 Hey everyone, this is Dan. Let's talk about the latest bank failure and what it might do to the stock market. After market closed last Friday, July 28th, the Kansas State Banking Commissioner declared that Hotline Tri-State Bank was insolvent. According to the FDIC bank failure records, Hotline Tri-State is the fourth bank that failed in 2023, following Silicon Valley Bank that failed on March 10th, then signature bank on March 12th, and First Republic Bank on May 1st. Hotline Tri-State's assets are low at $139 million compared to the other three failed banks, which each had hundreds of billions of dollars of assets before they failed. The total failed assets from the four banks add up to $548 billion. That's not even counting the Silvergate Bank, which went through a voluntary liquidation on March 8th. Because Silvergate's liquidation did not involve the FDIC, it is not on FDIC's bank failure list. It is nevertheless still a bank failure. In other words, we have totally five U.S. banks that failed since the beginning of 2023. One of the main reasons for these bank failures is that the Federal Reserve banks raised the Fed funds rate by 5.25% since March of 2022. Because many banks hold U.S. treasuries bought a few years ago at very low yields, as the current interest rates go up, these U.S. treasuries start to lose their values. When too many depositors start to withdraw money from a bank very quickly, it forces the bank to sell these U.S. treasuries and losses and therefore makes the bank insolvent. Many people are worried that the bank failures in 2023 will spin out of control and bring in a recession similar to the Great Recession of 2008. Back in 2008, 25 banks failed, followed by 2009 with 140 bank failures, and 2010 with 159 bank failures. At a time between 2008 and 2010 are known as a Great Recession. In 2023, there are four or it might count five bank failures already. When we look at the first four banks that failed in 2008, we see that they span from January to May of 2008, within a span of four months. The total failed assets among the four banks added up to $352 billion. In 2023, the four banks that failed span from March to July also four months, but the total failed assets add up to $548 billion, which is greater than the amount in 2008. In other words, 2023 could potentially be worse than 2008. But there are other factors that we should consider. After seeing the numbers on this page, we should be alerted and become more vigilant, but it might be too early to pan it yet. I was saying why. If you think what I'm showing you here is important for your stock investments, please click the like, subscribe and notification buttons so that you will be notified when I post my next video. Thank you very much. Let's continue. We have a lot of interesting stuff to cover. An important function of the Federal Reserve Banks is to purchase US securities and mortgage-backed securities from the banks. The Fed or the Federal Reserve Banks in turn issues money to the banks. The US treasuries and mortgage-backed securities bought by the Fed are called Fed assets. Therefore, the more Fed assets the Fed has purchased, the more money the Fed will have to create and send to the banks. And the more money the Fed has created, there is more liquidity in the market because the bank can loan out the money or use the money to buy stocks and other financial instruments. When the total Fed assets increase, the stock market usually goes up and the inflation rate might go up as well. Conversely, when the total Fed assets are reduced, the stock market usually will eventually go down and the inflation rate will go down as well. Since March of 2022, the Fed has been reducing total Fed assets and increasing the Fed funds rate in order to reduce inflation. Reducing Fed assets is also called QT or quantitative tightening. Let's take a look at the 2008 bank failures. I've taken a list of bank failures and plotted the cumulative failed assets under these banks represented by the black line here. I then plotted the S&P 500 index with a blue line and the total Fed assets with a green line. We can see that when the banks started to fail in 2008, S&P also started to go down. The US was entering recession in 2008. In order to turn around the economy, the Fed started to pump liquidity into the market by increasing the total Fed assets. After the Fed assets have been increased by more than $1 trillion between 2008 and 2009, S&P finally started to rebound. Now let's look at 2023. We had the full bank failures from March to July with the cumulative failed assets increasing from zero to more than $500 billion. S&P dropped initially from February to March when there were a lot of concerns about bank problems. The Fed then added Fed assets quickly in March, exceeding the amount of total failed bank assets up until that point. S&P then started to rebound in late March after the jump in Fed assets. The Fed then continued its QT process by reducing the Fed assets starting from April to now, which is the month of July. Interestingly enough, S&P continued to zigzag upwards since April, even after the Fed resumed its QT process. One explanation for the bullish stock market since April of 2023 might be because the Fed seems to be successful in reducing the inflation rate so that people expect the rate hikes and QT to be finished pretty soon. Another reason for the stock market optimism is that the recent quarterly reports from big companies such as Meta, Google and Netflix show bullish results. If you look at the similarities between 2008 and 2023, we can see that both of them have bank failures. As far as differences between the two time periods, we can say in 2008 the Fed assets were going up and up in order to fight the recession. S&P dropped in 2008 and did not start to recover until 2009. In 2023, the Fed assets went up briefly in March, then came down again after March. In 2023, S&P has been going up since April in spite of the shrinking Fed assets. Here is another comparison of the time periods by looking at the Fed funds rate, CPI and unemployment rate. We can see that in 2008, the CPI went from 4% to 6% and then down to negative 2% and then back up to 3%. In 2023, the CPI was as high as 9%, actually a little bit before 2023, that was back in June of 2022. Then it dropped to 3% in June of 2023. In 2008, unemployment shot up from 5% to 10% that was a full-blown recession. But in 2023, unemployment remained low between 3% to 4%. Obviously, some of the economic indicators for the two time periods are very different from each other. 2023 seems to be much more bullish than 2008 in terms of the rising S&P index and the low unemployment rate. Because the collapse of the real estate market was what brought on the 2008 great recession. Let's see what the real estate market is like today compared to 2008. From this chart, we can see that by May of 2008, the US housing price already dropped about 10% from the peak. If you look at the housing price today, it is certainly at a very high level based on the Case Shiller Index. In fact, Professor Robert Shiller, the inventor of the index, said recently that real estate prices might be dropping soon. But at least for now, we don't see the price dropping yet. When it does start to drop, it might trigger a recession. For now, I don't see the sign of recession yet, based on this Case Shiller Index chart. You might say, today, the part of the real estate market that is in real trouble is the commercial real estate because more people are working from home after the 2020 pandemic, which causes rental office spaces in many cities to be empty. From this chart published by the St. Louis Fed, we can see that from the second half of 2008 to 2010, the average commercial real estate price was already 10% to 30% less than the prices 12 months prior. That was indeed a very severe drop. In 2023, even though commercial real estate market has softened due to the pandemic, the average price as of Q4 2022 was only slightly below 12 months ago. Again, the commercial real estate market is nowhere near the kind of stress it experienced back in 2008. My conclusion is that even though the real estate market is very inflated today, we see the probability of a recession, but we have not seen the actual initial signs of a collapse yet. Let's return our focus to the banks. After March, bank failures of 2023, Fed Chair Jerome Power said, the banking system is sound, and that the Fed was conducting an internal review to identify where they can strengthen supervision in regulation. At the end of April, the Fed concluded its internal review on the failure of Silicon Valley Bank. It laid the blame on the bank as well as on the Fed itself. Michael Barr, the Fed's vice chair for supervision, said the bank's failure demonstrates that there are weaknesses in regulation and supervision that must be addressed. Barr also said the Fed plans to re-evaluate the 2019 rule changes which were passed by the US Congress. Barr believed 2019 rule changes weakened the banks. After Vice Chair Barr's statement, First Republic Bank failed in May and Heartland Tri-State Bank failed in July. Has the Fed really done anything differently from a few months ago with regard to regulation of the banks? According to statements made by Fed Chair Powell on June 29, he said the Fed still wanted to tighten financial rules based on the observation of many people. The Fed has been meeting resistance from the banking industry and some congressional Republicans regarding these proposed rule changes. In other words, the Fed is still in the process of evaluating proposals for such changes. From what I can see, the Fed has not been able to change much or at all in the way to regulate the banks between March and today, which is July 31. In my opinion, the banks are still not out of trouble yet. The Fed, however, can still help the banks if it stops the interest rate hikes in the near future or if it stops quantitative tightening, but not decreasing the Fed assets anymore. So what are my conclusions? First of all, the failed bank assets and the number of failed banks in March to July of 2023 already exceeded those from January to May of 2008. This is certainly an alarming sign. S&P 500 in 2023 is much more bullish than 2008, which is the good news. Also, the unemployment rate is much lower in 2023 compared to 2008. Fed assets are being reduced in 2023, whereas the Fed assets were increased in 2008 through 2009. One exception in 2023 was that the Fed assets were added briefly in March after early bank failures, which reversed the S&P drop at a time. 2023 will not be a replay of the 2008 Great Recession unless we see more indications for recession, such as the GDP number, the unemployment number, S&P drop, etc. Today, the Fed will need to walk the fine balance between easing monetary policy to stop the bank failures and not easing too much that they actually end up reigniting inflation. One of my stock trading strategies in light of all these. Last Friday, July 28th, I sold shares of TQQASML and Vedia that I bought on July 25th in order to lock in profits. I sold the long positions on Friday, not because a new Heartland Tristate Bank was failing. I sold because I saw the lower high last Friday compared to the intraday high on Thursday. I anticipated a short-term market dip before the market can rebound again. I might sell more shares of the above stocks and ETFs, and also I might sell Meta, Tesla, Moderna, shares that I bought in the last couple of weeks if the market starts to drop significantly in the next two days due to the latest news and bank failures. I will monitor Fed actions, especially the change in total Fed assets, as well as stock market movements, and any future bank failures. I will buy back the above stocks and ETFs if there is no more bank failure in the next few days, and if the market starts to rebound. I will update my Twitter subscribers on my trades and my analyses of developing events. At this point, I'd like to remind you to subscribe to my Twitter account, which is DanMarketL, in addition to subscribing to my YouTube channel. For example, on July 25th, I tweeted that I bought ASML as 6% below my sell price on June 19th. And then on Friday, July 28th, I tweeted that I sold one half of TQQ bought on July 24th and July 25th at 5.5% gain. If you like what you're seeing so far, I'd like to remind you to click the like, subscribe and notification button. As usual, I very much appreciate your comments, questions, and suggestions. I'd like to remind you that I'm not a financial advisor. I share my stock trading strategies and analyses for educational and entertainment purposes only. If you want to buy or sell stocks, you should make your own decisions. And you should definitely consult the financial advisors before you do so. This wraps up my video for now. I will chat with you again in the next few days. In the meanwhile, I'd like to wish you the very best of luck with your financial investments.