The Financial Riddler -- 4/14/23

Don't cheat!

The last Riddler was nine days back. A lot changed since then. Former President Trump was indicted for something “big” that’s not yet clear, but probably involved violating NY State election law in paying hush money to a porn star. Al Capone landed in Sing Sing for tax evasion. The lesson. You can escape all of the legal system some of the time and you can escape some of the legal system all of the time, but you can’t escape all of the legal system all of the time. Will Trump’s new campaign slogan be: Make Rikers Great Again!

Oh, and we just learned that all manner of top secret classified docs were given to a 21 year old who, apparently, decided to share them with his gaming buddies who decided to share them with the entire world. The 21 year old got hold of these docs, not by visiting Mar-a-Lago, but by being told. “Congrats, you have a top security clearance. Have at our nation’s secrets.”

Then, we had a Texas judge place a national ban on an FDA-approved abortion medication that’s been used for 20 years and is approved by the American College of Obstetricians and Gynecologists and the World Health Organization. The judge, who spent, I think, zero days in medical school, decided the FDA made a mistake. “It’s unsafe,” he said. His ruling is being appealed to the Supremes — the folks who just overturned Roe v. Wade.

Not to be upstaged, Florida Governor DeSantis today signed a bill banning abortions beyond six weeks of pregnancy. This is before many women realize they are pregnant. Then we have a pro-choice judge elected by a landslide in Wisconsin.

Wherever you stand on abortion, what all this portends is either the death of the Republican party, which doesn’t get that most voters, even in Florida, favor a reasonable right to abortion. Or it’s the economic civil war I forecasted back in June. How’s that work? Well, when we plan our summer vacation, we cross off places like Florida and Idaho if we are for the right to choose. And if we are deSantis, we stay far away from Wisconsin and Massachusetts. (Too bad, Ron. The folks in Martha’s Vineyard would love to meet you.)

Oh, right, I tried to suppress this. We had 15 mass shootings across the country in the last nine days. But bear in mind the biblical saying, Guns don’t kill people. People kill people. Call me stupid, but I’d say it’s People, psychotic people, with guns who kill people. Maybe, just maybe, we should modify the right to bear arms to the right of non-psychotics to bear arms. Can we all agree on that? Marjorie?

Anyway, enough fun news, let’s get to work.

1. Time was, actually on March 30th, that the banking system had over $18 trillion in deposits, $8 trillion of which were uninsured. How much in uninsured deposits have fled the banking system since Silicon Valley Bank faced a massive tweeted run by its uninsured depositors?

   a. $1 trillion

   b. $2 trillion

   c. $3 trillion

   d. $4 trillion

   e. $6 trillion

And the answer is …

$1 trillion. Well, actually a bit less. That’s a huge drop in just two weeks. But there must be a lot of really bright company Chief Financial Officers and brilliant rich people who have decided that their uninsured deposits are safe because, hey, Treasury Secretary Yellen made clear that uninsured bank deposits may not be safe. The Chief Financial Officer of Roku had $487 million, over a quarter of its liquid assets, in SVB when it failed. Had Secretary Yellen not made an exception and ordered the FDIC to insure all of SVB’s uninsured deposits, Roku could have lost, well, $487 million. I asked my undergraduate macro class whether if they were on the Board of Roku, they would have fired Roku’s CFO for leaving the company so exposed. To a person, they said yes. Then we checked online. The CFO was, indeed, fired (actually, allowed to resign). So, what about all the other CFOs who still are keeping billions of their companies’ money in uninsured deposits? Should they be fired? Well, kinda, sorta, definitely, absolutely, 100 percent. The real puzzle here is why even a penny of uninsured deposits is still sitting in FDIC insured banks, half of which we have learned have assets that, when valued at market, can’t cover their liabilities. I.e., they are bankrupt. Of course, lots of the uninsured deposits have been moved to the large, systemically important banks. But they now have a very high share of uninsured deposits and their assets are also, in many cases, worth less than their debts. A run on these banks would put the FDIC under water and require the Fed to print money for the FDIC. That could generate high inflation expectations and lead to everyone trying to withdraw their deposits before prices rise. By the way, if any large company needs a CFO to help move their uninsured deposits to safety, do give me a call.

2. What share of Japanese young people say they will never marry?

   a. 3 percent

   b. 7 percent

   c. 9 percent

   d. 15 percent

And the answer is …

Roughly 15 percent. In 2021, Japan had a only 811,604 new births — a record postwar low. And only 501,116 Japanese married, another record low. The only way that countries like Japan, S. Korea, and Singapore may still be around in a century is via test tube babies with all the questions and scary implications such a “solution” entails. Maybe these countries need to stage Love-Ins. Seemed to work in the Sixties.

3. In the U.S. 15 cities are connected by high-speed rail. How many cities in China are so connected?

   a. 13

   b. 18

   c. 51

   d. 444

   e. 900

And the answer is …

It’s 900. The U.S. is in the process of being eclipsed by China economically and militarily. We might want to look for a way to get along with China rather than treat this country, with which we engage in massive trade, as our worst enemy. Yes, the Chinese are threatening us in reaction to our threatening them in reaction to their threatening us in .. But the policy we’re following isn’t working for either country.

4. Is inflation over the past three months a lot lower than over the past six and past 12 months?

   a. Yes

   b. No

And the answer is …

Not really. Thorsten Slok, in last week’s podcast, said all three values are roughly 5 percent. The market is predicting 2.3 percent inflation starting over the next five years and thereafter. It may be right, but if inflation stays a 5 percent, a hot dog in five years will cost 27 percent more than it does today. That means that your pension, if it’s not inflation adjusted, will permanently lose 27 percent of its purchasing power.

5. Is the Fed fighting inflation or just accommodating inflation?

   a. Fighting

   b. Accommodating

And the answer is …

Others will differ, but I’d say it’s accommodating. The real federal funds rate, adjusted for inflation, is zero — essentially the same value as a year back. When Paul Volcker raised interest rates to combat the inflation of the 1970s, he raised the real federal funds rate to 3 percent — that’s 300 basis points higher than the current value.