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THE PENN WEALTH REPORT VOLUME 12/Issue 01

18 Aug 2024 $5.99

A New Wave of Bank Runs? Last year it was financial institutions catering to the crypto and tech startup communities; this year it is all about commercial real estate exposure

The Panic of 1907 At the turn of the 20th century, a few greedy men unwittingly helped to expose seismic cracks within the US banking system

(Re)Building Your Bond Ladder Before the Fed begins a new easing cycle, investors are scrambling to rebuild their bond portfolios

IN THIS ISSUE Travel, from LA to Vegas to the Moon

ON PAGE 14 Your Emergency Reserve Fund

ON PAGE 18 A 200-year-old Nordic Bank

ON PAGE 20 An all-weather bond portfolio

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Volume 12 Issue 01

Cover Image: The bank runs of the 1930s really didn’t look all that different than they did last year, with a mad rush to pull deposits out to protect principal. Photo licensed by Penn Wealth

Strategic Vision

Financia

06 04

Emergen

From the Editor

Just as term households, life’s surpris

The Panic of 1907

Looking back at the Greenspan years and the easing cycle of 2001 can offer valuable lessons for today’s investor

At the turn of the 20th century, a few greedy men helped to expose the seismic deficiencies within the US banking system

Tactical Awareness

08 05

The Story in Charts

A look at some of the charts which have helped shaped the news over the past month

Nordea Will CRE Foment New Bank Runs?

Investors ne but nobody the risks un industry

Last year it was financial institutions catering to the crypto and tech startup communities; this year it is all about commercial real estate

Science & Technology Investor

Under the Radar

The Trading Desk Actions we have taken at the Penn Trading Desk, plus a look at what other Wall Street Analysts have to say, along with accompanying charts

2 Penn Wealth Report

Travel, from LA to Vegas to the Moon

Bright Ideas Being I

A micro-cap industrial company wins an out-of-the-world competition; Getting from LA to the craps table is about to get a lot speedier

A US supply chain firm, an Au industrial, and a Mexican soda flying under the radar of inve

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WTealth he Penn . SW uccess ealth. report Happiness.

Build Wealth Enjoy the Journey

al Planning

The Penn Wealth Report 16

Investment Intelligence

Monthly Business Report

Why we are not excited about Capital One’s acquisition of Discover Financial China is wearing out its welcome in Latin America, even among leftist leaders

ncy Reserve Fund

(Re)Building Your Bond Ladder

m life insurance is crucial for young , an Emergency Reserve Fund for ses should be in everyone’s vault

Why would investors buy longer-duration bonds when their shorter-term cousins have a better yield? It’s all about the trajectory of rates going forward

Whether Boston Beer wants to sell itself is up for debate, but the need for change at the brewer is not Americans’ savings rate and credit card debt levels are going in two different directions—and both point to trouble ahead

Potential bellwether for the economy: pool sales are sinking Dear lawless FTC, prepare to go down in flames yet again

Top quotes of the month... Poe on Perspective Lincoln on Preparation Whitman on Finding Joy

Bank Abp

eed exposure to the financials sector, y said they couldn’t diversify away nique to the American corner of the

An Unconstrained, All-Weather Bond Portfolio With bond portfolios finally beginning to shine once again, this well-managed fund has outperformed its peer group

Travel & Leisure

Ignored

New Zealand’s Adventure Paradise

ustrian bank, a Japanese a bottler: Four ideas estors and the press

18 Aug 2024

The Penn Strategies 30

Strategic Income Portfolio

Dynamic Growth Strategy

Global Leaders Club

Intrepid Trading Platform

New Frontier Fund

Penn International Investor

Most-Shorted Stocks List

Penn Wealth Report

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Strategic Vision American Business History

The Panic of 1907 At the turn of the 20th century, a few devious men helped to expose the seismic deficiencies within the US banking system In the early months of 1907, skies were bright within the United States. The Gilded Age brought forth an unprecedented period of expansion within the country, and the US economy had grown to become the largest in the world, supplanting that of the United Kingdom. As is so often the case, just as a sense of sanguine bullishness begins to set in, a storm begins to coalesce on the horizon. By the end of the year, a panic would cause the New York Stock Exchange to plunge, a recession would be triggered, imports would decrease by 26%, and reverberations from the event would be felt around the world. The first global economic crisis of the century would also sow the seeds for the Federal Reserve System—a central bank within the United States which would emulate the macroeconomics of Europe.

some 40 million pounds of copper per year. After a tumultuous few years, filled with legal challenges and even hand-to-hand combat within the veins between miners of opposing companies, Heinze agreed to sell his Butte operations to one of the Copper Kings for $12 million. It was off to New York with his United Copper, where he planned on becoming a major financial force within the industry. As fate would have it, the wealthy would-be potentate struck up a friendship with Charles W. Morse, a speculator and businessman of questionable character who had previously cornered the lucrative ice business in New York, gaining the moniker “Ice King.” (At the time, commercial ice was cut from lakes and rivers, taken to an ice house, and packed with straw and sawdust for insulation; remarkably, these giant ice blocks often had the ability to stay frozen until the following The backdrop winter!) Morse attempted to use his monopoly to jack Frederick “Fritz” Augustus Heinze was an American up the price of the frozen commodity, but his plan fell businessman born in Brooklyn to German immi- apart when it was revealed he had colluded with local grant parents. At age 20, he took his degree from politicians in exchange for a kickback. the Columbia School of Mines and headed out to Butte, Montana as an engineer for the Boston and Banks, trusts, and bucket shops Montana Company. When his father died not long In the early 20th century, banks within the US operafter, this hard-drinking, boisterous entrepreneur used ated with far fewer rules than they do today. With his $50,000 inheritance to develop an advanced new the ascendancy of America’s economic might came an smelter in the region. Unsatisfied with leasing mines to increase in the demand for financial services, leading secure the ore for to a proliferation his smelter, Heinze of trust compastumbled across nies to fill the void. an area abundant Trust companies with ore deposits were subject to and purchased the even fewer rules surrounding land. than the banks—a With his gregarfact that would ious nature and an come back to uncanny political haunt depositors. acumen, Heinze One such assotook on the two ciation was the “Copper Kings” in Knickerbocker the region and Trust Company, built what would chartered in 1884 become the United by a friend and Copper Company, classmate of J.P. which produced Morgan. The firm F. Augustus Heinze (Public Domain) Charles W. Morse (Public Domain) 6 Penn Wealth Report

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Strategic Vision served as trustee for individuals, corporations, and estates. By 1907, under the leadership of Charles T. Barney, Knickerbocker had become the third-largest trust company in New York City. That was about to change. There was another component to the banking/investment environment in the early 20th century: a nexus between the two worlds known as a bucket shop. These seedy establishments were street corner “offices” which allowed for the betting on stock and commodity prices without the transfer or delivery of actual shares or goods ever taking place. These archaic derivative houses would ultimately be outlawed in the US, but they were a fixture within the financial zeitgeist of the early 1900s. Cornering United Copper It was Augustus Heinze’s brother, Otto, who originally hatched the scheme to corner the market on United Copper, the firm his brother built in Montana. Believing that his family already controlled a majority of the company, the plan was to aggressively buy more shares in an effort to run the price up, thus squeezing all of the bucket shop short sellers by calling the shares. Ironically, Knickerbocker’s president had turned down the plan to fund the scheme when the two brothers and Morse presented it to him. Despite the fact that Augustus and Morse both sat on a number of bank and trust boards at the time,

Barney warned that the plan was too risky and too costly for his trust company. Otto didn’t heed that warning when he began accumulating more shares despite the lack of funding, and the refusal would not insulate Barney from the carnage which would ensue. When Otto put his plan into motion on Monday the 14th of October, he quickly drove shares of United Copper from the $40 range to around $60. To his shock and dismay, when he called the short sellers’ bluff on Tuesday, they had little problem finding enough shares (outside of Heinze family control) to meet his demands. By Wednesday, the stock price had collapsed to $10 per share. Otto’s fledgling empire was reduced to rubble. While the New York Stock Exchange suspended Otto’s trading privileges, both his brother and co-conspirator Morse began losing their lucrative board seats. Banks holding large amounts of United Copper stock as collateral against outstanding loans began to fail. Because of his relationship to Morse and Heinze, Barney was forced to resign, but that didn’t stop nervous depositors from yanking their funds out of the trust. Like a wildfire among dry brush, the panic quickly spread to other financial institutions. The city’s wealthiest and most respected banker, J.P Morgan, decided it was too late to save Knickerbocker Trust, but he was able to staunch the bleeding at healthier institutions by cajoling a group of the

Wall Street during the bank panic of October 1907 (Creative Commons)

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city’s other trust presidents. Not only did the group agree to provide over $8 million in emergency loans to the Trust Company of America, Morgan persuaded John D. Rockefeller—the richest man in the world at the time—to pledge up to half his wealth to preserve the system. Most importantly, Treasury Secretary George Cortelyou pumped some $25 million of government funds into several New York banks to instill confidence. None of these actions, however, soothed the nerves of investors, who began selling shares on the New York Stock Exchange at breakneck speed. When the dust settled, the Exchange had lost some 50% of its value from the previous year’s peak. It would take more strong-arm tactics by Morgan (like locking the bankers in his library until enough funds were committed) and an intervention by trust-busting President Theodore Roosevelt to end the crisis, but the damage had been done. The banking system in America would never be the same. From the gold standard to Jekyll Island The shock waves at home from the Panic sent ripples across the pond to Europe. European banks had significant investments in America; investments which began to plunge in late 1907. Banks on the continent began to tighten standards, causing a slowdown in economic activity. Additionally, policymakers begin to question the viability—and limitations—of a monetary system built upon a country’s store of gold. Back at home, the US Congress passed the Aldrich-Vreeland Act which established the National Monetary Commission. This group’s mandate was to identify ways to overhaul the banking industry. One glaring problem became clear: the country needed a central bank to manage the flow of funds. One of the Act’s namesakes, Senator Nelson Aldrich, called a secret meeting—not publicly acknowledged until the 1930s—at a secluded island off the coast of Georgia in 1910. Six wealthy and powerful men met at the ultra-exclusive Jekyll Island Club to rewrite the country’s entire banking system. The Aldrich Plan called for a system of 15 regional central banks which would make emergency loans to commercial member banks, and serve as a fiscal agent between the federal government and the banking industry. The Fed was born. The Panic of 1907 led to a realization that global economies were intertwined as never before. Sadly, that fact would be borne out some twenty-two years later.

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