Is this the Next Bank Collapse?

Charles Schwab can’t escape rumblings about financial sturdiness … bond yields are gyrating … shelter inflation cools … 300 million jobs to be impacted by AI

It’s a busy news cycle. Let’s cover some stories that are likely to be impacting your portfolio.

If you bank or invest with Charles Schwab, be aware of what’s happening

Schwab might be the next bank in trouble.It’s the same story that you’ve heard so far – massive unrealized losses in the bond portfolio combined with lower revenues are putting pressure on the company’s financial sturdiness.Here’s Bloomberg with the details:

…The questions around Schwab won’t go away……As the crisis drags on, investors are starting to unearth risks that have been hiding in plain sight.Unrealized losses on the Westlake, Texas-based firm’s balance sheet, loaded with long-dated bonds, ballooned to more than $29 billion last year.At the same time, higher interest rates are encouraging customers to move their cash out of certain accounts that underpin Schwab’s business and bolster its bottom line.It’s another indication that the Federal Reserve’s rapid policy tightening caught the financial world flat-footed after decades of declining rates.Schwab shares have lost more than a quarter of their value since March 8, with some Wall Street analysts expecting earnings to suffer. 

To be clear, Chief Executive Officer Walt Bettinger has been adamant that Schwab is healthy and can handle the fleeing depositors, saying “There would be a sufficient amount of liquidity right there to cover if 100% of our bank’s deposits ran off.”While this is reassuring, it raises eyebrows that Schwab can’t escape the headlines and speculation about being the next shoe to drop in the banking sector.A better understanding of Schwab’s business model helps explain. Back to Bloomberg:

At the root of Schwab’s income is idle client money. The firm “sweeps” cash deposits from brokerage accounts to its bank, where it can reinvest in higher-yielding products.The difference between what Schwab earns and what it pays out in interest to customers is its net interest income, among the most important metrics for a bank.Net interest income accounted for 51% of Schwab’s total net revenue last year…After a year of rapidly rising rates, there’s greater incentive to avoid being stagnant with cash. While many money-market funds are paying more than 4% interest, Schwab’s sweep accounts offer just 0.45%.

Given these numbers, it’s no wonder investors have been pulling money out of Schwab. If you’re a customer, keep your eyes on this.

On a related note, after nosediving following the banking implosion, bond yields are gyrating, making Louis Navellier uncomfortable

As Bloomberg just pointed out, so much of the banking crisis boils down to soaring bond yields (which means plummeting bond prices) destroying the value of bank bond portfolios over the last year.Well, in the wake of the recent banking chaos, bond yields finally fell off a cliff.From March 1st through last Friday, the 10-year Treasury yield plummeted from 4.07% to 3.37%.Meanwhile, over roughly the same period, the two-year Treasury yield cratered from 5.06% to 3.76%.These are massive collapses.But this week, yields are ticking higher again after going through some major volatility. As I write Wednesday morning, the 10-year yield is up to 3.59% and the two-year is at 4.10%.For more, let’s jump to legendary investor Louis Navellier from his recent Platinum Growth Club Special Market Update:

Treasury bond yields are up quite a bit, especially on the two-year note.I’ll be honest with you – that’s not good. The market is losing its mojo a bit…I don’t like to see the treasury yields gyrate the way they’re gyrating. It means things need to settle down a bit.Treasury securities are the most liquid securities in the world, so when those things are swinging, it means the world hasn’t made up its mind what course we’re on.

Louis’ concern about bond yields doesn’t contradict his bullishness that we profiled in yesterday’s Digest. That confidence is about specific sector performance. For example, regular Digest readers know how much Louis likes top-tier energy stocks today.But broadly, so much of our economy rides on the back of these bond yields, making their movement important to watch. We’ll keep you updated.

Meanwhile, this week has brought more good news on the inflation front

Both involve shelter costs. This is important as shelter costs make up about 33% of the headline Consumer Price Index (CPI) number.First, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, home prices cooled in January. They were up only 3.8% on a year-over-year basis.Even more encouraging, they dropped 5.6% from December.Here’s more from CNBC:

Prices have been falling for seven straight months, but the decline was a bit smaller in January. That was likely due to a brief drop in mortgage rates and a resulting jump in sales.

And it’s not just home prices. For our second piece of good news, rents also are declining.Back to CNBC:

The rental market has seemingly flipped: After prices surged throughout 2021 and most of 2022, they’ve declined almost as quickly for five of the last six months, a new rent report reveals. U.S. rent prices decreased by 0.25% from January to February 2023, according to the latest data from rental listings site While it’s a smaller decrease than in previous months, it brings the U.S. monthly average rent price down to $1,937 — lower than its August 2022 peak of $2,053.

As we’ve pointed out here in the Digest, due to how the calculations are performed, it takes longer for these price reductions to show up in the overall CPI number. However, we should finally see some of this cooling trickle into the data this spring.Keep your eyes on Wednesday, April 12, which is two weeks from today. That’s when the next CPI report comes out. We’ll be watching to see what the headline number is, which will offer the latest clues about Fed policy.

Finally, while we cheer the advancements of AI, some very bright thinkers are concerned

Experts are already suggesting that we’ll look back at last fall’s introduction of ChatGPT as the line-in-the-sand that ushered in the transformative age of accelerated Artificial Intelligence.We’re standing at the edge of mind-blowing technologies. For example, I just listened to a podcast suggesting we’re within months of a new AI tool that will allow a user to type in details of a live-action scene he/she wants to see, and AI will then create a bespoke video of that scene.Consider the ripple effects relating to jobs for just this one AI-manifestation alone…How will it impact actors? Directors? Deep-pocketed investors who were once required to finance movies? The people operating the cameras? The entire film crew?Well, according to a new study from Goldman Sachs, AI stands to impact 300 million jobs worldwide.For perspective, the entire population of adults in the U.S. (over age 18) comes in at roughly 259 million. So, imagine AI impacting the entire U.S. labor force and then some.From CNBC:

“Significant disruption” could be on the horizon for the labor market, a new Goldman Sachs report dated Sunday said. The bank’s analysis of jobs in the U.S. and Europe shows that two-thirds of jobs could be automated at least to some degree.In the U.S., “of those occupations which are exposed, most have a significant — but partial — share of their workload (25-50%) that can be replaced,” Goldman Sachs analysts said in the research paper.Around the world, as many as 300 million jobs could be affected, the report says.

Back to just film, here’s how educational filmmaking website CinedD concluded its analysis of the situation:

Even if all of this seems a bit spooky at times, new AI tools can and will affect the field of video creation significantly.This is an unstoppable process now, so it’s up to us whether we keep up and integrate this technology into our workflows to augment creativity or boycott it and possibly stay stuck in the past.

While I don’t want to get too off-track, I have to mention the enormous investment opportunities related to AI. Our hypergrowth expert Luke Lango of Innovation Investor has been writing about them extensively.Here’s Luke describing the amount of data we’re going to create in the coming years, and how that impacts one of his favorite ways to play AI:

The world isn’t going to take any steps back in terms of this “smart” pivot. No. We love our smartphones, smart cars, and smart watches too much.Instead, society will accelerate in this transition. In 2020, the world produced about 47 zettabytes of data. That number is expected to grow by more than 45X to 2,142 zettabytes of data by 2035…My favorite way to play the AI revolution [and this data creation] is through AI software companies, since they are more specialized and singularly focused, and therefore, offer higher upside potential.

Luke has his eye on a specific enterprise AI software company that is essentially democratizing applications so that any company, of any size, can scale AI capability throughout the enterprise.You can learn more about this AI powerhouse and access more of Luke’s AI research right here.

Returning to “caution” with AI, the impact on jobs could be just the tip of the iceberg according to some of today’s sharpest thinkers

This morning, news broke that Elon Musk, Apple co-founder Steve Wozniak, and 2020 presidential candidate Andrew Yang have all signed an open letter from the Future of Life Institute, urging AI Labs to pause on creating the next generation of AI beyond GPT-4.From the letter:

Contemporary AI systems are now becoming human-competitive at general tasks, and we must ask ourselves: Should we let machines flood our information channels with propaganda and untruth?Should we automate away all the jobs, including the fulfilling ones? Should we develop nonhuman minds that might eventually outnumber, outsmart, obsolete and replace us? Should we risk loss of control of our civilization?Such decisions must not be delegated to unelected tech leaders.

The letter goes on to request that AI Labs pause next-generation AI development for at least six months.I’m reminded of how Louis Navellier often ends his market update podcasts…

“Fascinating times we’re living in.”

We’ll keep you updated on all these stories here in the Digest.Have a good evening,Jeff Remsburg

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