The Lake Street Review Podcast

In this episode, Germinal G. Van presents the concept of the full-reserve banking system as well as its mechanisms, advantages and disadvantages.

The main concept about the full-reserve banking system is that it is a system where banks are required to hold deposits in reserve, meaning they cannot lend out nay of the money deposited by their customers. This is in contrast to the fractional-reserve banking system, which is the currenct system used in most countries, where banks can lend out a portion of their deposits while keeping a fraction in reserve.

The full-reserve banking system presents a number of advantages such making depositors' money safe, and stabilizing the financial system; but also contains some drawbacks such as limited credit availability and the inability of central banks to monitor the money supply. Germinal G. Van sees these drawbacks, however, as advantages because they enhance a prudent approach to banking and show that central banking is not a necessity to maintain economic stability.

In this episode, Germinal holds a conversation with Gabriel Carrier, a professional mathematician on Markets, Bitcoin ETFs, and Central Banking. Gabriel gave his expert opinion on where he sees the economy going, the problem with central banking, and how Bitcoin could impact our lives in the future. 

Gabriel's email is: contact@praxeologos.com

Fractional-Reserve Banking is a banking system in which a most of depositors' money is lent to borrowers, and a fraction of that money is kept in reserve (10%). This process leads to money creation and banks make their money from the interest income they generate from the loans they grant to borrowers.

Fractional-Reserve Banking is inherently an inflationary system because it relies on credit expansion through the expansion of the money supply. This expansion of credit then creates inflation, increase debt (the national debt and consumer debt), and exposes banks to bank runs, which in turn, weakens the financial system.

Fractional-Reserve Banking exacerbates wealth inequality because commercial banks are far more lenient with upper-class depositors than with lower-social-class depositors. Since banks make money through interest payments on loans, they supply loans with higher interest rates and harsher terms to lower-social-class borrowers than to upper-class borrowers. As a result, banks make money off lower social classes while the upper class continues to lives off loans at cheaper interest rates.  

In this episode, Louis & Germinal recap the major events that shaped America and the world from Musk's acquisition of Twitter that impacted free speech, to the War in Israel and the threat of China on Taiwan.

The major topics addressed were:

1) The Potential Death of American Democracy

2) Musk's ownership of twitter on Free Speech

3) The Rise of Antisemitism

4) Inflation, Interest Rates & the U.S. Economy

5) The War in Ukraine, the Threat of China on Taiwan, and Potential World War III

In this episode, Germinal argues that inflation is not a necessary condition to stimulate economic growth because the growth of an economy is not based on an increase in the price of goods and services but on an increase in their quantity. Inflation is the result of a mismatch between price and quantity engineered by governments and central banks.

Germinal argues that central banks approach economic growth the wrong way, as they try to stimulate aggregate demand by expansionary monetary policy while economic growth should be stimulated from the supply-side, because demand affects prices but not quantity while supply affects quantity and quantity affects prices since the total quantity of goods and services are what affect prices, and not the other way around.

Germinal maintained that inflation, rather than being an asset to economic growth as central bankers want to make people believe, is a hindrance to growth because in addition to reducing the purchasing power of consumers, it also generated the uneven distirbution of wealth through the Cantillon Effect.

In this episode, we touched-base on all the scenarios and political intricacies of the Republican Primaries. We discussed Tim Scott's recent campaign's suspension; the conflict of vision of Nikki Haley who holds a neoconservative vision for America against that of Vivek Ramaswamy who holds the vision of patriotism and isolationism for America. We've also discussion the decline of Ron DeSantis as he is becoming his own shadow, which could impede his presidential ambitions for the future, and we also discussed whether the issue of abortion alone, would suffice for the Democratic Party to win the 2024 election and retain power. 

In this episode Louis & Germinal discuss a series of events and hypotheses. They discuss whether or not Saudi Arabia could one day become a superpower. Saudi Arabia is known to be an oil-rich country but it recently started to diversify its revenue streams by massively investing in sports. However, the likelihood that Saudi Arabia becomes a superpower rivaling the United States is small because it still relies on the United States for many commercial agreements.

Moreover, Louis & Germinal discussed the decline of the Chinese economy, which is mainly attributed to the failure of the one-child policy and central-planning policies; as well as the rise of Gavin Newsom, who recently visited China, and tries to position himself as the frontrunner of the Democratic Party since President Biden is becoming more and more of a liability. 

In this episode, Louis and Germinal talk about current events; on the vacate speakership where Republicans has trouble finding a replacement for Kevin McCarthy; on the ongoing conflict between Israel and Hamas; and on SBF, Ponzi scheme and whether or not the crypto market ought to be regulated.

John D. Rockefeller is known to be first billionaire in the world. By the time of his death in 1937, his worth north was over $1 billion, which equated 1.5% of total U.S. GDP.

Rockefeller's ability to accumulate so much wealth lies on three factors. First, the fact that he lives in an economic system that promote free enterprise, competition, and private ownership of the means of production (capitalism); second the fact he was a business owner, which enabled him to increase his equity, to have cash-flow, and to reduce his tax liability; and three, the fact that he was a very frugal man.

Rockefeller was the owner of Standard Oil Company, an oil company that ended up controlling 90% of the entire American oil market. Rockefeller financial success was based on the application of vertical and horizontal integrations, which allowed him to expand and consoldiate his oil company into a business empire.

Rockefeller was an enigmatic figure. On the one hand, he was a ruthless businessman and on the other hand, his philanthropic work improved the lives of millions of Americans, which made him look like a saint.

In this episode, Germinal & Louis address the issue of whether business leaders are effective political leaders.

Louis argues that Business Leaders are not good politicians because they lack the ideological component that make differentiates politicians from business leaders when it comes to make political decisions. The ideological component is what makes politicians committed to implement policies that are aligned with their beliefs. Moreover, Louis stated that since it counterproductive for government to produce surpluses, Business leaders won't be able to implement laws that will make government more active in providing services to the people. 

Germinal, on the other hand, argued that Business leaders are fit to be effective political leaders because their profit-motive mindset will drive them to producing surpluses rather than maintaining deficits. And producing surplus enable to reduce the size and role of government in the economy.

Why are Third World countries poor? The general narrative to explain poverty in Third World countries is colonization. However, the impact of colonization is not a significant on the current and future generations than rentier economics. Third World countries, notably African countries are struggling economically because they rely on the rentier economy, which is an economic unsustainable system because it relies on external sources to generate revenue, does not rely on the productive capacity of its resident and citizens, and government is the primary beneficiary of these revenue generated from these exports. Rentier economics creates wealth inequality between the political class and the rest of the population.

Can term limits reduce the power of politicians? In this influence, Louis and Germinal argue the merits of having term limits, especially for the federal legislative branch.

Germinal argues that term limits are necessary to enhance political alternation and more importantly, to curb the power of politicians who use the power of their office to apply rent-seeking. Thus, Germinal argues that the application of term limits should come with a set of measures that will regulate politicians behavior in order to maximize output for their constituencies while serving their terms.

Louis, on the other hand, argues that if term limits will incentivize politicians to be even more corrupt before leaving office, knowing that they won't have to worry about reelection. He believes that the lack of term limits enables experienced politicians to cement their legacies as they have more time in office to implement long-term policies.

The purpose of this episode is to explain the brief history of mortgage-backed securities; what they are; how they are structured; when were they created; and the crucial role they played in the financial crisis of 2008.

Mortgage Backed-Securities (MBS) are a type of asset-backed security, which is secured by a collection of mortgages. And these pooled mortgages are sold to investors as a securirty. These MBSs are structured as financial instrument either as pass-through securities or Collateralized Mortgage Obligations, also known as CMOs.

The first MBS was created by the federal government to through an agency called GNMA (Ginnie Mae) to provide a secondary market for mortgages. In the 70s and 80s, the federal government went on to issue pass-through MBS and in the 80s, the MBS market expanded to private-label MBS.

MBS played a crucial role in engineering the financial crisis of 2008. Investments banks such as Lehman Brothers packaged subprime mortgages with prime mortgages as CMOs and sold those CMOS to investors. Since the number of subprime mortgages outweighed the number of prime mortgages, these CMOs eventually became worthless, and the housing bubble burst.

Did the economic policies of President Biden truly work? In this episode, Germinal and Louis analyze the merits of Bidenomics. Germinal argues that Bidenomics exacerbated the financial and economic conditions of the low-and-middle income households, an income group that was supposed to benefit from these policies. He argued that Bidenomics contributed to the high level of inflation we have today due to excessive government spending. Louis, on the other hand, argued that Bidenomics is not entirely a failure and that it helps to some extent the labor market as job creation beat economists' expectations every month.

In this episode, Louis provides an analysis of the major Republican candidates. He explains why Donald Trump chose not to participate in the debate, and also argues that this debate is the chance for DeSantis to get the spotlight and make the case for his campaign in order to surge back in the polls. Louis also argued that since Trump won't be on stage, most candidates will go after DeSantis because he is the "frontrunner" among the available candidates on stage. 

Sign up to get the details on Jason's FREE Webinar on how to use Options to simulate an insurance policy on your 401(k). This surprisingly easy, intuitive technique is a cost efficient way to use a separate investment account to protect your 401(k) assets from downside risk. [It also works if most of your assets are in an individual brokerage account rather than a 401(k)]. You don't want to miss it. Enter your info on the contact page and in the message box, type the word "Options":

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Jason is an early investor of the Lake Street Review, and a Senior Associate at a major U.S. Non-Bank Financial Institution. His primary role is Trade Lifecycle Management on about $500 billion in short-term and long-term debt, Repo, Treasury bonds, and Interest Rate Derivatives. He has worked on the transition away from LIBOR over the last three years, which the global market completed in July of this year.

In this episode, Jason assesses market conditions, discusses the deflationary state in China and its potential impact on the U.S. economy. He also discusses the mechanisms of options and futures trading and their implications in financial markets.

WARNING:

- The material given in this episode on Options and Futures is not sufficient to qualify listeners to go out and trade these types of derivative contracts. If you are seriously considering the use of these tools, please go to our contact page and write "consult" to get education from professionals on how to manage them responsibly.

CORRECTIONS:

• Investment Research Analyst Lynn Alden appeared on Palisades Gold Radio with Tom Bodrovik, not "Gold, Goats, and Guns". It's highly informative for anyone looking for a big picture perspective on inflation and deflation, here is the link: https://open.spotify.com/episode/4xAlW7miub36yituPkvMbT?si=TSioOAlaTtGcAk8dkvxQAA
• And her website: https://www.lynalden.com/

CLARIFICATIONS:

• Germinal: team "Soft Landing" - Expects the US economy to continue to expand
• Jason: team "Recession" - Expects the US, Europe and South America to have negative growth in production and employment in the next calendar year.

Notes and Links from the Conversation

1. Let's recap the major economic events out of China over the last few years:

   1. March 2020 - Strictest lockdowns in the world are enacted - we later found out that apartment building doors were welded shut to keep people inside

   2. August 2020 - China banking regulators start to crack down on real estate lending with "three red lines".

      1. They introduced caps on debt ratios for major financial institutions

   3. June 2021 - Evergrande has to cut down its debt

      1. Buyers of Evergrande's commercial paper start to claim they have not received payments

   4. August 2021 - construction developments halted as Evergrande struggles to make payments on debt.

   5. January 2022 - holders of Evergrande retail wealth management products protest offices around the country

   6. All that is to say - we've known there's been a downturn in the property development market in China for a long time - that real estate development has been a big driver of demand for heavy industrial and energy commodities over the last decade and a half.

   7. 5/17/2023 - 

      1. BE report estimates about 11.2 percent of real estate debt in China to be "At risk of Default". Another 37.1 percent are already in default (classified as defaulters). Analysis of 186 listed developers  - borrowing that has been defaulted upon or is at risk is estimated to be 48% of total borrowing.

      2. https://news.bloomberglaw.com/capital-markets/china-faces-property-debt-defaults-worth-12-of-gdp-be-says

   8. 8/12/2023

      1. "Credit data for July released Friday showed a slump in demand from businesses and households to borrow money for the future". Yes - a slump - of 89%, to 345.9B yuan in new local currency bank credit in July. Reuters reported that this is the biggest slow down since 2009. 

      2. https://www.cnbc.com/2023/08/14/china-economy-new-loans-fall-property-fears-low-consumer-sentiment-.html

   9. 8/13/2023

      1. Country Garden has liabilities of 194 billion dollars as of year end 2022. That’s about 1 percent of China's 2021 dollar GDP wrapped up in one company. The company announced it will suspend trading of its 11 onshore bonds from Monday, according to filings to the Shenzhen Stock Exchange on Saturday. The company missed coupon payments on two US dollar bonds last week.

      2. https://www.cnbc.com/2023/08/14/china-country-garden-to-suspend-trading-of-onshore-bonds-from-monday.html

   10. 8/14/2023

       1. PBOC lowered one year policy interest rate by 15 basis points. The PBOC is a bit different in that it has two policy rates, one for seven days and one for a year. July data showed consumer spending, industrial output and investment slowing, with unemployment rising. China hasn't had a rate hike since 2019, indicating that the central bank's inclination over the last 4 years has been more stimulative than anything else.

       2. https://www.bloomberg.com/news/articles/2023-08-15/china-central-bank-unexpectedly-cuts-key-rates-as-economy-slumps

   11. Crude oil was supposed to get some momentum out of the reopening, but that trade broke down quite fast. Crude has traded sideways in a range of $68 to 82-83 dollars all year.

   12. 

   13. Another simple corollary to economic growth is the country's treasury yields. The logic there being that a rising risk free rate indicates that investors are selling bonds and taking more risk.. That increasing taking of risk feeds the supply of credit, which is the biggest driver behind what macro economists call "Aggregate Demand"

   14. Well if we look at that in the case of China… Yields have been in a slump since November of 2020. When the reopening narrative was still strong we saw the yield rise from 2.6 to 3 by February 2023, but today the market came within only 8 basis points of its all time (pandemic) low of 2.52.

   15. That doesn't look good.

   16. 

   17. And this is the cool thing about the bond market. We don't know what kinds of economic downward revisions are ahead of us for the months that have already passed. China's stats bureau will publish a more accurate reading of those stats we mentioned sometime next year. We didn't know that employment had slowed until a few days ago. But if you had only taken macro cues from the general direction of the 10 year China bond yield, you would've concluded, "something's probably wrong with the economy over there".

   18. There are actually more prices we could look at as well, but we'll focus on currency. The US dollar index hit 114 in the bottom of last year's bear market. In the last month it's gone from 99.8 to 103.2. The Yuan has lapsed

1. Macro implications for other countries.

   1. What’s the bond market signal look like for the US? If the 10 year yield can close above 4.22 for about a week - multiple trading sessions, I’d revise my view on the macro economy which is that we’re more likely to see a recession in the next two quarters than we are further out.

   2. 4.284 is the level we closed at today - which is interestingly the same level it stalled out at on June 27th 2008.

   3. But that wouldn’t necessarily be great for stocks - because they tend to move 

   4. 

2. Related article:

   1. Earlier this year, Bank of America (BAC) compiled a list of the S&P 500 companies with the highest exposure to China. Topping the list was Las Vegas Sands (LVS), down nearly 6% this month, with 68% of its sales coming from China. Qualcomm (QCOM), with a 67% exposure rate to China, issued disappointing forward guidance during earnings last month, citing China’s slow recovery.Tesla, Intel, Nvidia (NVDA), Wynn Resorts (WYNN) and MGM Resorts (MGM) were also among the 25 S&P 500 companies with the most exposure to China. Companies that generate more than 50% of sales outside of the United States saw an earnings decline rate of -10.2% in the first quarter of 2023, according to FactSet data. Companies that generated more than 50% of sales inside the United States, however, saw an earnings growth rate of 2.7%. Source: CNN Money (a broken clock is right twice a day) https://www.cnn.com/2023/06/08/investing/premarket-stocks-trading/index.html

3. Implied Rate Cuts

   1. Goldman says it’s expecting 50 basis points of cuts in 2024, starting in the second quarter, which is not too far off from what the SOFR Futures prices are saying - with about 50 basis points “priced in” from December to June 2024

   2. 

1. Options - What they are and an example

   1. Definition - Start thinking of all financial instruments as legal agreements - it’s a contract. That’s the starting point - the building block - for all financial instruments from bonds to repos to total return swaps to credit default swaps. They’re all just contracts. What does the options contract say?

   2. There are options for pretty much all types of assets - the kind we’re concerned with today is stocks and ETFs - but there’s options on interest rates, commodities, cryptos, every asset you can think of.

   3. They’re not a new fangled financial product. I just read a paper about the behavior of US financial assets leading up to and during the Panic of September 1873. The author used options prices from that year to show that many investors - probably the savvier ones - were using options to bet against the market leading up to the panic.

1. Now from here on, I’m going to speak in terms of options on ETFs, since that’s going to be the best hedge for most people’s portfolios.

2. There are two types of options - Calls and Puts. A Call is an option to buy the ETF. A Put is the option to sell the ETF. The best way to really show how these work is with an example. Typically, you would first learn about call options, but since our primary concern today is how to deal with the risk of a declining US stock market, we’re going to focus on puts..

3. We’re going to talk about a speculative play, and then follow it up with a hedging or risk management play.

4. Let’s say that I think the NASDAQ stock index is going to fall by two percent or more in the next week. Maybe I’m expecting some kind of surprise out of the Fed or something…

5. The biggest ETF that tracks the NASDAQ is Invesco QQQ - symbol QQQ. And let’s say I want to get short exposure to 100 shares of the QQQ - which at today’s closing price is about $36,300. There are two ways I can do this and options are much cheaper.

6. But the first way is to buy an ETF that does the opposite of QQQ, it’s called the PSQ - it’s structured to model a short position in the NASDAQ, and therefore it’s to gain about 1 percent for every 1 percent the QQQ loses. To get $36,000 of exposure with this method, I need to have $36 thousand on hand in my brokerage account, so I can go in and buy about 3,350 shares of the short ETF at about $11 bucks a piece. That’s fine, you can do that. But it kind of sucks.

7. Method 2 - I go into my brokerage account and I buy a Put Option on the ETF at the strike price of $363.00, expiring in a week’s time. This gives me the right - but not the obligation - so sell 100 shares of QQQ to the option writer, in a week’s time.

8. The cost of entering this trade is the Option premium. And today, that premium was about $3.50. The minimum size of an option is 100 shares of the underlying stock or etf, so my total outlay for this, is 3.50 x a hundred equals 350 dollars. 

9. The magic of options lay in the fact that by spending $350, I now have a short position in 100 shares of QQQ. Also, 350 is my maximum loss. That’s because if the trade goes against me and the QQQ goes to an all time high, I don’t have to actually do anything with the option, I can just let it expire. And that’s the importance of the phrase, “the right, but not the obligation” to sell.

10. Let’s see what happens in the case that I’m right and in the case that I’m wrong.

11. First, I’m wrong, instead of declining 2 percent in a week, the QQQ advances by 2 percent, reaching a price of $370. 

    1. To sell the 100 shares, I would have to buy them for $370 and then offload them for $363, a loss of 7 x a hundred is $700. But I don’t have to do that because it’s an option, not an obligation. My max loss is simply the premium I paid to get into the trade: $350

    2. What would’ve happened if I’d spent $36,000 buying the short QQQ etf? The short ETF would decline in value by 2 percent as QQQ rises 2 percent (that's why it's dubbed an "inverse ETF"). So, if I'd gone out and bought positions in the short ETF... I would be sitting on a loss of $700. And that would suck. With the Put Option strategy, My trade may not have panned out, but I lost 1 percent instead of 2 percent.

12. Second scenario, I’m right. The QQQ declines 2 percent to $356. 

    1. I now have two ways of collecting the profit from this trade. I can exercise the option to sell the shares at $363, by first buying them for $356, and by profit is 7 bucks x 100 equals $700. 

    2. Or if I don’t want to actually buy the shares, I can simply sell the option contract itself, because it will now have a higher price than I paid for it. That price will tend to reflect the intrinsic value of exercising the option, and get me in the ballpark of a $700 profit. Most investors will want to sell the option contract at the higher price, rather than exercise the option and have to procure shares.

13. The long and short of it is - this put option, allows me to get short exposure in $36,000 of the QQQ - which is to say I profit when it drops, for the small price of less than 1% of that portfolio - $350. 

14. Second, I can gain from a fall in the QQQ without even owning the security in the first place.

Why do Americans vote the way they do? And what influence did social media play on the psychology of the American voter? In this episode Louis & Germinal are dissecting the mindset of the American voter. Both analysts elaborate on the factors that incentivize the American voter to lean one way or the other.

Moreover, the analysts argued that social media worsened the political landscape because it made politics more tribal and more personal, which further created echo chambers. However, each analyst offered their ideal voting system that they believe would be best for America.

In this episode, Louis & Germinal discuss the merits of President Trump's indictment and the impact it could have on his candidacy for the Republican primaries and the general election. Moreover, they discuss the factors that led to DeSantis' debacle in the polls as well as the fundamentals of his economic policies.

Today, all governments around the world manage their economies on budget deficits instead of surpluses. Why is that? Why governments rather spend more than generating revenue?

In this episode, Germinal argues that governments use debt as the main financial instrument to run their economies on budget deficit because they can borrow limitlessly from central banks.

Governments run their economies on budget deficit because it suits their purpose, which is maintaining public opinion satisfied in order to expand their electoral basis at the expense of creating real wealth to improve the material conditions of people. 

However, government spending and deficits are what trigger inflation, erode our purchasing power and make life unaffordable.

This episode touches on several political subjects. In this episode, Louis and Germinal analyze the evolution of the U.S. Election; the political causes of World War II; the art of political persuasion and how it affects political outcomes; and the nature of political power. On the nature of political power, Louis and Germinal argue that since political power is naturally coercive, then which type of political regime is the most appropriate to govern society.