of high grocery bills, California’s participation in the federal Supplemental Nutrition Assistance Program hit an all-time high in July at 4.9 million people as of July. Today, almost 1 in 6 Californians are still on the program. What is more confusing is that the last time food stamp participation was this high, the Golden State’s unemployment rate was over 16%. Currently, it’s at 3.8% – that’s the lowest level since at least 1976. Very strange. Then again, we don’t need this guy to tell us those numbers don’t add up:

Credit: One thing is certain: The floundering economy is no surprise to both FedEx corporate officers and Amazon founder Jeff Bezos. After all, it was just two weeks ago that Bezos suggested that households would be smart to avoid buying big ticket items at this time because the economy was going to face tough sledding in 2023, while FedEx actually made the ironic move of laying off workers ahead of the holidays instead of increasing them. The question is: How bad do things have to get before the Fed abandons its fight against inflation and caves in to pressure from both Wall and Main Streets by lowering interest rates? And on a related note:

Credit: On the other hand, the inimitable MN Gordon says, “Whether inflation has been contained for good, or whether the Fed will pivot sooner rather than later, really doesn’t matter.” That’s because Gordon says rising interest rates are already doing their damage. That being said, he notes that the damage is also beneficial; in this instance, it’s beginning to “correct the mistakes of over two decades of brain damaged monetary policy.” Uh huh. Which is why the Fed still has miles to go before it sleeps. Not that anyone seems to care.

Credit: By the way, Gordon also points out that, “Over the next six to 12 months, return of principle should have a greater bearing than return on principle for the prudent investor. Rising interest rates have made parking money in Treasuries a possible option. Five percent (on a 1-year Treasury bill) will still result in a real inflation adjusted loss. Nonetheless, at the end of the year duration you get your entire principle back, plus the 5 percent.” How times have changed. If you offered investors a guaranteed nominal 5% return three years ago, they would have laughed at that number.

Credit: In other news, macro analyst Tuomas Malinen is warning that “the ‘mother of all economic crises‘ is brewing which may erupt as early as this winter, thanks to … massive imbalances that are now built into the global economic and financial systems, and over-indebted government and corporations.” What would such a crisis look like? Well … in addition to an inflation crisis which is already here, Malinen says, “this crisis is likely to also include: a financial crash; a banking crisis; a sovereign debt crisis; a corporate debt crisis; and a currency crisis.” As you can see, Tuomas is famous for his calm, even-keeled and understated opinions.

Debit: Frankly, Malinen may be on to something, as more than 2 in 5 small business owners in the US say they couldn’t pay the rent on time for the month of November – that includes 57% of beauty salons, 45% of gyms, 44% of retail and 44% of restaurants. Yikes. As for those of you looking for potential explanations as to why so many people are suddenly having trouble paying their landlords, well … this might be one reason:

Debit: Meanwhile, the fallout from the failure of Sam Bankman-Fried’s FTX crypto exchange continues. But it’s important to keep in mind that our fiat currency deposits in even the largest regulated banks aren’t as secure as many believe. In fact, they’re subject to the same run on deposits that crypto depositors are with any of these large crypto exchanges. And while the Federal Deposit Insurance Corporation (FDIC) insures bank depositors up to $250,000 per account, backed by $25 billion in assets and a $100 billion line of credit from the US Treasury, that doesn’t look very impressive when one considers that there are more than $9 trillion of insured deposits.

Credit: Of course, people love to conflate “stores of value” with cryptocurrencies in the same way that, as financial analyst J. Kim reminds us, “people equate ‘regulated’ with safety – which is quite naïve given the fact that ‘regulated’ Cyprus banks stole more than half the money deposited in their banks in 2013. The true difference in safety comes only from the perception that traditional bank accounts are much safer, thus making them less likely to be subject to a bank run.” Well … until they’re not.

Debit: Expounding on the public’s misguided trust in the banking system, Kim provides this very real example: “If you have $1 million in any large ‘respected’ global bank, try walking into that bank, unannounced and withdrawing 10%, or just $100,000 in cash. If a traditional bank account is really a thousand times safer than a crypto exchange account, (then) no bank customer should ever have a problem withdrawing 50%, let alone 10% of their entire account amount on any given day, completely unannounced.” Very true. These days, most banks seem to choke on modest requests of even $5000.

Debit: Here’s the bottom line: As soon as you deposit any money into a bank account, that money is technically no longer yours because it’s an unsecured loan to your depository. Of course, the bank will tell you to relax because you can call in that unsecured loan at any time. So sleep well tonight. After all, everybody knows bankers have no reason to lie.

By the Numbers

Among the fifty US states, here are the ones with the highest and lowest credit card delinquency rates this year, based upon data from Experian and the Federal Reserve Bank of New York:

50 Nevada (90-day delinquency rate: 12.00%)

49 Florida (10.66%)

48 Arkansas (10.23%)

47 Texas (9.43%)

46 Arizona (9.40%)

5 Vermont (6.03%)

4 Minnesota (5.78%)

3 Washington (5.77%)

2 Utah (5.66%)

1 Wisconsin (5.34%)

Source: UpgradedPoints

Last Week’s Poll Results

What is your budget for Christmas gifts this year?

• $501 to $1000 (30%)
• $251 to $500 (21%)
• More than $1000 (18%)
• $101 to $250 (16%)
• $0 (8%)
• $1 to $100 (6%)

More than 1800 Len Penzo dot Com readers responded to last week’s question and it turns out that about $500 appears to be the median Christmas gift budget this year. In the Penzo household, this year our gift budget is slightly more than $500, but that figure has been falling for several years now – and I expect it to be under the median next year.

If you have a question you’d like me to ask the readers here, send it to me at Len@LenPenzo.com and be sure to put “Question of the Week” in the subject line.

The Question of the Week

[poll id="451"]

Useless News: Morris the Miser

Morris realized he needed to purchase a hearing aid, but he was unwilling to spend a lot of money. “How much do they cost?’ he asked the salesperson.

“That depends,’ the salesman replied. “They run from $2 to $2000.”

“Then let’s see the $2 model,” said Morris.

So the salesperson went to the backroom. Soon after, he returned and put the device around Morris’ neck. “You just stick this button in your ear and run this little string down to your pocket,” the salesman instructed.

“Okay,” said Morris. “But how does the thing work?”

“For two bucks it doesn’t work,” the salesperson replied. “But when people see it on you, they’ll talk louder.”

(h/t: Wilson)

More Useless News

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Letters, I Get Letters

Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach out to me at: Len@LenPenzo.com

After reading an ancient article of mine about the old Coke Rewards program, Mike left this comment:

When I had 4000 points I tried to make a deal: I would relinquish all 4000 points for two Coke Zero 400 tickets at Daytona. Well, I never got a reply back. Maybe they didn’t want to answer me, but at a buck a Coke that’s $4000! Figure that out you all! Makes no sense!

Actually, Mike … it makes lots of sense.

If you enjoyed this edition of Black Coffee and found it to be informative, please forward it to your friends and family. Thank you! 😀

I’m Len Penzo and I approved this message.

Photo Credit: public domain