POP QUIZ

After Charlie Munger’s death, what’s the median age for Berkshire Hathaway’s board? (The answer is at the bottom of this newsletter!)

IN THE NEWS

💬 How Cheap Deposit Rates Bail Out Banks

Are banks in trouble? Depends on who you ask and which banks you’re talking about.

Since March, banks have been top of mind for many investors after a mini-crisis saw a few familiar names go under, like Silicon Valley Bank and First Republic.

Without diving too into the weeds, one of the issues at hand structurally for banks is many had a) bought a lot of bonds in 2020 & 2021 and b) those bonds lost a lot of value on paper when, thanks to the Fed, interest rates began rising in 2022

• You can see below the estimated losses across the banking system from declining bond values over the past year and a half, represented by the combined value of held-to-maturity securities — where banks don’t have to report paper losses — and available-for-sale securities — bonds they do have to report losses on.

As Nicholas Dunbar of the FT writes, “behind all this is a story of deposits, in particular the $4.2 trillion worth of ‘non-interest-bearing’ deposits in the U.S. banking system.” These are deposits from individuals and businesses that earn essentially no interest, which, like all bank deposits, act as a form of funding for banks, allowing them to make loans.

• If banks had to pay the roughly 5% rates common on U.S. Treasury bonds for that financing to depositors, that translates to an additional $90 billion per year in interest costs across the banking system.

Why it matters:

As Dunbar puts it, “Customers accepting this (zero or low interest on deposits) is the secret behind banks’ ability to maintain underwater securities portfolios.”

• By not paying some customers anything close to market rates on their deposits, banks nationwide have enjoyed cheap financing that helps offset the sting of big losses in their bond investments.
• Who are these folks content earning nothing? Bank of America suggests that a chunk of these funds come from checking accounts, where many accept low-to-zero interest in exchange for fewer fees and convenient service.

Not so fast: Of course, the opportunity costs of earning negligible interest as a depositor have increased, and with that, “banks have lost a lot of non-interest deposits in the past year or so, as depositors steadily hunt for better returns for their deposits.”

• So, folks have increasingly pulled money from bank accounts earning nothing in pursuit of higher yields on their cash elsewhere.
• Banks must rely more on customer deposits at costlier rates to support their businesses, which might prompt some to answer our initial question by saying, “Yes, banks are in trouble.”
• But, banks’ losses on their bond investments have decreased as bond prices have rallied this past month over the prospect of the Fed halting rate hikes.

To what extent these opposing forces for banks’ financial health (costlier deposits — bad for banks, and rallying bond prices — good for most banks’ balance sheets) offset each other going forward will provide greater clarity on the state of the banking system entering 2024.

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💳 Apple and Goldman Sachs to End Credit Card Partnership

Sometimes, true love isn’t meant to be. And sometimes, what we thought was true love wasn’t. Either way, Apple and Goldman Sachs’s corporate relationship is ending, symbolically finalizing Goldman’s retreat from consumer banking.

• That is, its efforts to transition from just being an investment bank, focusing on things like advising companies on mergers & acquisitions, and instead taking deposits from the public.

To be or not to be: A big part of that push was a partnership with Apple, where Goldman would underwrite credit card loans to folks hoping to earn 3% cashback when financing Apple product purchases.

• But the arrangement was troubled from the beginning. Apple first promoted the card as not being from a bank, which reportedly irritated Goldman execs.
• And Apple supposedly wanted almost everyone to be approved for their credit cards, pushing Goldman to lend money unprofitably to people unlikely to pay off their balances (or accrued interest.)

All at once: Another issue came from Apple’s classic focus on streamlined simplicity for users — it wanted everyone’s statements to come due at the beginning of each month.

• The problem, though, is that banks usually space out these due dates; maybe your bill is due on the 15th, and someone else’s on the 20th, and so on, spreading out influxes of inevitable customer support questions about their balances.
• Goldman’s customer support systems were apparently overwhelmed with questions at the start of each month.

Why it matters:

Apple is now giving Goldman a chance to exit the credit-card partnership over the next 12-15 months. This also includes the high-yield savings accounts Apple has offered through Goldman.

If you’re an Apple card user or have an Apple savings account, don’t worry; someone else will almost certainly take this over.

• Right now, that “someone” looks like American Express, but Synchrony Financial has also thrown its name into the ring.

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🍔 McDonald’s Overhauls Its Biggest Item

You can’t get more traditional than a hamburger with fries at McDonald’s, one of the world’s most iconic companies.

Yet McDonald’s has overhauled its signature offering, including the Big Mac, which will now have a more uniform sear, special sauce, fresher lettuce, cheese, and pickles. Even the bun is changing to a buttery brioche.

Higher quality, less junk: McDonald’s has made over 50 tweaks to its burgers as it tries to upgrade its core menu amid heightened competition in the burger market, notably Five Guys and Shake Shack.

• In other words, McDonald’s is trying to make its burger a bit healthier — and tastier. Unsurprisingly, prices will increase as a result.
• “We can do it quick, fast and safe, but it doesn’t necessarily taste great. So, we want to incorporate quality into where we’re at,” McDonald’s senior director of global menu strategy told The Wall Street Journal.

McDonald’s benefited from the Covid-19 pandemic, like many quick-service restaurants and drive-thru chains. The Chicago-based food giant is still growing: U.S. same-store sales jumped 10.3% last year, much better than Burger King (2.2%) and Wendy’s (3.9%).

• In 2022, McDonald’s posted $6.2 billion in profit in an enormous U.S. burger market (roughly $136 billion in annual sales).

But McDonald’s recently placed just 13th among chains whose customers called their burgers “desirable.” Only 28% of Americans surveyed said they “craved” a McDonald’s burger, while White Castle (72%) and Burger King (52%) led the list.

Why it matters:

Sales for higher-end, fast-casual chains Smashburger, Five Guys, Red Robin, and Shake Shack are growing much faster than McDonald’s, a $200 billion giant founded in 1955.

Burgers are everything: Burgers accounted for roughly 40% of U.S. fast-food sales last year. About two-thirds of Americans eat burgers at fast-food restaurants at least every month.

• As Burger King’s president put it, the hamburger is “everything” to the company.
• McDonald’s tested its new burgers in Australia and will bring the revamped recipe to its 13,460 locations across America, its biggest market.

Study the past: As a kid, McDonald’s menu strategy director recalls eating delicious McDonald’s burgers. It’s a nostalgic flavor he wants to bring back.

• “Sometimes you have to look to the past to understand where you are going in the future,” he said.

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TRIVIA ANSWER

Even after Munger’s passing, Berkshire’s board is one of the oldest in the S&P 500 with a median age of 67, but it’s not the oldest. The oldest is Teledyne Technologies, with a median age of 77 on its board.