PUL$E: 〽️The Great Reset

Over the last year, we have seen the FED aggressively raise rates to slow or stop the excessive inflation in the system. And it is working for the first time in a very long time.

But it feels like they are using a machete when they should be using a scalpel.

The FED has been way too aggressive.

Therefore, my sentiments have changed drastically in the last eight months. Both because of the Fed's actions and because I am actively buying and selling businesses and real estate. And here is what I know from first-hand experience:

The only way to make sense of the deals is to put an unreasonable amount of cash down or offer prices well below the asking.

The Reality

We are in a standoff. And I do not believe interest rates are going to go lower. At least not for a very long time.

I believe we have moved into a new economic cycle.

The Unspoken Truth

Most are unaware that the debt markets control asset prices. The median home price in 1987 was $87,000. While interest rates were between 7.5% and 10.13%Since 2000 rates have been 8% and 3.72%x and since 2010, the rates have not been above 5.14%Meanwhile, the median home price got as high as $386,000 in 2022.

The "inflation" we are experiencing today is a byproduct of 20+ years of cheap money. However, we can no longer get cheap money. Therefore, something has to give. And I believe that will be asset prices.

This is similar to what happened in 1987 during the Savings & Loan crisis.

The Savings & Loan Crisis of 1987

In the 1960s, savings and loans institutions (S&Ls) efficiently provided stable, long-term mortgage loans to middle-class Americans; through fixed-rate mortgages and short-term deposits. However, in 1966, Congress introduced Regulation Q, which aimed to reduce S&L costs and allow lower interest rates on mortgage loans. As a result, Regulation Q capped the interest rates S&Ls could pay savers at 5.5%, which created an illusion of stability for banks and led to complacency among consumers, bankers, and regulators.

So when Paul Volker decided to start raising interest rates in the 1980s to combat inflation, interest rates reached almost 20%. However, savers were capped at a measly 5.5%. As a result, they went looking for better yields in money market funds that were offering much higher returns.

And a wave of deposit withdrawals drained liquidity from the banks. This forced S&Ls to sell assets in order to get more liquidity. However, no one was willing to buy their low-interest rate-bearing bonds. In turn, the S&Ls were forced to pay higher rates for savings accounts, but it was too late; borrowing at twice the cost of earning is unsustainable.

When all else failed, the banking institutions turned to the Federal Savings and Loan Insurance Corporation, but they could only cover $6 billion of the negative net worth of $150 billion. As a result, nearly 1,400 S&L banks failed

6 Reasons the 1987 S&L crisis happened

• Deregulation: In the late 1970s and early 1980s, the U.S. government implemented deregulation policies aimed at encouraging competition and reducing the regulatory burden on the financial sector. This led to the relaxation of lending standards and allowed S&L institutions to engage in riskier investments.

• High-interest rates: The Federal Reserve raised interest rates significantly in the late 1970s and early 1980s in an effort to combat inflation. This increased the cost of borrowing for S&Ls and made it difficult for them to earn profits from their traditional mortgage lending activities.

• Risky investments: As a result of deregulation and the search for higher profits, many S&Ls began to invest heavily in speculative real estate ventures, junk bonds, and other high-risk investments. These investments ultimately proved to be disastrous for many institutions when the real estate market crashed and the value of these assets plummeted.

• Fraud and mismanagement: The lax regulatory environment allowed widespread fraud and mismanagement within the S&L industry. Many executives engaged in self-dealing, insider transactions, and other unethical practices that further exacerbated the financial problems of their institutions.

• Inadequate oversight: The regulatory agencies responsible for overseeing the S&L industry, such as the Federal Home Loan Bank Board, were ill-equipped to deal with the rapid growth and increased complexity of the industry. This lack of effective oversight allowed problems to fester and worsen over time.

• Government guarantees: The Federal Savings and Loan Insurance Corporation (FSLIC) insured deposits at S&L institutions up to a certain limit. This created a moral hazard, as S&Ls had an incentive to take on excessive risks, knowing that the government would cover any losses.

If I was a betting man, which I am, we are very close to experiencing another S&L-like crisis. History has a funny way of repeating itself.

This is why it's so important to spread your savings across multiple banks, but why it's even more important to own businesses and control your own outcomes. Sitting in cash, banking on savings, and not owning assets is the fastest way to go broke in a cash crunch.

Today, they don’t call it a savings and Loan program; they call it fractional banking.

The Moral of the story is that we are not in a recession, we are rolling over into a deflationary era, and cash will be the most valuable asset you can have as asset prices reset.

Best,

Samson

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