Money Guide | system stress, cracks & breaks
Also: Indicators, World Watch, Weekly Agenda, News, Musings, Opportunities
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In this issue: interest-rate decisions and speculations, banking turmoil, bond rallies, Yale investing, and a few thoughts on system stress, cracks & breaks
Indicators
Previous update: March 12, 2023
π’=positive mid-term forecast*
π΄=negative mid-term forecast*
βͺ=neutral mid-term forecast*
π©=positive past-period performance
π₯=negative past-period performance
β¬=neutral past-period performance
β²=increase during past-period
βΌ=decrease during past-period
β=no change during past-period
Click here for an in-depth look at how to read the Money Guide Indicators
ππ©βΌ US Inflation: 6.00% (vs 6.40% 01/23)
ππ₯β² US Funds Rate: 4.75% (vs 4.50% 11/22)
ππ©βΌ US 02Y T-Note: 3.82% (vs 4.50%)
ππ©βΌ US 10Y T-Note: 3.44% (vs 3.70%)
ππ©βΌ DXY index: 103.86 (-0.7% vs 104.63)
πβ¬β EURUSD: 1.07 (0.0% vs 1.07)
ππ©βΌ EU Inflation: 8.50% (vs 8.60% 01/23)
ππ₯β² EU Funds Rate: 3.00% (vs 2.50% 02/23)
ππ₯β² USDMXN: 18.82 (+2.3% vs 18.40)
ππ©βΌ MX Inflation: 7.60% (vs 7.91% 01/23)
ππ₯β² MX Funds Rate:11.00%(vs10.50% 11/22)
πβ¬β MX 01Y Cetes: 12.07% (vs 12.07%)
ππ₯βΌ DJIA: 31997 (-4.1% vs 33374)
ππ©β² S&P500: 3917 (+1.1% vs 3876)
ππ©β² NDQ100: 12577 (+5.3% vs 11946)
ππ₯βΌ RUT: 1763 (-2.4% vs 1807)
ππ©βΌ GSCI: 541.73 (-5.9% vs 576.00)
ππ©βΌ Brent Oil: 73.70 (-11.7% vs 83.47)
ππ₯β² Gold: 1988 (+6.5% vs 1867)
ππ©β² BTC: 28058 (+26.3% vs 22216)
ππ©β² ETH: 1785 (+12.2% vs 1591)
π|β¬ Overall
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World Watch
πβ¬ International conflicts (Ukraine, US vs China, Middle East, East Asia)
ππ© Local conflicts (US, Latin America, Europe, China)
ππ© International Trade and Commodities (Shortages, chain disruptions)
ππ₯ Bond markets (Liquidity, Participants, Volatility)
πβ¬ Corporate health (Q42022 reports, 2023 forecasts)
For more:
2023 Threats
2023 Threatsβ status updates
Weekly Agenda
All times are US ET (UTC-5)
Monday, March 20
09:00 π EU ECB President Speech
Tuesday, March 21
07:30 π CA Inflation Rate
(Previous: *, Expected: *)
09:00 π US Federal Open Market Committee (FOMC) meeting
Wednesday, March 22
02:00 π UK Inflation Rate
(Previous: *, Expected: *)
13:00 π US Federal Open Market Committee (FOMC) meeting & statements β οΈ
(Previous: *, Expected: *)
Thursday, March 23
07:00 π UK BoE Interest Rate Decision
(Previous: *, Expected: *)
18:30 π JP Inflation Rate
(Previous: *, Expected: *)
Friday, March 24
08:45 π US Purchasing Managers' Index (PMI) report
β οΈProbable high volatility when information is released to the public
(Click here to read about the usual market behavior)
*Forecasts, analysis and additional information locked in the previous sections are available only in the premium edition of Money Guide for paid-subscribers
News
π° βͺ Confused about the bank meltdown? Here's how to speak Wall Street | Wall Street can seem bewildering, given its sheer amount of jargon, banking terms, and acronyms (link)
π° π’ βSystemic risk exceptionβ invoked to fully protect all Silicon Valley Bank depositors, Fed rolls out new backstop for banking sector | The Central Bank also announced that it will make more funding available to other banks to help assure they can meet the needs of all depositors (link)
π° βͺ What is the US Fed discount window andΒ why are banks using it so much? | In the tumultuous week ending March 15, banks borrowed $152.85 billion through the discount window, up from $4.58 billion the week before. The previous record was $111 billion, a mark reached during the 2008 financial crisis. Hereβs what to know. (link)
π° π’ UBS is buying Credit Suisse in bid to halt banking crisis | Switzerland's biggest bank, UBS, has agreed to buy its ailing rival Credit Suisse in an emergency rescue deal aimed at stemming financial market panic unleashed by the failure of two American banks earlier this month (link)
π° π΄ US Fed and other Central Banks try to head off crisis by boosting flow of US Dollars | The US Federal Reserve and several other major central banks announced a coordinated effort Sunday night to boost the flow of US dollars through the global financial system with the aim of keeping credit flowing to households and businesses. From Monday through at least the end of April, the Fed and other central banks will make dollars available on a daily basis, rather than weekly (link)
π° π’ Inflation gauge increased 0.4% in February, as expected and up 6% from a year ago in line with market expectations | A drop in energy prices helped keep inflation in check, while shelter costs increased sharply. The probability that the Fed would raise benchmark interest rates a quarter percentage point next week increased following the report (link)
π° π’ Wholesale prices post unexpected decline of 0.1% in February; retail sales fall | The producer price index fell 0.1% for February, below the estimate for a 0.3% increase (link)
π° π΄ ECB defies mounting banking strains with half-point rate rise | The ECB said in a statement that it would increase its key rate to 3%, following consecutive half-point rate increases in February and December. The 50 basis-point rise surprised analysts who had expected a smaller uptick given the tense market situation after the collapse of Silicon Valley Bank. Decision shows central bank still sees tackling inflation as its priority (link)
π° π΄ Court asks SEC to weigh in on whether loans should be securities | Any reclassification of syndicated loans as securities under the SEC would have enormous consequences, forcing issuers and banks to adhere to more regulations and forcing a rethink of the way issuers tap capital markets. The syndicated loan market is around $1.4 trillion in sizeΒ (link)
π° π’ What Metaverse? Meta says its single largest investment is now in 'advancing AI' | Roughly a year-and-a-half after Facebook renamed itself "Meta" and said it would go all-in on building a future version of the internet dubbed the metaverse, the tech giant now says its top investment priority will be advancing artificial intelligence (link)
π° π΄ Argentina's inflation tops 100% for the first time since 1991 | Argentina's yearly inflation rate rose past 100% for the first time in three decades, as the government struggles to control rising prices (link)
π° π΄ Russia: 60-day extension of wartime grain deal acceptable | A Russian delegation at talks with senior U.N. officials said Monday that Moscow is ready to accept an extension to a grain export deal that has helped bring down global food prices amid the war in Ukraine -but only for 60 days as the Kremlin holds out for changes to how the arrangement is working (link)
Musings
π π΄ Traders worldwide herald end to rate hikes after US bank run | Global bond markets have declared that the steepest global monetary tightening campaign in a generation has nearly run its course (link)
π π΄ What the SVB fallout could mean for the next US Fed rate hike | Recent bank failures are a reminder that sharp rate increases could break things (link)
π π΄ Credit Suisse and Silicon Valley Bank were both addicted to clients | Both put clientsβ interests first, which is great, until it isnβt (link)
Opportunities
π‘ Yale invests this way. Should you? | Yale Universityβs endowment has earned spectacular returns in hedge funds, private equity and other βalternative assetsβ. Investors hoping to mimic the school need to understand what has made it successful (link)
π‘ JPMorgan joins those saying cash in bond gains as hikes possible | US government bonds have surged in recent days as traders cut wagers on Fed rate hikes amid turmoil in the banking sectorΒ (link)
A few thoughts onβ¦
system stress, cracks & breaks
By now, almost everyones knows Silvergate Bank, Silicon Valley Bank and Signature Bank collapsed. First Republic Bank received a liquidity injection from other top banks. There were wild speculations as to what would happen to Credit Suisse until UBS announced a takeover. The US Fed and the US Treasury took drastic measures to prevent a full-blown crisis.
In a span of just 11 days, the banking situation has dramatically changed. Some issues were already there and just surfaced or were widely noticed, others materialized overnight.
Last week, I wrote:
When we talk about the 2007-2008 Great Financial Crisis many terms come to mind: βDerivativesβ, βSub-Primeβ, βCollateralised Debt Obligationsβ (CDOs), βCredit Default Swapsβ (CDS). Maybe this time everyone will get familiarized with βConcentrated risksβ, βInterest-rate risksβ, βMark-to-Market lossesβ, βBank-runsβ and some other ones.
(Click here to read the full piece)
What happened to the previous conversation? The one about βinflationβ, βwagesβ, βraising ratesβ, βquantitative tighteningβ. Did it go away? Did it lose relevance? Of course not. The main focus, right now, is on βbanking distressβ but it is still a conversation about βinflationβ.
What we are seeing are the effects of Central Banks efforts to fight inflation which are, ultimately, the delayed consequences of the economic crisis unleashed by the COVID-19 pandemic. The pandemic threw a wrench into the well-oiled World Economy, and an immediate recession followed. The recession was short (mere months) and shallow: governments raced to keep things moving providing stimulus measures that pulled general demand forward when there was little supply, pushing inflation higher. We depleted demand in advance, and now we are stuck with supply, high inflation and waning demand. This slowing of the economy wasnβt just expected, but encouraged by Central Banks:
By raising rates, money becomes more expensive to borrow, and interest makes future money more valuable.
The overall result is a reduction on the general economic activity, and the market forces that normally push prices higher (investing, development and supply/demand dynamics).
The common consequences are: unemployment (as explained by the Phillips Curve) and prices dropping (including commodities, products, services, bonds, stocks, and almost everything else)
(Click here to read the full piece)
How bad does that sound? Well, that depends on what do we imagine while reading those words. Most people do not entertain those thoughts for longer than they have to.
Central Banks are trying to make everyone tighten their belts. But some belts get tighter, and others look more like a noose around the neck. All that stress causes cracks and, eventually, breaks. Itβs not just about unemployment. Itβs about loan defaults, foreclosures, bankruptcies. It is about uncertainty, fear and unrest.
Remember when we talked about divergences?
[β¦]market participants have multiple diverging opinions. Those opinions are weighted, according to their share of the market activity. And that doesnβt mean those opinions are correct. That only means the price is right, in the sense of being the consensus. Price is not the same as value. And when there are important divergences of price and value, a correction is expected.
(Click here to read the full piece)
Some think that the problems will happen, but they wonβt happen directly to them, as if being oblivious is the best course of action to navigate these turbulent times.
Many were hoping for a βsoft-landingβ (some still rare). Thatβs a euphemism for an economic miracle. Solving an inflationary crisis with little-to-no adverse effects for the general economy.
In reality, there has to be an economic crisis to fix the inflationary crisis. How big or small, that is debatable. I hope this crisis wonβt be so harsh. But things will break. And once things break, all bets are off. Models canβt predict all outcomes for the chain reactions that will be unleashed, and there will always be random factors into play.
If the US Fed decides (as the ECB just did) to keep fighting inflation through higher Target Interest Rates for longer and Quantitative Tightening, then we should expect more stress, more cracks and more breaks before this is over.
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take care, have fun, be chill
-SM
There is more to life than money. Be in the knowβ¦
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