Weeds of the Financial Garden

March 13, 2023

As I sit here in a doctor’s waiting room, I contemplate the financial world as it exists, and has existed. The paradoxes, the contradictions, and the obvious weaknesses in the system. Like any problem, we, as inquisitive human beings, like to dig and root out the problem, and either get rid of it, or at least avoid it as much as possible. I liken it to gardening. The bane of every gardener’s existence seems to be weeds. Weather is an issue, but we can’t control that, but we certainly can dig out and kill every life sucking weed attacking our flowers and veggies. It’s a never ending battle, and some years seem to be worse than others. And it seems to me that, much like weeds, when the markets really suffer, it seems to be the same underlying issue.

All of us remember 2008. In hindsight, the problem was simple. In the late 90’s, the government “encouraged” banks to make home loans to everyone, even if they couldn’t afford it. The banks knew this was a bad idea, but they weren’t about to let this pass without making a ton of money. The lent the money to everyone and their dog (literally), but knowing that a good many of these loans would default, they packaged these loans as mortgage bonds and sold them to investors. However, the banks weren’t able to unload all of them, and voila, a mortgage banking crisis decimates the US economy. The banks, however, didn’t pay the price. They received taxpayer bailouts, and their CEO’s padded their own accounts with million dollar bonuses, while millions of taxpayers lost their homes, and millions more lost their jobs.

So, why the history lesson? Because as Churchill repeated (with a minor edit) in 1948, “Those who fail to learn from history are doomed to repeat it.” It seems we have another banking crisis on our hands. Two decent sized banks failed last week, and the entire banking sector is getting “repriced” (think prices down…..a lot). Now we have no idea how widespread this will become, or if at all. What we do know is that we have sold our banking positions for the time being. After 2008, we, as a firm, made the decision to not own the big 5 banks in any of our portfolios. The question is do we now eliminate the entire banking sector from consideration? Not to hyperbolize, but in a financial sense, it feels like being in an abusive relationship. It sure seems to us that any big financial crisis seems to be predicated on bankers doing something to someone, and frankly, it’s getting to be a consistently sad story.

Bankers: The weeds of the financial garden.