All things in moderation

A smart friend, in a private chat so I won’t ID, made the following observation…

It is a great point. Generally speaking, banking 101 tells us that periods of rising rates should be good for banks because they can reprice loans faster than they need to reprice deposits. Credit card rates and other floating loans can reprice instantly. Some deposits don’t need to be repriced at all (checking accounts for example), and most consumers are generally not chasing an extra five basis points of interest on a savings account.

To put it another way, rate hikes provide banks with the cover to charge more for money they are selling, without necessarily requiring them to pay more for the money they are buying.

All banks are different. And it doesn’t play out nearly as neatly in the real world. But the overall idea is solid.

Yet, this time around, rising rates are just annihilating certain banks.

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So, what is going on?

There are probably lots of reasons why it is happening. For one, as I said before, things are never as simple as the up good, down bad, oversimplification presented above. Also, some banks made stupid decisions. Credit Suisse is its own special situation in that it has been a terrible bank for decades. It feels like the Swiss just decided to put the crisis to good use to solve that long-standing problem.

But above all else, it feels like the real lesson here is one we have spoken about before: The last cycle went on for too long; so long the banks forgot it was a cycle. They rode the wave, forgetting that waves inevitably ebb and flow.

The most frequent question I got on my Silicon Valley Bank post is: Surely management couldn’t have been that stupid? And indeed, they weren’t that stupid. (Pay no attention to me using the word “stupid” in the title. Can’t imagine where anyone would have gotten the idea they were stupid.)

I’d wager management knew full-well the potential disastrous consequences of their asset allocation decisions. But they also knew it had worked so far and would continue to work until it didn’t. The longer it goes on working, the more we believe it will continue to work into the future. Pendulums inevitably swing back hard, but they take time to swing.

I hate it when people talk about “good recessions” or “healthy corrections,” but truth is we humans need the occasional reminder of our hubris and proof we are not immune to cycles. One simple explanation of this bank crisis is that rates stayed low for so long, a generation of bankers didn’t get the proactive reminder that all good things do, eventually, come to an end.

Bankers aren’t stupid. But they were lulled into a complacency that caused at least some of them to do stupid things. We investors are not stupid. But we are just as susceptible to being lulled, and taking unwise actions as a result.

Emerson put it best, saying “A foolish consistency is the hobgoblin of little minds.” (That’s very much a lowercase “f” in foolish for my friends from that world.)

We need to be constantly questioning what we believe. If we challenge a belief and reconfirm it, it becomes stronger and better developed. And if it doesn’t stand up to the challenge, it is a good thing we asked the question.

As an investor with far too many stocks in my portfolio to really stay on top of each and every one of them, this can be an issue. But I do try at least a couple of times a year to ask myself why each stock is in the portfolio. And I do occasionally sell. I sometimes make poor decisions as I evaluate, but I think there is a net benefit in at least asking the questions.

Don’t get too complacent. Don’t get too full of yourself when things are going well, or too negative when things aren’t going so well. And definitely ask the questions. Remember that all things, good and bad, come in waves and exist as cycles. This too shall pass.

We talk about this a lot when things aren’t going well as a way to build ourselves back up. We need to also be mindful of it when things are going great.

Otherwise, the most obvious things can catch us totally off guard.

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