As the Legal ‘Storm’ Rages On

As the Legal ‘Storm’ Ravages On

Watching the historical indictment and subsequent arraignment of a former president of the United States was indeed shocking. Yet, given the goings-on in Washington over the past eight years or so, and the hyper-destruction of norms we had hitherto taken for granted, I guess it shouldn’t be all that surprising.

For the past few weeks, the Donald Trump-Stormy Daniels hush-money payment has been front and center in the minds of even the most casual news observers. And while I would love to have never heard about this sordid issue again, reality dictates differently.

Interestingly, this morning, I heard from one reader (Sam S.) who reminded me that he liked my take some years ago on the deeper issue involved when someone doesn’t keep their word, whether it’s a former adult film actress or a group of people who want to breach the agreements made by the Constitution and its citizens.

Frankly, I hadn’t even thought of what I had written nearly four years ago to the week. But as a refresher, I reread The Deep Woods issue that Sam reminded me of. Today, I want to republish that piece for you, as what it said about the sacrosanct concept of “word is bond,” and the failure of so many to live that principle in earnest, is one of the deepest wounds afflicting society. And those thoughts still very much apply to current events of the day.

So, the following is my article, “The Recent Storm of Contract Dysfunction,” which was originally published March 28, 2018, (all references therein apply to that time period)…

Word is bond.

That’s the phrase that keeps coming to mind for me amidst the two most prominent political stories of the day — the Stormy Daniels affair and the latest push to restrict gun rights.

Now, “word is bond” is urban slang shorthand for the longer phrase “your word is your bond,” meaning that if you give someone your word, then you also are giving them your solemn promise.

In the case of Stormy Daniels, the former adult film actress gave her legal promise (which included the signing of a non-disclosure agreement, or NDA) that she would not reveal the details of her alleged affair with Donald Trump. In exchange for that promise, Daniels would receive the sum of $130,000.

That payment was made, yet Daniels still talked.

Her recent appearance on “60 Minutes” was just the latest violation of the word-is-bond ethic.

Now, I want to go on record here as saying that I think the whole Stormy Daniels/Donald Trump incident is repugnant on many fronts. And I am most definitely not arguing for the propriety of Mr. Trump and his associates in this matter.

I also am not an attorney, so I can’t attest to the relevance of any lack of signature on the agreement by Donald Trump via an alias, or to whether that legally invalidates the contract. These legal intricacies are all extraneous to my ethic.

What I am saying is that when you make an agreement with another party, and then you violate your part of the agreement, you are guilty of what I consider the most serious ethical breach… i.e., the breach of “word is bond.”

In my own business career, I have signed many NDAs having to do with the trade secrets, methods and practices of my employers. And if I were to violate those agreements, I would rightly deserve the social and legal scorn coming to me.

Call me old fashioned, but I believe the principle that “word is bond” is sacrosanct.

I also believe that when it comes to our rights as Americans, the word-is-bond ethic also applies.

That’s why it’s been disturbing to me to see the latest push for a restriction of our Second Amendment rights.

The March for Our Lives protest last weekend in Washington, D.C., and in dozens of cities around the world, has focused attention on ending the horrific gun violence and mass shooting incidents that afflict our society.

And while I sympathize and agree with the need to make our society safer for all Americans, I also can’t help but think that the focus on restricting gun rights is a violation of the word-is-bond ethic in the United States Constitution.

You see, the Founding Fathers were intent on creating a nation free from government tyranny.

That’s why it is no accident that the ability to speak freely (the First Amendment) as well as the means by which to protect oneself from government-initiated physical force (the Second Amendment) are bedrock foundations of a tyranny-free state.

I see the Constitution as a kind of word-is-bond agreement between the Founders and future generations of Americans. A word-is-bond agreement that ensures and safeguards our liberties better than any other document in world history.

Now, however, there are those who wish to essentially default on that agreement because they think it will make society safer.

Indeed, even a former Supreme Court justice thinks we should alter our Constitutional bond, arguing that the Second Amendment is a “relic of the 18th century.”

Of course, part of the brilliance of the Constitution is the provisions in it that allows Americans to alter that agreement provided there is enough consensus.

So, if we want to have that debate, then we should have it.

If we do, I suspect we’ll discover the true wisdom in the concluding text of our Founders’ promise, “…the right of the people to keep and bear Arms, shall not be infringed.”

Word is bond.

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ETF Talk: Size Matters with this Big Bank ETF

In last week’s issue of The Deep Woods, I, along with my special market insider who helps me put together the Eagle Eye Opener, began to speculate whether the regional banking crisis that brought Silicon Valley Bank and Signature Bank to their financial knees had ended.

Unfortunately, as you know from reading about “The Trouble With Banking Tribbles,” the banking crisis is far from over. Indeed, JP Morgan Chase CEO Jamie Dimon recently said as much in a very long annual message to shareholders.

“The market’s odds of a recession have increased,” Dimon wrote. “And while this is nothing like 2008, it is not clear when this current crisis will end. It has provoked lots of jitters in the market and will clearly cause some tightening of financial conditions as banks and other lenders become more conservative.”

At the same time, though, the banking crisis doesn’t mean that we should flee the sector for safer and calmer waters. Indeed, there is always the potential for a future rebound somewhere.

For instance, the Roundhill Big Bank ETF (NASDAQ: BIGB) is an exchange-traded fund (ETF) that tracks the performance of the largest and most liquid U.S.-listed banks and capital markets issuers. The fund primarily uses swaps and forwards to provide exposure to them.

The fund’s managers select six to ten large, liquid, financial service firms that are “globally systemically important banks” (GSIBs). In the wake of the 2008 financial crisis, these banks are required, by law, to carry higher capital ratios than non-GSIB banks. The largest institutions are then identified based on market capitalization and trading volume. The stocks in the fund are equally weighted and rebalanced quarterly.

Although it does not always do so, the fund can also invest in U.S. Treasury securities, money market funds or other short-term instruments, as well as common stocks, American Depositary Receipts (ADRs), swaps and forward contracts.

The fund’s current portfolio includes JPMorgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Bank of America (NYSE: BAC) and Citigroup (NYSE: C).

Since this ETF is so new, its track record and performance history are limited. For now, it is difficult to accurately assess its long-term potential and risks; however, the underlying holdings in the fund are, in fact, the biggest and most stalwart firms in the banking space. So, if you are a long-term bull on America and capitalism (and I am), then this basket of banks certainly offers the prospect of long-term capital appreciation.

The fund’s expense ratio is 0.29%, and it has $4.1 million in assets under management.

Of course, interested investors should carefully consider the potential risks and drawbacks before making any investment decisions.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

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In case you missed it…

The Trouble with Bank Tribbles

Fans of the Sci-Fi classic “Star Trek” no doubt know about “The Trouble with Tribbles.”

That was the title of one of the most memorable episodes from the original TV series, an episode that first aired on Dec. 29, 1967 (for all you Trekkies out there). The episode also happens to be my favorite, and for two reasons.

First, it featured cute, fluffy and purring creatures called “tribbles,” which resembled the teddy bear hamsters I raised as a kid. The second reason it’s my favorite is because it warns us that “trouble,” left unchecked, has a way of multiplying exponentially.

That’s what happened with the tribbles, as the trouble they caused was their rapid reproduction and their near takeover of the USS Enterprise. Sure, a few are cute, at first, but when they multiply and then eat up all of the ship’s food, well, that’s a big problem.

This episode reminded me of another “trouble” of sorts, only this trouble is far from science fiction. Unfortunately, this trouble is fact, and it might just be trouble that’s far bigger than we suspect. In fact, the trouble with banks and the recent bank failures is that they could be about to multiply just like those adorable tribbles!

In today’s issue of my daily market briefing, Eagle Eye Opener, my “secret market insider” provided a detailed look of what he calls, “the true indicator of banking stress.”

Let’s check that out now, as the following excerpt will explain to you why the trouble with banks might not be over just yet. More importantly, you’ll discover the one indicator I’m watching to make sure I know if this situation is going to multiply like tribbles…

Determining whether the regional bank crisis is over is the most important near-term issue for markets right now. And while analysts in the financial media often give opposite opinions, luckily, we have a resource that tells us whether the crisis is getting worse or better, and so far, it’s getting worse.

There are currently two loan programs from the Fed that are specifically designed to help regional banks that are experiencing liquidity issues. The first is the Fed discount window, where banks can pledge U.S. Treasuries to access liquidity. It’s been around for a long time, although it’s likely very few people have paid attention to it since the beginning of the great financial crisis (when all of us were paying attention to it!).

The second program is new, the Bank Term Funding Program, which the Fed just created to alleviate the liquidity issues that brought down SVB and SBNY.

Think of these two programs as “bridge loans” the Fed extends to banks which need cash. These are ­­not facilities that banks use regularly, and just like a company (or person) needs a bridge loan to “stay afloat,” there’s a stigma in the banking industry attached to using these facilities. Put simply, if a bank is using them, it’s a sign it is in trouble, which can make the problem substantially worse. Here’s why this matters.

The usage amounts of these two facilities are updated every Thursday after the close. We literally can see how many banks are using both the discount window and the BTFP, and just like any emergency loan program, the higher the usage, the worse the problem.

• Since the start of March, the usage of the Fed’s discount window has spiked from about $4 billion (prior to the crisis) to $110 billion.
• Since the creation of the BTFP, use has surged from $0 (because it didn’t exist) to $12 billion two weeks ago, to $53 billion last week!

So, between the two programs, the Fed has had to lend $160 billion in quasi-emergency loans to banks since the beginning of March. As the chart here shows, that dwarfs what was needed during the pandemic, and equals what was needed during the great financial crisis!

As the old adage goes, “Put your money where your mouth is.” So far, banks’ money and their mouths are telling us that the regional bank crisis is not over, and if anything, may be getting worse under the surface.

Now, that does not mean that stocks are going to automatically fall based on this data. These Fed “bridge loans” are designed to prevent bank runs, and so far, they are working. But the fact that more is needed each week implies that stress is very much in the marketplace, and as such, I think that should directly push back on the idea that, while there have been no more bank failures since SBNY, we are not out of the woods yet!

Looking forward, we will be watching this weekly release, and the analysis here is simple: The bigger these numbers get, the worse the stress (even though it may not seem that way on the surface).

That isn’t a reason to dump stocks or withdraw money from a bank, but it is a reason to resist the urge to think that the crisis has totally passed. As long as these borrowing numbers are rising, it has not.

Conversely, if these numbers drop, that’s a sign that stress is legitimately easing, and it will mean the lower probability of a looming bank-inspired “air pocket” in stocks.

For insights like this delivered to your inbox every trading day by 8 a.m., then you must check out my Eagle Eye Opener, right now.

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A Jeffersonian Preference

“I prefer dangerous freedom over peaceful slavery.”

— Thomas Jefferson

We all want freedom, and we all want peace, but the world is such that both are not usually open to us equally and at the same time. Freedom offers us the capacity to succeed and to fail, and there is no guarantee of either outcome. Of course, you can submit to a higher authority, give up your freedom and become a slave, and if your masters are so kind, perhaps they’ll grant you peace in the process. Unfortunately, history is a long and ugly odyssey of the enslaved suffering under neither freedom nor peace. And so, I choose freedom, despite its peril.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

P.S. My colleague, Jon Johnson, will be holding a free teleconference on “How We Closed 19 Winning Trades in a Row.” The event will take place on April 12 at 2 p.m. EST. The event is free to attend, but you have to register here to be able to attend. Don’t miss out!

P.P.S. Come join me and my Eagle colleagues on an incredible cruise! We set sail on Dec. 4 for 16 days embarking on a memorable journey that combines fascinating history, vibrant culture and picturesque scenery. Enjoy seminars on the days we are cruising from one destination to another, as well as dinners with members of the Eagle team. Just some of the places we’ll visit are Mexico, Belize, Panama, Ecuador and more! Click here now for all the details.

In the name of the best within us,

Jim Woods