In this podcast, Motley Fool senior analyst Bill Barker discusses:
- Regulators seized First Republic Bank and it was sold to JPMorgan Chase.
- JPMorgan Chase CEO Jamie Dimon commented about the state of play in banking.
- Norwegian Cruise Line beat low expectations in the first quarter.
Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp continue their conversation with Motley Fool senior analyst Bill Mann about the "new normal" of investing in China.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on May 01, 2023.
Chris Hill: We've got another bank going under and another new normal for investors to consider. Motley Fool money starts now. I'm Chris Hill joining me in studio, Motley Fool Senior Analyst Bill Barker. Good to see you. Thanks for being here.
Bill Barker: Thanks for having me.
Chris Hill: Once again. The news fairy showed up over the weekend. First Republic Bank was seized by regulators and then sold to JPMorgan Chase. JPMorgan Chase will assume all of First Republic's $92 billion in deposits and there are a few different ways we can go here. I'm going to start with something you and I talked about earlier today, which was on a call with analysts, CEO Jamie Diamond said and I quote, there are only so many banks that were offsides this way. There may be another smaller one, but this pretty much resolves them all. This part of the crisis is over. That last part of his comment. This part of the crisis is over, that headline is being splashed everywhere and look, Jamie Diamond is one of those, he's on the shortlist of people you want to hear from any time there is any large economic challenge happening, particularly if it's in banking. But I'm not pro-banking crisis. I'm very anti-banking crisis and yet I think some people are reading too much into that quote.
Bill Barker: Breaking news. You are not pro banking crisis for the listeners out there who had been confused about that. I'm going to take the position that this is not news ferry deliverance in the sense that the news fairy only comes by surprise. This follow the usual script at the end of last week, I think we saw this weekend the regulators, the big banks are going to get together, figure out a public-private solution to this and there's enough time because of the weekend to do this without seeing the price of First Republic collapse even more as it had been in the process of doing daily toward the end of last week. I think that we saw something very much like this occurring by the end of last week. This part of the crisis is over because First Republic, that part of it is now no longer in crisis. How many banks do you think there are in the US?
Chris Hill: It's got to be more than 11.
Bill Barker: I googled it so I have the definitive information through the Internet, maybe. But it is like 4,000 some and we've lost three in the last couple of months.
Chris Hill: We've lost three in the last couple of months. It's three of the four largest bank failures in US history have happened in the last couple of months. Again, I'm not pro-banking crisis, but I'm also not immune to the fact that, wow, three out of four have happened in the last two months. Look, Diamond is usually the smartest person in the room, particularly when it comes to banking. His comments do put me somewhat at a ease, but he also put out there the very real possibility that this is going to happen again. The only solace is that It's not going to be as bigger bank as First Republic.
Bill Barker: I think the other part of solace to take from here is that the problem, again, appears to be as a little bit more nuanced than this, but they bought too many bonds that have gone the wrong way, they're on the other side of the trade. If the problems that you have were created by buying, I'll make up a number of $50 billion worth of bonds, which are now on the open market because of the direction of interest rates since you bought them now worth 40 billion. You're in a lot of trouble, but the system is not and if over the weekend, JPMorgan and others had to figure out what is really going on here. What is this worth? It's pretty easy to tell, they bought the bonds. The bonds are obviously worth a lot less than they paid for them. That's a big problem for them because that's what they did with all the deposits they got. That was mistake, they shouldn't have done that. But I can tell you exactly how much these bonds are worth today. I don't have to sort through thousands of awful mortgages over the weekend which was what was going on in the 2008 real banking crisis. As long as we're in the realm of you took your money, you put it into bonds. Bonds have gone the wrong way. They're absolute to the penny. We can tell what they're worth right now, what you can get for them on the open market. That's an individual banking crisis rather than a systemic one.
Chris Hill: We really seem to be well past the point of worrying about big banks being too big. Because JPMorgan Chase bought a not insignificantly sized bank for a ham sandwich and now JPMorgan Chase becomes even bigger.
Bill Barker: As we discussed earlier, I was trying to shoehorn my political philosophy learnings in college into this equation by bringing up the prisoners dilemma, which I think is at the heart of all of these runs on banks and not to google it if you need. But basically, the dilemma is a couple of prisoners, they'd been caught. Both of them don't know what the other one is going to do and if they both confess, they seem to be getting a better deal than if they don't confess because they don't have enough information. This is what's going on in the banking world with the runs on the banks is that everybody has presented with this bank mega wonder, I may have too many uninsured deposits there. I should just move my money to a safe place. The safe places are the big banks because they've been highly regulated, subjected to the stress tests over the last 15 years now since 2008. As a market, as a society, today, we seem to accept that that regulation has delivered sound banks at the top of the pyramid, the too-big-to-fail banks. They've been identified, they're scrutinized and then you go down a layer and there's less scrutiny obviously SVB, First Republic, big enough that they should have had more scrutiny than they had. But there's this separate category of the highly regulated stress test ones and at the moment, everybody agrees that the regulators are on top of that and not too worried about them getting bigger.
Chris Hill: Because of all that, do you think the big banks as a group are more attractive as stocks than they were six months ago? Not necessarily relative to regional banks because a lot of things are more attractive than regional banks at the moment. But just because of this new phase that we've entered into, for people like me who don't own shares of any of the big banks, are these more attractive investments in your mind?
Bill Barker: Well, the competition is, although still, let's call it 4,000, most of those 4,000 are not really relevant to the business prospects where the biggest banks. Yeah, they're getting bigger. I think that the discount rate on them in terms of investor, how investors look at them, and what return they want in the investment is probably improved by some of the competition going away in First Republic's case, JPMorgan has just acquired a lot of apparently rich people's bank accounts and they know how to serve rich people I think at JPMorgan. Maybe there'll be another one. Pac West is the next domino that people are lining up to topple because of this. Not necessarily the same profile on the bonds, but close enough that people are asking questions that a couple of more in the list. But I think that the list is known and is being studied, the regulators are looking at it. Doesn't mean if everybody, again, prisoners dilemma, if everybody who's depositor at Pac West decides to pull their money, nothing's going to stop them. That is the end of the bank, if everybody wants their money back.
Chris Hill: It sounds like that's exactly what you're recommending?
Bill Barker: No. Unlike you, I'm aware there's a question about whether you are pro-banking crisis or not or was until today, if we can believe you, I've always been out there as against banking crises.
Chris Hill: It's well-documented. Let's move on to a completely different industry. Shares of Norwegian Cruise Line Holdings up five percent after first-quarter results were better than expected and to be clear, while the revenue was actually higher-than-expected, Norwegian Cruise did not post a profit, but the loss was smaller than expected. It's all about expectations. This is one of those businesses you look at the long-term chart, the entire public life of Norwegian Cruise Line Holdings and it's not great.
Bill Barker: Well, it looks OK until COVID and then boy, it does take a straight line down. It's been fighting ever since to get back there as things opened up a little bit, people felt better after the vaccine rollout. You saw the stock get back to about half of what it had been pre-COVID and it really just hasn't taken it hasn't been able to get the full bookings that it needs for the business model to work. They lost money last quarter. That's in part by a factor of seasonality. You don't have as many people cruising. You don't have as many families taking cruises as you're going to have in the summer. Spring break was late for because of where Easter was in the calendar. Seasonally they're about to enter the better part of the year and actually make some money again. We'll see they need society to be past COVID. Some people are, some people aren't. There are enough who are booking cruises now that it looks like they're going to return to profitability, but they've got some debt that they've taken on because they and the other cruise lines which are also up in sympathy today, had next to no revenue. Big boats that have to be maintained. The boats are giant holes in the water that you throw money into. They had to throw money at these things, keep them clean and ship-shaped. That's not free.
Chris Hill: It seems a little bit like the movie theater industry where it's just maybe they would be better off and therefore more profitable if there was more scarcity. If there are fewer movie theaters that people who actually want to go to theaters they're going to go and you don't need as many multiplexes. With Norwegian Cruise, Carnival Cruise, and these other cruise lines, maybe the path to profitability is just to get smaller.
Bill Barker: Well, certainly the supply increased a lot going into 2020. The boats just get bigger and bigger. The size of them is now, I'm just going to be conservative and say they're like four or five times the size of the titanic. Not like that's not an exaggeration. The titanic dwarfed by modern cruises. That's a lot of beds. As you say, the supply outstrips, demand went to zero. Supply was at an all-time high. They're still looking for people to come back. Are they helped by things like the last night's episode of succession which somewhat belittled cruises.
Chris Hill: If you're going to share as well, we had an episode on Saturday with Gillies talking with Ricky Mulvey about investing lessons from succession. I was very clear at the beginning of that episode like this is your spoiler alert warning,so if you haven't caught up then save the episode for later, which, look, it's a Jim Gillies episode. Everybody's got to listen to it later that you put it in a time capsule when it's Gillies, but you're not going to say anything else about last night succession are you?
Bill Barker: No. Not really. There is a glancing shot at Land Cruisers in the episode, which really has nothing to do with the actual cruise industry and what it derisively, call it a land crews is really a shot at Disney's story living concept for 55-plus retirement communities with Disney themed opportunities and it. These are aimed at people like yourself who are now over 55 and thinking about whether that's how they want to spend their remaining years.
Chris Hill: I think you and I will continue this conversation offline. Bill Barker, always great talking to you. Thanks for being here.
Bill Barker: Thanks for having me.
Chris Hill: Apple's CEO, Tim Cook, is trying to pull off the balancing act of moving some iPhone production out of China while still trying to remain on good terms with political leaders in the central government. Bill Mann, Alison Southwick, and Robert Brokamp continue their conversation about new normals after the pandemic with a focus on investing in China.
Allison Southwick: Welcome to part two in our series on the new normal with Bill Mann. Let's talk about the new normal for China. I remember when I first started the Motley Fool over a decade ago speaking of Elvis.
Bill Mann: China, China, China.
Allison Southwick: China, China, China. That's all anyone talked about. China was all the rage. Not only was it providing labor and goods for US-based companies and their consumers, but capitalism was taking hold. Oh, it's going to be amazing. Chinese-based companies were presenting such an exciting opportunity for investors and Bill you wrote on fool.com, "The arguments for investing in China have always been based on some form of its 1.4 billion people and the economy is growing like wildfire. But the Chinese government is now openly hostile to private industry and willing to kneecap companies, it'd be used as a threat." Also your words from more present day Bill. So what happened?
Bill Mann: Holy counted I write that, that was amazing. It has always been the case in China as a command economy that the interests of the government and yours had better align if you're going to be invested there. That comes from being individual investors who have absolutely no power all the way up to companies like Tesla and Apple, you had better make sure that your interests and the government's interests are aligned, which is why now you see so many countries and some of it is political and then some of it was driven by the pandemic when China shut tight. Companies like Procter & Gamble who have 17,000 products had 16,000 of them that were suddenly at risk because of Anna ingredient that they only got from China.
Allison Southwick: Wow.
Bill Mann: So there is a reality there that the pandemic showed what a single point of failure of having so much of your production in one country can do to you, there is absolutely a sense of, let's near-shore, let's at least duplicate what we're doing in China. The political part I think is also reality. I think China is more authoritarian than it has been in the last 40 years. It is closing in on being a one-person ruled country. That's meaningful. I'd just simply means doubling down on, if you are trying to make money from China, you had best to make sure that you are making money from China and China is making money along with you. As individual investors, it's really, really, really hard.
Allison Southwick: So one of your articles that I read, you're actually saying like billionaires are disappearing. Like you mean, they're literally disappearing. Like what?
Bill Mann: I mean, not like a magic trick. Yeah. So Jack Ma was the primary one who is the founder of Alibaba and, he wasn't even an executive of Alibaba anymore. But he made a speech where he was suggesting that maybe perhaps in my role as an individual citizen of this country, which I love so much that the Central Bank is maybe making a little bit of a mistake. He was not seen in public for a really long time after that. So yeah. I guess now is where I need to apologize to the Chinese just in case I go there someday, I'm a billionaire, but I don't want to be disappeared. Yeah, it absolutely has happened.
Allison Southwick: So if China is a hostile place, how our company is responding, because I can tell you that Christine Lagarde advice amid the fractured and fragmented global economic new normal is securing resilience supply chains with allies, and diversifying energy production. So that's now on my to-do list for the weekend.
Bill Mann: Sure. Was that your Christine Lagarde voice because that was amazing.
Allison Southwick: No. I don't actually have no idea which I assume she sounds French.
Bill Mann: It doesn't matter.
Allison Southwick: I assume she sounds French.
Bill Mann: Yeah, I can tell you. We'd have to apologize to China and France though. Yes. But it's not as simple as stamping your fingers and moving out of China. I mean, take Apple again as an example. They have so much of their manufacturing in China right now. They are looking to move some of it out from Vietnam, to India. But they are structuring it very strictly as repeating what they have in China. Because if you've got so much of your production in China and your openly like, well, we're going to move it out, what's China going to do? They're not just going to let you. They're not just going to say, that sounds really good for you.
Allison Southwick: We're breaking up. I'm really happy for you and your new partner. I wish you the best.
Bill Mann: Yeah, wish you the best. Hopes and dreams, eat, laugh, love, whatever. That's not how they are going to do. Tim Cook was in China, I believe within the last two weeks and he was very effusive about the partnership with China. At the same time, they are in fact diversifying into other geographies. I think places like Mexico and Vietnam and India are obviously going to be big beneficiaries of a repeat lift of what they're doing in China now. Then after that happens, you might actually see some companies say, well, you know, it's not worthwhile being in China anymore, but at that point, China does not have the upper hand in those relationships.
Allison Southwick: So should individual investors be reducing their exposure to China because bro, I assume that's not super easy.
Robert Brokamp: It's not super easy, especially if you're investing in mutual funds and you're getting your international exposure to like an international index funds because if you look at the Vanguard total stock market index, it's nine percent in China. If you get like the Vanguard emerging markets ETF, it's 35 percent in China. As you're listening to this, you might be thinking, well, it doesn't really matter. I don't invest in China, but you probably do. The question for you is, do you want to invest, which relies on capitalism in a country that is becoming increasingly hostile to capitalism?
Bill Mann: Can I give it an investment recommendation?
Robert Brokamp: Please do.
Bill Mann: There is a freedom-weighted equity index that's put together by a company called, they called them the life and Liberty Indexes. They have one called the freedom index. It's an ETF and they invest strictly in countries that obviously have a capitalist system, but then also they overlay on top of that the freedom house ratings. They do not invest in companies that have a lower level of democratic or freedom of capital movement. So there's an alternative.
Robert Brokamp: There are ETFs now, like for example, there's an iShares ETF that's emerging markets, ex-China. So it's EM XE is the ticker because then you can invest and all the emerging markets except China, because you may be uncomfortable with putting your capital with a country that's becoming more and more. It was always communists. I think the way you put it as in one of your articles, as it was a fig leaf of communist rule, but it's not that way anymore.
Bill Mann: No, but it's a command economy and I think that's probably the loss pejorative way of putting what it is that you're putting your money into.
Allison Southwick: So are you investing less in China?
Bill Mann: I have held one company in China over the last four years. So the answer is yes, doesn't really have to do with this. I would love to love to invest in China, but I don't really see the necessary safety nets that I would want. In all honesty, I just don't know what China is going to look like two or three years from now. I mean, it is the most highly indebted country in the world. Large country. We think of them have holding all of our treasuries. But there's another side of their balance sheet, so, no, I'm not really invested in China. I am invested in China a lot through companies that have operations in China, but not.
Allison Southwick: That's enough for you. That's good. Bill, what's your parting advice here for the new normal in China?
Bill Mann: In terms of advice, I consider China to be largely uninvestable for individual investors and which is not to say that there aren't, as I said earlier, I do own one company in China, but I've chosen very, very carefully and I just hope people remember the next time around when the, Hey, everybody needs to invest in China, the meme comes along that you remember the nature of the beast that we're talking about here. It is not a country that is structured to allow profits to leave it very easily. I think that that's going to remain meaningful for a while.
Allison Southwick: I hope you don't get disappeared for saying all that.
Bill Mann: I know I can't go anywhere.
Allison Southwick: Join us next week when we're going to tackle our final episode on our series the new normal, talking about Silicon Valley.
Chris Hill: As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy yourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
