Not Banks Again!

Here we go again. The government is bailing out Silicon Valley Bank (SVB). I have to believe this is a political bailout since tech firms had their money in this bank. I could be wrong, but it smells suspicious. Call me a conspiracy theorist if you want, but when bank management makes dumb decisions, then why should taxpayers bail them out? It removes all worries from other banks. "Well if we mess up, don't worry, the government will save us, so we can take some additional risks." It sets a horrible precedent.

I thought after the 2008 fiasco, we had new protections and capital requirements in place. With this in mind, how did SVB loan money primarily to startup businesses as the primary means of earning income from their loan portfolio? On the face of this, it doesn't take a smart person to figure this out. If 87% (quoted on the internet, so take it with a grain of salt) of their loans were to startups, then common sense would tell you that not all of these startups will be successful. They are startups for Pete's sake! Recessions have a tendency to lower the water level, so we can see where all the bodies are buried. I expect more banks to be exposed in this manner. Stay tuned.

I suppose startups need business loans to get going, but a good rule of thumb is to not keep the bulk of your assets in business checking, business money markets, business CDs and business savings accounts. In fact, with the use of ACH, a smart way to do things in my humble opinion (not investment advice) would be to only keep the minimum amount of money in the bank and keep the rest in multiple brokerage firms like Charles Schwab & Co., Inc., TD Ameritrade, or Fidelity. (In other words, diversify your accounts.)You can move money to your bank when needed, like for payroll or loan payments and other business needs. Even though, you can get FDIC insurance up to $250,000, I would recommend no more than $100,000 at any one particular FDIC insurance bank. Why? 2008 is my reason. Did you ever think the 2008 financial crisis would happen?

If you have personal money at a bank, then I have to ask why? You really do not need to keep large amounts at banks. They want you to, believe me, but you should not feel obligated to keep large balances at the bank. The main reason is that they do not pay you doodle squat in interest on savings and money markets, or CDs for that matter. They certainly do not pay you anything on your checking. It will take managing, but I would suggest (not investment advice) that you keep $10,000 or less at the bank. If you have larger monthly bills, then perhaps a little more. As you pay your bills, then move money over from your brokerage account to your bank via ACH (in one day) and replenish your bank account that you pay bills with. Of course, the brokerage firms have a bill paying service, too. This way, you may not even need a bank at all. Most banks have gotten out of the personal loan business. People tend to go to credit unions for personal loans today. I can tell you that I do not need a bank for much of anything except to pay bills.

Perhaps it is time to re-evaluate your need for a bank and whether you want to keep a lot of money in one.

Another Week of Fed Speak

 Almost without fail, every time the Federal Reserve Chairman speaks, the stock market declines. This week Chairman Powell reiterated that they will continue to raise rates for as long as necessary. I wonder why we need the Fed at all. A case in point. If a consumer has been putting items on their credit card at 10%, then their rate climbs to 15%, the odds are that they will limit their spending. Where does the Fed fit into this? They do not. That is the rub.

We do not need the Fed raising rates, because consumers will restrain their spending on their own when rates go up. Look at housing and mortgages. When rates go up, it does not affect cash buyers. It only affects people who need a mortgage to buy a house. At a 4% mortgage, they could perhaps have afforded a 2,500 square foot home. However, at an 8% mortgage, they may only qualify for a 1,800 square foot home. Unless they are in a forced move situation like a job transfer, then odds are they will wait until interest rates decline to buy more house for the money. Again, where is the Fed in this scenario? We do not need the Fed to tell us when to buy a mortgage. We can make that decision all on our own.

Therefore, the Fed raising rates only throws gasoline on the fire. The Fed's actions will do a few things, none of which are good for the average person. They will force people to pay higher interest rates. They will force large corporations to lay people off. They will force banks to quit loaning money or make it very restrictive to qualify for loans. The Fed does all this in order to get interest rates to decline. Yes, they raise rates for an extended period in order to get interest rates to decline. In other words, they inflict severe financial pain on most Americans. It is stupid. (My favorite word.)

Later this month, it is now expected that the Fed will raise interest rates another 0.50%. They do not need to do this. People will stop spending on their own. Rates are already high enough to curb credit card spending and mortgages. When the Fed raises rates, they put banks at financial risk, because people with 24.99% credit card rates are going to say, "To hell with it. I ain't paying this no more." The banks who issue credit cards will have to go after these people and their recovery prospects are diminished. There is only so much money banks will spend chasing down bad credit card debt. Most banks will write it off, then sell it to bill collectors who will hound the hell out of people trying to collect.

In my opinion, we do not need the Fed if this is their planned outcomes. Ron Paul was right.

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1099-K for 2022 Tax Return

Starting January 1, 2022, the IRS has a new form, the 1099-K which you may receive if you accept more than $600 from payment processors like Zelle, Venmo, PayPal and others. The IRS wants to match your 1099-K to the income that you report on your 2022 tax return. The problem is you may be simply doing a convenience transaction for a roommate for example. Imagine that your roommate transfers half of their rent to you ($750) and you pay the full rent ($1,500) to the landlord. Did you really have $750 in income? According to the form 1099-K you do. If you do transactions like this, then you will be having to explain that you used that $750 to pay your roommates rent. Complications that you do not need.

A better way to do it is to have your roommate send $750 to the landlord and you send $750 to the landlord, then you do not have this phantom $750 in 1099-K income problem to deal with.

Here is a link to a 1099-K form with instructions.

https://www.irs.gov/forms-pubs/about-form-1099-k

Where Have I Been?

Working hard for clients everyday. Sometimes you have to step back and re-evaluate things that you are doing to see what makes sense and what does not. I was thinking about changing my blog site to match the look and feel of my company's website (marianfs.com), but after careful consideration, the time commitment in doing this would be too much. I would essentially have to code every blog post and with this Google Blogger site, I do not have to do that. Therefore, I have decided to stay with Google Blogger as my Blog site. I will post regularly in the future. Sorry for the missed time, but I suspect that you have been busy living your best life and not the least bit worried about my blog.

Thanks.

Rick M. Allison, CFP®