Category: Economy

The U.S. Debt Limit and the False Sense of Security in Money Market Funds

Posted on by phoffman@channelchek.com
Image Credit: Images Money (Flickr)

Even a Short-Lived Default Would Hurt Money Market Fund Investors

While the U.S. Treasury is now at the mercy of politicians negotiating, positioning, and stonewalling as they work to raise the debt ceiling to avoid an economic catastrophe, money kept on the sidelines may be at risk. Generally, when investors reduce their involvement in stocks and other “risk-on” trades, they will park assets in money market funds. These investment products are now paying the highest interest rates in 15 years, which has made the decision to “take money off the table” even easier for those involved in the markets.

But, are investors experiencing a false sense of security?

Background

Money Market Funds (MMF) are mutual funds that invest in top credit-tier (low-risk) debt securities with fewer than 397 days to maturity. The SEC requires at least 10% to be maturing daily and 30% to be liquid within seven days. The acceptable securities in a general MMF include Treasury bills, commercial paper, and even bank CDs. The sole purpose of a money market fund is to provide investors with a stable value investment option with a low level of risk.

Unlike other mutual funds, money market funds are initially set and trade at a $1 price per share (NAV). As interest accrues, rather than the value of each share rising, investors are granted more shares (or fractional shares) at $1. However, the funds are marketed-to-market each day. Typically market prices don’t impact short-term debt securities at a rate above the daily interest accrual. But “typically” doesn’t mean always. Occasionally, asset values have dropped faster than the daily interest accrual. When this happens, the fund is worth less than $1 per share. It’s called “breaking the buck.”

When a money market fund “breaks the buck,” it means that the net asset value (NAV) per share of the fund falls below $1. In addition to quick valuation changes, it can also happen when the fund’s expense ratio exceeds its income. You may have gotten a notice during the extremely low interest period that your money market fund provider was absorbing expenses. This was to prevent it from breaking the buck.

Nothing is Risk Free

Just under $600 billion has moved into money-market funds in the past ten weeks. This is more than flowed into MM accounts after Lehman Brothers went belly up which set off panic and flights to safety. Currently, $5.3 trillion is invested in these funds; this is approaching an all-time record.

The Federal Reserve has been lifting interest rates at a record pace, the level they have the most control over is the bank overnight lending rate, or Fed Funds. This impacts short-term rates the most. Along with more attractive rates, stock market investors have become nervous. This is another reason asset levels in MMFs are so high – a high-yielding money-market fund that is viewed as risk-free looks attractive compared to the fear of getting caught in a stock market sell-off.  

As discussed before, there are risks in money-market funds. And right now, the risks may be peaking. This is because government spending has exceeded the ability for the U.S. to borrow and pay for it under the current debt ceiling limit. The limit was actually reached last January when it was addressed by kicking the problem further down the road. Well, the road now ends sometime in June. In fact, U.S. Treasury Secretary Janet Yellen said the U.S. government may run out of cash by June 1 if Congress doesn’t act, and that economic chaos would ensue if the government couldn’t pay its obligations. Not paying obligations would include not paying interest on maturing U.S. Treasuries.

It isn’t a stretch to say the foundation of all other securities pricing is in relationship with the “risk-free” rate of U.S. debt. That is to say, price discovery has as its benchmark that which can be earned in U.S. debt which has been presumed to be without risk of non-payment.

What Happens to Money Market Funds in a Default?

In a default, the U.S. Treasury wouldn’t pay the full principle it owes on liabilities such as maturing  Treasury debt – short term term government debt with extremely short average maturities is a staple of market funds. That is why the price of one-month Treasury debt has dropped recently, sending its yield up to above 5% from a 2023 low of about 3.3%. It has driven expected returns of MMFs up as well, but there is a risk that these short maturities may not get fully paid on time. Many fund providers’ money market funds would then break the $1 share price.

Breaking the buck can have significant consequences for investors, particularly those who rely on money market funds for their cash reserves. Because money market funds are considered a low-risk investment, investors may not expect to lose money on their investment. If a money market fund breaks the buck, it would diminish investor confidence in the stability of these funds, leading to a potential run on the fund and broader implications for the financial system.

Likelihood of Breaking the Buck

Money market funds breaking the buck is a relatively rare occurrence. According to the Securities and Exchange Commission (SEC), there have been only a few instances where MMFs have broken the buck in the history of the industry. The most significant of these occurred in 2008 during the financial crisis when one of the oldest money market funds, Reserve Primary Fund, dropped below $1 due to losses on its holdings of Lehman Brothers debt securities. This event led to a run on many money market funds creating significant instability in the financial system.

Since the Reserve Primary Fund incident, regulatory changes have been implemented to strengthen the money market fund industry and reduce the risk of funds breaking the buck. These changes include requirements for funds to maintain a minimum level of liquidity, hold more diversified portfolios, and limit their exposure to certain types of securities.

Take Away

Nothing is risk-free. Banks such as Silicon Valley Bank found that out when their investment portfolio, largely low credit risk, normally stable securities, wasn’t valued at what they needed it to be worth to fund large withdrawals.

Stock market investors that were drawn in invest in to rising bond yields also found that when yields keep rising, the values of their portfolios can drop just as quickly as if they were invested in stocks during a sell-off. While no one truly expects the current tug-of-war over debt levels in Washington to lead to a U.S. default, one can’t be sure at a time when there have been many firsts that we thought could never happen in America.

Paul Hoffman

Managing Editor, Channelchek

Can You Prepare for Hyperinflation?

Posted on by phoffman@channelchek.com

Hyperinflation, Can Investors Protect Themselves?

Inflation in Argentina so far in 2023 is running at 126.4%. Meanwhile, its GDP has declined by 3.1%. This certainly meets the definition of hyperinflation. Can this situation occur in the U.S. economy? Hyperinflation is when prices of goods and services in the economy run up rapidly; at the same time, it causes the value of the nation’s currency to fall rapidly. It’s a devastating phenomenon that has serious consequences for businesses, investors, and households. Below we explore the causes of hyperinflation, its effects on the economy, and some ways to protect investable assets against it.

Causes of Hyperinflation

Hyperinflation can be caused by a variety of factors, but one ingredient that is most common is excessive money printing by the country’s central bank. When a central bank allows excessive cash in circulation, especially if it is during a period of low or negative growth, natural economic forces that occur when there is an abundance of currency chasing the same or fewer goods, serves to drive up prices and down currency values. This inflation can quickly spiral out of control, leading to hyperinflation. Other causes could include shortages of goods or services driving prices up as demand outstrips available supply.

Effects on the Economy

Excessive inflation is not good for anyone that holds the impacted currency. Businesses can command higher prices, but they will also be paying higher prices to run their business and receiving payment with notes with far less purchasing power. This is because hyperinflation increases costs for labor and raw materials, weighing down profit margins. Less obvious, but certainly adding to the hardship, is that businesses may have trouble securing financing and loans during hyperinflation; this can limit their ability to function or grow.

For households and individuals, hyperinflation also rapidly decreases purchasing power, as prices for goods and services jump up. This lowers living standards in the country as people are forced to pay more for the same goods and services. Additionally, hyperinflation can lead to a loss of confidence in the currency. Behavior including the belief that items should be purchased now because they will be more expensive tomorrow leads to hoarding and other actions that create shortages and drives up prices even further.

How Some Prepare for Hyperinflation

Hyperinflation is rare, yet, once the wheels start turning, such as they did in Venezuela in 2016, or Germany in 1923, it is important for businesses and individuals to take steps to prepare for the possibility. Here are ways that people have prepared for excessive inflation in their native currency.

Diversify Your Investments: While some believe it is always prudent to stay widely diversified, it may offer even more protection when the economy goes through the turmoil of excessive inflation. Preparing in this way means spreading your investments across a variety of asset classes, such as stocks, bonds, real estate, and commodities. This will help by avoiding any one particular asset class that gets hit hard. Keep in mind, stocks are often a good hedge against moderate inflation, and precious metals have historically been looked to for protection in times of extreme inflation. Earnings of companies that export are not expected to suffer as much as importers.

Hold Some Assets Denominated in Other Currencies: This can include established digital currencies, foreign stocks, bonds, that are not denominated in your own home currency. By holding assets denominated in other currencies, you can protect yourself from its devaluation versus others.

Invest in Hard Assets: Hard assets, such as gold and silver, land, and even tools can be a good way to protect yourself or your business from hyperinflation. These assets have intrinsic value and can retain their value even if the currency they are denominated in loses value. Remember that if inflation remains, it is likely to cost more in the coming months for the same piece of office equipment that helps your business run more efficiently.

Cryptocurrencies: Keeping within the guidelines of diversification, more established tokens such as bitcoin and ether are considered by some to help protect from hyperinflation. A word of caution, cryptocurrencies have little history against currency devaluation and inflation. The theory however is these digital currencies are decentralized and not subject to the same inflationary pressures as fiat currencies.

Take Away

In 2018 inflation in Venezuela exceeded 1,000,000%, proving, when the recipe for higher prices is in place, the unimaginable can happen.  

While there is no consumer or investor that can proactively impact a rising price freight train, if hyperinflation is expected, there are steps one can take to reduce the negative impacts. These financial steps can be as simple as buying things today that you expect to need later, and more substantially diversifying your portfolio toward hard assets, companies that export to countries not experiencing inflation, and even bonds with either short maturities or an inflation factor as part of the return.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.nasdaq.com/articles/argentina-inflation-seen-at-126.4-in-2023-central-bank-poll-shows

https://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhyperinflation.html#:~:text=In%201923%2C%20at%20the%20most,surprise%20by%20the%20financial%20tornado.

https://www.theatlantic.com/business/archive/2012/03/the-hyperinflation-hype-why-the-us-can-never-be-weimar/254715/

The Week Ahead –  Inflation (CPI), Inflation (PPI), and Fed Governors’ Words of Wisdom

Posted on by phoffman@channelchek.com

The Market is Deciding if the Fed is Finished or Not, Here’s How this Week Will Help

Two key inflation reports and quite a few Fed governors are coming out of the blackout period, removing the gag and sharing their thoughts on the state of the economy and monetary policy. Last Friday’s strong US Jobs report has left many market participants looking for a clearer sign that the Fed will take a neutral stance. The two inflation reports and Fed governor addresses may help make clear the Fed’s next “data dependent” step.  

Monday 5/8

•             10:00 AM ET, Wholesale Inventories (preliminary), this is the second estimate for March wholesale inventories. It is expected to print at a 0.1 percent build-up, unchanged from the first estimate. The report measures the dollar value of sales made and inventories held by wholesalers.

Tuesday 5/9

•             House Speaker Kevin McCarthy will meet with President Joe Biden to discuss the debt limit. The meeting comes three weeks before the U.S. is projected to run out of money to pay its bills.

•             6:00 AM ET, The Small Business Optimism Index has been below, at times deeply below, the historical average of 98. The April consensus is 89.7 versus 90.1 in March.

•             8:30 AM ET, Phillip Jefferson took office as a member of the Board of Governors of the Federal Reserve System in May 2022. While he is relatively unknown, he may begin to play a larger part as he is considered a favorite for Fed Vice Chair, with Biden set to nominate Jefferson for the seat vacated by Lael Brainard seat.

•             12:05 AM ET, John Williams is the President of the New York Federal Reserve. The New York Fed President takes the role of Vice Chair of the FOMC, the seat is a permanent voting member (outside the rotation).

Wednesday 5/10

•             8:30 AM ET, Consumer Price Index (CPI) for April is expected to show that core prices are continuing at the same pace of a monthly increase of 0.4 percent. The headline number is also expected to rise 0.4 percent after March’s 0.1 percent increase, which was below expectations – remember, energy prices spiked last month. Annual rates, which in March were 5.0 percent headline and 5.6 percent for the core, are expected at 5.0 and 5.5 percent, showing little or no improvement.

•             2:00 PM, the Treasury Statement for April is expected to show a $410.0 billion surplus. That would compare with a $308.2 billion surplus in April a year-ago and a deficit in March this year of $378.1 billion. April, tax month, is the seventh month of the government’s fiscal year.

Thursday 5/11

•             8:30 AM ET, the Producer Price Index (PPI), after falling 0.5 percent in March, is expected to rise 0.3 percent in April. The annual rate ending April is forecast to be 2.5 percent, down slightly from March’s 2.7 percent. April’s ex-food ex-energy rate is seen at 0.2 percent on the month and 3.3 percent on the year versus March’s monthly 0.1 percent decline and plus 3.4 percent yearly rate.

•             7:45 AM ET, Christopher Waller is a member of the St. Louis Federal Reserve Board of Governors. He is a CBDC advocate. Along with Bullard and Mester, Waller is considered to be among the Fed hawks.

•             4:30 AM ET, The Fed’s balance sheet is a weekly report presenting a consolidated balance sheet for all 12 Reserve Banks. It lists factors supplying reserves into the banking system and factors absorbing reserves from the system. The official name for the report is Factors Affecting Reserve Balances, otherwise known as the “H.4.1” report. This report has taken on renewed interest as it is the only place to get information on quantitative tightening moves, and the impact of new measures taken to secure troubled banks.

Friday 5/12

•             8:30 PM ET, Import/Export Prices. Import Prices, an inflation harbinger is expected to rise 0.3 percent for April, this would end nine straight declines. Export prices are expected to rise 0.2 percent.

•             10:00 PM ET, Consumer Sentiment looking at the first indication for May, which in April fell 1.5 points to 63.5, is expected to fall another half point to 63.0.

•             7:45 PM ET, a late day address by St. Louis Fed Chair James Bullard.

What Else

Investment roadshows are like getting a front-row seat to information direct from management’s mouth. The most useful investor information often comes from the unplanned responses to questions during the roadshow – either asked by you, or other interested investors.

Noble Capital Markets has a growing, interesting calendar of roadshows during the week and month. Some are in cities that are paid less attention to. These include Entravision in Kansas City, MO, on May 9 (lunch). Entravision will again be presenting on May 10 in ST. Louis (lunch). Also on May 10, Salem Media will be in New York (lunch). For more details, and a complete list of roadshows and cities, Click here.

Paul Hoffman

Managing Editor, Channelchek

Sources:

https://www.federalreserve.gov/newsevents/calendar.htm

https://www.federalreserve.gov/newsevents/calendar.htm

https://www.econoday.com/

https://www.channelchek.com/news-channel/noble_on_the_road___noble_capital_markets_in_person_roadshow_series

Debt Ceiling Crisis Versus Partisan Politics

Posted on by phoffman@channelchek.com
Image Credit: The White House

Can Biden and McCarthy Avert a Calamitous Debt Default? Three Evidence-Backed Leadership Strategies that Might Help

The U.S. is teetering toward an unprecedented debt default that could come as soon as June 1, 2023.

In order for the U.S. to borrow more money, Congress needs to raise the debt ceiling – currently $31.4 trillion. President Joe Biden has refused to negotiate with House Republicans over spending, demanding instead that Congress pass a stand-alone bill to increase the debt limit. House Speaker Kevin McCarthy won a small victory on April 26 by narrowly passing a more complex bill with GOP support that would raise the debt ceiling but also slash spending and roll back Biden’s policy agenda.

Biden recently invited congressional leaders, including GOP leader McCarthy, to the White House on May 9 to discuss the situation but insisted he isn’t willing to negotiate.

Rather than leading the nation, Biden and McCarthy seem to be waging a partisan political war. Biden likely doesn’t want to be seen as giving in to Repubicans’ demands and diminishing legislative wins for his liberal constituency. McCarthy, with his slim majority in the House, needs to appease even the most hard-line members of his party.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of, Wendy K. Smith, Professor of Business and Leadership, University of Delaware.

Having studied leadership for over 25 years, I would suggest that their leadership styles are polarized, oppositional, short-term and highly ineffective. Such combative leadership risks a debt default that could send the U.S. into recession and potentially lead to a global economic and financial crisis.

While it may seem almost impossible in the current political climate, Biden and McCarthy have an opportunity to turn around this crisis and leave a positive and lasting legacy of courageous leadership. To do so, they need to put aside partisanship and adopt a different approach. Here are a few evidence-backed strategies to get them started.

Moving From a Zero-Sum Game to a More Holistic Approach

Political leaders often risk being hijacked by members of their own party. McCarthy faces a direct threat by hard-line conservative members of his coalition.

For example, back in January, McCarthy agreed to let a single lawmaker force a vote for his ouster to win enough votes from ultraconservative lawmakers to become speaker. That and other concessions give the most extreme members of his party a lot of control over his agenda and limit McCarthy’s ability to make a compromise deal with the president.

Biden, who just announced he’s running for reelection in 2024, is betting his first-term accomplishments – such as unprecedented climate investments and student loan forgiveness – will help him keep the White House. Negotiating any of that away could cost him the support of key parts of his base.

My research partner Marianne W. Lewis and I label this kind of short-term, one-sided leadership as “either/or” thinking. That is, this approach assumes that leadership decisions are a zero-sum game – every inch you give is a loss to your side. We argue that this kind of leadership is limited at best and detrimental at worst.

Instead, we find that great leadership involves what we call “both/and” thinking, which involves seeking integration and unity across opposing perspectives. History offers examples of how this more holistic leadership style has achieved substantial achievements.

President Lyndon B. Johnson and fellow Democrats were struggling to get a Senate vote on the Civil Rights Act of 1964 and needed Republican support. Despite his initial opposition, Republican Sen. Everett McKinley Dirksen – then the minority leader and a staunch conservative – led colleagues in crossing party lines and joining Democrats to pass the historic legislation.

Another example came in 1990, when South Africa’s then-President Frederik Willem de Klerk freed opponent Nelson Mandela from prison. The two erstwhile political enemies agreed to a deal that ended apartheid and paved the way for a democratic government – which won them both the Nobel Peace Prize. Mandela became president four years later.

This integrative leadership approach starts with a shift of mindset that moves away from seeing opposing sides as conflicting and instead values them as generative of new possibilities. So in the case of the debt ceiling situation, holistic leadership means, at the least, Biden would not simply put up his hands and refuse to negotiate over spending. He could acknowledge that Republicans have a point about the nation’s soaring debt load. McCarthy and his party might recognize they cannot just slash spending. Together they could achieve greater success by developing an integrative plan that cuts costs, increases taxes and raises the debt ceiling.

Champion a Long-Term Vision Over Short-Term Goals

What we call “short-termism” plagues America’s politics. Leaders face pressure to demonstrate immediate results to voters. Biden and McCarthy both have strong incentives to focus on a short-term victory for their side with the presidential and congressional elections coming soon. Instead, long-term thinking can help leaders with competing agendas.

In a 2015 study, Natalie Slawinski and Pratima Bansal studied executives at five Canadian oil companies who were dealing with tensions between keeping costs low in the short term while making investments that could mitigate their industry’s environmental impact over the long run. The two scholars found that those who focused on the short term struggled to reconcile the two competing forces, while long-term thinkers managed to find more creative solutions that kept costs down but also allowed them to do more to fight climate change.

Likewise, if Biden and McCarthy want to avert a financial crisis and leave a lasting legacy, they would benefit from focusing on the long term. Finding points of connection in this shared long-term goal, rather than stressing their significant differences about how to get there, can help shift away from their standoff and toward a solution.

Be Adaptive, Not Assured

Voters often praise political leaders who act swiftly and with confidence and self-assurance, particularly at a moment of economic uncertainty.

Yet finding a creative solution to America’s greatest challenges often requires leaders to put aside the swagger and adapt, meaning they take small steps to listen to one another, experiment with solutions, evaluate these outcomes and adjust their approach as needed.

In a study of business decisions at a Fortune 500 technology company, I spent a year following the senior management teams in charge of six units – each of which had revenues of over $1 billion. I found that the team leaders who were most innovative tended to be good at adaptation. They constantly explored whether they had made the right investment and made changes if needed.

Small steps are also necessary to build unlikely relationships with political foes. In his 2017 book, “Collaborating With the Enemy,” organizational consultant Adam Kahane describes how he facilitated workshops to help former enemies take small steps toward reconciliation, such as in South Africa at the end of apartheid and in Colombia amid the drug wars. Such efforts helped South Africa become a successful multiracial democracy and Colombia end decades of war with a guerrilla insurgency.

This kind of leadership requires small steps toward connection rather than large political leaps. It also requires that both sides let go of their positions and consider where they are willing to compromise.

Biden and McCarthy could learn from two former Tennessee governors, Democrat Phil Bredesen and Republican Bill Haslam. Though they oppose each other on almost every political issue, including gun control, the two former leaders have built a constructive relationship over the years. Rather than tackle the big divisive issues, they started with identifying the small points where they agreed with each other. Doing so led them to build greater trust and continue to look for connections.

So when a gunman killed six people at a school in Nashville recently, the two former governors were able to move beyond political finger-pointing and focus on how their respective parties could work together on meaningful gun reform.

Of course, it’s easier to do this once you’re out of office and the pressure from voters and parties goes away. And although current Tennessee Gov. Bill Lee agreed on the need for gun reform, his fellow Republicans in the state Legislature balked.

A Long Shot, But …

And that’s why I know this is a long shot. The two main political parties are as polarized as ever. The odds of a breakthrough that leads to anything more than a last-second deal that kicks the debt ceiling can down the road remain pretty low – and even that seems in doubt.

But this is about more than the debt ceiling. The U.S. faces a long list of problems big and small, from high inflation and a banking crisis to the war in Ukraine and climate change.

Americans need and deserve leaders who will tackle these issues by working together toward a more creative outcomes.

May’s FOMC Meeting and the Statement Pivot

Posted on by phoffman@channelchek.com
Image Source: Federal Reserve

The FOMC May Now Apply Less Brake Pedal to the Economy

The Federal Open Market Committee (FOMC) voted to raise overnight interest rates from a target of 4.75% – 5.00%. to the new target of 5.00% – 5.25%. This 25bp move was announced at the conclusion of the Committee’s May 2023 meeting. The monetary policy shift in bank lending rates had been expected but concerns of the impact of tightening on some economic sectors, including banking, had been called into question and left Fed-watchers unsure if the Fed would clearly indicate a pause in the tightening cycle. Inflation which had been easing somewhat going into the last FOMC held in March has since reversed direction and remains elevated.

As for the U.S. banking system, which is part of the Federal Reserves responsibility, the FOMC statement reads, “The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.”

As for inflation which is hovering at more than twice the Fed’s target, the post FOMC statement reads, “The Committee remains highly attentive to inflation risks.” Both of these quotes can be viewed as not trying to panic markets in either direction.

There were few clues given in the statement about any next move, causing some to believe that the Fed is now going to take a wait-and-see position as previous rate hikes play out in the economy. The statement was shorter than previous releases following a two-day FOMC meeting, but it ended with the following forward-looking actions:

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

Fed Chair Powell generally shares more thoughts on the matter during a press conference beginning at 2:30 after the statement.

Paul Hoffman

Managing Editor, Channelchek

US Debt Ceiling Explained

Posted on by phoffman@channelchek.com
Source: The White House

What Happens if the US Hits the Debt Ceiling?

The US debt limit is the total amount of money the United States government is authorized to borrow to meet its existing obligations. These include interest on debt, Social Security, military costs, government payroll, utilities, tax refunds, and all costs associated with running the country.

The debt limit is not designed to authorize new spending commitments. Its purpose is to provide adequate financing for existing obligations that Congress, through the years, has approved. While taxes provide revenue to the US Treasury Department, taxation has not been adequate since the mid-1990s to satisfy US spending. This borrowing cap, the so-called debt ceiling, is the maximum congressional representatives have deemed prudent each year, and has always been raised to avert lost faith in the US and its currency.

Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – which has never happened before. Default would bring about another financial crisis and threaten the financial well-being of American citizens. Since a default would be much more costly than Congress meeting to approve a bump up in the borrowing limit, which the President could then sign, it is likely that any stand-offf will be resolved on time.

Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt.

How Does this Apply Today?

According to the Congressional Budget Office, tax receipts through April have been less than the CBO anticipated in February. The Budget Office now estimates that there is a significantly elevated risk that the US Treasury will run out of funds in early June 2023. The US Treasury Secretary has even warned that after June 1, the US will have trouble meeting its obligations. The implications could include a credit rating downgrade in US debt which could translate to higher interest rates. If US Treasury obligations, the so-called “risk free” investments, does not pay bondholders on time (interest), then the entire underpinning of an economy that relies on the faith in its economic system, could quickly unravel.

What Took Us Here?

On January 19, 2023, the statutory limit on the amount of debt that the Department of the Treasury could issue was reached. At that time, the Treasury announced a “debt issuance suspension period” during which, under the law, can take “extraordinary measures” to borrow additional funds without breaching the debt ceiling.

The Treasury Dept. and the CBO projected that the measures would likely be exhausted between July and September 2023. They warned that the projections were uncertain, especially since tax receipts in April were a wildcard.

It’s now known that receipts from income tax payments processed in April were less than anticipated. Making matters more difficult, the Internal Revenue Service (IRS) is quickly processing tax return payments.

If the debt limit is not raised or suspended before the extraordinary measures are exhausted, the government will ultimately be unable to pay its obligations fully. As a result, the government will have to delay making payments for some activities, default on its debt obligations, or both.

What Now?

The House of Representatives passed a package to raise the debt ceiling by $1.5 trillion in late April. The bill, includes spending cuts, additional work requirements in safety net programs, and other measures that are unpopular with Democrats. To pass, the Senate, which has a Democratic majority, would have to pass it. Democratic Senator Chuck Schumer described the chances as “dead on arrival.”

House Speaker McCarthy has accepted an invitation from President Biden to meet on May 9 to discuss debt ceiling limits. The position the White House is maintaining is that it will not negotiate over the debt ceiling. The President’s party is looking for a much higher debt ceiling that allows for greater borrowing powers.

In the past, debt ceiling negotiations have often gone into the night on the last day and have suddenly been resolved in the nick of time. Treasury Secretary Yellen made mention of this and warned that past debt limit impasses have shown that waiting until the last minute can cause serious harm, including damage to business and consumer confidence as well as increased short-term borrowing costs for taxpayers. She added that it also makes the US vulnerable in terms of national security.

Expect volatility in all markets as open discussions and likely disappointments will heat up beginning at the May 9th meeting between McCarthy and Biden.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://fiscaldata.treasury.gov/americas-finance-guide/

https://www.cbo.gov/taxonomy/term/2/latest

https://www.cbo.gov/publication/58906

Which Other Banks Could Wipeout?

Posted on by phoffman@channelchek.com
Image Credit: Hellinahandbasket (Flickr)

Well Known Banks that May be Secretly Insolvent

The taming of monetary policy necessary to slow price inflation has triggered a corrective trend in the valuation of financial instruments. Many big banks in the United States have substantially increased their use of an accounting technique that allows them to avoid marking certain assets at their current market value, instead using the face value in their balance sheet calculations. This accounting technique consists of announcing that they intend to hold such assets to maturity.

As of the end of 2022, the bank with the largest amount of assets marked as “held to maturity” relative to capital was Charles Schwab. Apart from being structured as a bank, Charles Schwab is a prominent stockbroker and owns TD Ameritrade, another prominent stockbroker. Charles Schwab had over $173 billion in assets marked as “held to maturity.” Its capital (assets minus liabilities) stood at under $37 billion. At that time, the difference between the market value and face value of assets held to maturity was over $14 billion.

If the accounting technique had not been used the capital would have stood at around $23 billion. This amount is under half the $56 billion Charles Schwab had in capital at the end of 2021. This is also under 15 percent of the amount of assets held to maturity, under 10 percent of securities, and under 5 percent of total assets. An asset ten years from maturity is reduced in present value by 15 percent with a 3 percent increase in the interest rate. An asset twenty years from maturity is reduced in present value by 15 percent with a 1.5 percent increase in the interest rate.

The interest rates for long-term financial instruments have remained relatively stable throughout the first quarter of 2023, but this may be subject to change as many of the long-term assets of recently failed Silicon Valley Bank and Signature Bank must be sold off for the Federal Deposit Insurance Corporation to replenish its liquidity. The long-term interest rate is also heavily dependent on inflation expectations, as with higher inflation a higher nominal rate is necessary to obtain the same real rate. It is also important to remember that the US Congress has persisted in not raising the debt ceiling for the government, which is currently projected to not be able to meet all its obligations by August. This could impact the value of treasuries held by the banks.

Other banks that may be close to an effective insolvency include the Bank of Hawaii and the Banco Popular de Puerto Rico (BPPR). The Bank of Hawaii’s hypothetical shortfall as of the end of 2022 already exceeded 60 percent of its capital. The BPPR has over double its capital in assets held to maturity. All three banks—Bank of Hawaii, BPPR, and Charles Schwab—have lost between one-third and one-half of their market capitalization over the last month.

It is difficult to say with certainty whether they are indeed secretly close to insolvency as they may have some form of insurance that could absorb some of the impact from a loss of value in their assets, but if this were the case it is not clear why they would need to employ this questionable accounting technique so heavily. The risk of insolvency is currently the highest it’s been in over a decade.

Central banks can solve liquidity problems while continuing to raise interest rates and fight price inflation, but they cannot solve solvency problems without pivoting monetary policy or through blatant bailouts, which could increase inflation expectations, exacerbating the problem of decreasing valuations of long-term assets. In the end, the Federal Reserve might find that the most effective way to preserve the entire system is to let the weakest fail.

What Investors Learned in April That They Can Use in May

Posted on by phoffman@channelchek.com
Image Credit: Bradley Higginson (Flickr)

Stock Market Performance – Looking Back at April, Forward to May

Will the hawks at the Federal Reserve find their perch following the May FOMC meeting? After an aggressive year of tightening, many expect Powell will now signal a pause while the Fed keeps a sharp eye on inflation and other pests that thrive in an overly stimulated economy. Bearish investors that have pulled back are now beginning to have reasons to change their sentiment – their lack of aggressiveness or risk aversion during a solid stock market showing in April may turn their JOMO (joy of missing out) to FOMO (fear of missing out) in the coming weeks.

For a while, the markets have been paddling upstream, navigating a shaky economy with poor visibility. Once the FOMC meeting is in its wake, the stock market should have more visibility from which to make decisions.

Out of the Woods Yet?

The next scheduled FOMC meeting is May 2-3. The expectation is that they will decide to raise Fed Funds another 25bp and then just observe as higher interest rates and all-around tighter money play out in the U.S. economy. Investors will know during the first week of the month if this is what they can expect as Fed Chair Powell will offer guidance at his press conference on May 3.

If the barrage of rate hikes is over, investors will turn their focus toward other factors. These could include the U.S. debt ceiling which is expected to be reached in June, a weakening dollar which benefits U.S. exports, and whether the stock market, which has been pricing itself for a recession may have gone too far with the fear trade.   

Source: Koyfin

Not shown in these charts is performance since Silicon Valley Bank was closed (March 12). One might expect that this would have caused investors to run to the sidelines. Instead, the S&P 500 rose 8% since March 10. It may be that the event has served as a turning point.

Look Back

Three of four broad stock market indices (Dow 30, S&P 500, Nasdaq 100, and Russell 2000) were positive in April. The Russell Small-cap index demonstrates the caution that investors were still taking. In theory, small-cap stocks that have traditionally outperformed over longer periods, should make up for some of this lost ground at some point, and reward investors. April was not a month where the risk-on trade made this happen.

The Dow industrials, considered a more conservative index, was up nearly 2.50% during the month. The S&P 500 index was lower at nearly 1.50%, and the Nasdaq 100 rose nearly .50%.

Market Sector Lookback

Of the 5 top performing S&P market sectors (SPDR) all exceeded a 5% return on the month. Top on this list was communications stocks in the XLC SPDR; it returned 7.21%. Real Estate rallied in the XLRE to return 7.03% in April, this marks a big turnaround after months of real estate weakness.

One might think that the markets are irrational when they see the financial stocks in the XLF is the third best performer. But the index which includes large banks such as JP Morgan Chase, and Wells Fargo benefitted from investors that quickly decided that the Silicon Valley Bank failure brought financial stocks below where they should be valued.

Energy, as benchmarked by the XLE SPDR rallied as the price of oil began rising after an OPEC decision last month. The price of oil carried energy stocks with it. Lastly, consumer staples indicated by XLP moved up to perform slightly better than the overall S&P 500 Index (SPX).

Source: Koyfin

Of the bottom 5, or lowest performing SPDR benchmark ETFs, all were positive performers. The worst of which is Industrials (XLI) returning 1.81%. Second from the bottom was the materials sector shown as XLB, this returned 3.60%. Consumer discretionary companies, or XLY, includes companies like Starbucks, Home Depot, and Nike. This index was third worst, but still approached the average of the full S&P 500 at 4.35%.

XLU are utilities, since utilities usually attract dividend investors, rising rates can weigh on these companies. Many utilities also find their costs increase as energy prices rise. However, the 4.59% increase in the index ETF was part of a broad-based upward move in stocks last month.

The best of the worst was the technology sector or XLK. The return of 4.63% during April shows that big tech was not favored last month. Investors have learned how this sector can roar up and also roar down, this may be causing some to diversify more broadly.

Source: Koyfin

Looking Forward

Should the Fed indicate they are going to pause the tightening cycle, the yield curve may take its more natural upward slope. Fear of recession may be replaced with greater inflation fears with the Fed standing aside. This would cause market factors to reshape the longer end of rates. A positive sloping yield curve would be a positive for the earnings of lending institutions.

Rates in the very short end may begin to spike as no investor wants to be holding a maturing U.S. Treasury if the U.S. doesn’t raise the debt ceiling. This would only impact T-Bills and T-Notes coming due in weeks and months.

Will bearish sentiment turn to bullishness? Those not in the market missed a rally across all industries. This suggests that there was money flowing in as experienced investors and traders know to buy when there is a “sale,” not after the prices have already been jacked up.

Does this mean the risk-on trade is getting started? The broad S&P 500 rising in every industry could demonstrate that fears over a recession, the banking crisis, the war in Europe,  and other “hide under your covers” events, were more than priced in. If that is true, strength will continue. With that strength, investors will begin to look for areas that have not participated in the rally. Perhaps this is when small-cap stocks will retake their position as the better performers.

Take-Away

The market has been given a lot to think about recently. First Republic Bank and a forced FDIC take-over, inflation trending up, debt ceiling fears, unexciting earnings, and the realization that higher interest rates on bonds does not mean total return on a bond portfolio can’t be negative. So the “guaranteed return trade” isn’t guaranteed to have a positive return.

The stock market reacts before there is complete clarity. In fact, traders don’t want complete clarity, it’s when a positive economic outlook is most certain is often when the market has peaked. The current lack of sure visibility may now be handing us the opposite effect.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://app.koyfin.com/

The Week Ahead –  FOMC Meeting, FRB Bank, Employment

Posted on by phoffman@channelchek.com

The FOMC Meeting is the Big Story this Week, But First Republic Will Steal Headlines

In a week full of economic releases, the markets will be most obsessed with two events.

First, the FOMC meeting on May 2-3 is expected to result in the Fed raising the Fed Funds rate by 25 basis points. Market watchers will be looking for signs the FOMC will pause. This could be conveyed in the wording of the statement from the Fed at 2pm on May 3, or during the press conference, Fed Chair Powell is expected to hold at 2:30 on the same day.

Second, inflation information will also keep some investors on edge. A few vocal Fed governors continue to signal that they believe that wage growth and other non-housing inflation warrants continued vigilance. This makes the April Employment Report of particular concern. It is not expected to change the story about a strong labor market. There may be a few more signs of the imbalances in labor supply and demand resolving, but many businesses are still hiring, and relatively few are laying off workers.

Monday 5/1

•             9:45 AM ET, Purchasing Managers Index (PMI) for April is expected to come in at 50.4, unchanged from the mid-month flash to indicate marginal economic expansion relative to March.

 •            10:00 AM, The ISM Manufacturing Index has been contracting during the last five months. April’s consensus is for slight growth of 46.8 versus March’s 46.3.

Tuesday 5/2

•             9:00 AM ET, The monetary policy-setting arm of the Federal Reserve will begin a two-day meeting that will end with an announcement of any adjustments to policy.

•             10:00 AM ET, Construction Spending for March is expected to have increased at a barely detectable .1% after falling .1% the previous month.

•             9:00 AM ET, Factory Orders is an important leading indicator of economic activity. The consensus forecast for March is a solid increase of 1.2%. This follows a decline the previous month of .7%.

Wednesday 5/3

•             10:00 AM ET, Institute for Supply Management (ISM) surveys non-manufacturing (or services) firms’ purchasing and supply executives. The services report measures business activity for the overall economy; above 50 indicates growth, while below 50 indicates contraction. The number for April is expected to be above 50 at 52%.

•             2:00 PM, the Fed statement following the FOMC meeting will be released.

•             2:30 PM, Fed Chair Jay Powell will answer questions on economic policy in a post FOMC meeting press conference.  

Thursday 5/4

•             8:30 AM ET, Initial Jobless Claims for the week ended April 29 is expected to be higher at 240,000 than the prior week, where it stood at 230,000 individuals claiming unemployment.

Friday 5/5

•             8:30 PM ET, the U.S. Employment Report is chocked full of data that could cause a late-week shift in inflation expectations. The survey provides estimates for nonfarm payrolls, average weekly hours worked, and average hourly and weekly earnings. For April compared to March the economy is expected to have added 180,000 new jobs versus 236,000have an unemployment rate of 3.6% versus 3.5%, hourly wages are forecast to have a second month of increases averaging .3%, and an average year-over-year hourly wage increase equalling 4.2%.

What Else

There is more concern being created in the banking sector as the FDIC is said to be preparing to take First Republic Bank into receivership until they find a suitor. The bidding process among large banks is likely to be headline news before and after.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://us.econoday.com/byweek.asp?cust=us

U.S. Money Supply, Here’s Why it’s Critical for Inflation Forecasts

Posted on by phoffman@channelchek.com
Image Credit: Pictures of Money (Flickr)

M2 is Fuel for Inflation, How Much Money Must the Fed Drain to Achieve 2 Percent?

U.S. Money Supply, measured as M2, is an important consideration when forecasting inflation. A decline in immediately available cash in the economy has a downward effect on price levels. At the same time, less cash available to consumers also cools economic growth. With the Federal Open Market Committee’s (FOMC) interest rate decision coming the first week in May, the updated report this week (for March) will give investors a look see at how successful the Fed has been draining funds from the system while trying to maintain some growth.

M2 Shrinking

The Federal Reserve will update stock and bond markets Tuesday afternoon on the total amount of currency, coins, bank savings deposits, and money-market funds held in March. This broader measure, officially M2SL, referred to as M2, gained renewed focus after contracting for the first time ever in December 2022, then contracting even further in January and February. January’s 1.75% decline and February’s 2.4% drop to $21.1 trillion, are the steepest drops so far in M2.  

Image: M2 levels ramped up starting in 2020 in response to pandemic economic efforts

A fourth consecutive decline in M2 would provide more evidence that inflation can be expected to continue to come down and weigh into the FOMC decision when the Fed meets to adjust monetary policy at its May 2-3 meeting. While the chart above shows the recent declines are significant, it is still far higher than the trend line that was established decades ago. So while a decline of similar magnitude as the first two months would be welcome by inflation hawks, there is still a great deal more cash in the system than there was pre-pandemic. But it would be a huge positive and may cause the Fed to pause or slow draining money from the system.

Inflation

Consumer price inflation is well off its 8.6% average for all of 2022. Inflation since rose 5% in March 2023 (annual basis), decelerating from February’s 6% pace. While this slowdown in price increases is substantial, the Fed doesn’t want to declare “mission accomplished” until it is ranging near 2%. Its work is not yet finished.

How close is the Fed from finished is what investors will try to discern from M2. Highly regarded analysts and Fed watchers anticipate that there is a lag of about a year when the money supply shrinks. However, as indicated above, it has never come down on an annualized basis, and January and February were the largest declines to date. So even the best analysts have little history to point to.

Financial Sector

The data is for March, so it is the first look at M2 since the banking sector showed trouble early that month. A part of the difficulty banks are currently experiencing is that the reduction in cash has caused a need for them to liquidate U.S. Treasuries and other bonds to fund withdrawals. A further huge reduction in M2 could be shown to be challenging more banks as bonds and other interest rate-sensitive assets had lost considerable value as rates rose dramatically over the past year.

Using the most recent data, the Federal Reserve reported bank deposits were down 6% for the week ending April 12 versus a year ago. Deposits have been falling year-over-year since November, off slightly at $17.2 trillion compared to the highest-ever $18.2 trillion level seen in April last year.

Further declines in deposits should lead to fewer loans written, fewer loans slows economic growth. This in part, accounts for why there is a lag between when the Fed drains and when it has an impact on inflationary pressures.

Take Away

M2 is an important gauge of future inflation. Because of this, the release of data may cause economists to change their May FOMC meeting forecast. A large decline may cause the Fed to pause, if M2 resumed its path upward the Fed may become more hawkish. Efforts to help the banking system last month, may have reinflated money supply, this will be a very interesting report.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230322.pdf

https://fred.stlouisfed.org/series/M2SL#

https://rationalreasoning.substack.com/p/on-the-feds-discontinuation-of-the

https://www.barrons.com/articles/fundamental-reason-interest-rates-will-come-down-444ab9c

https://www.investopedia.com/terms/m/m2.asp#:~:text=M2%20is%20seen%20as%20a,even%20better%20predictor%20of%20inflation.

Yellen is About to Know the Debt Ceiling Do or Die Date

Posted on by phoffman@channelchek.com
Image Credit: Federal Reserve (Flickr)

Tax Date Will Provide Timing on Critical Debt Ceiling Breach

While both stock and bond investors are focused on the Federal Reserve and how it will orchestrate lower inflation without crashing the economy, the debt limit time bomb hasn’t gotten much attention yet, this could quickly change. The U.S. mathematically hit its allowed debt ceiling on January 18, 2023. Treasury Secretary Janet Yellen has since been taking measures to avoid a U.S. default on the national debt. But she can only do this dance for so long. How long will become much clearer quite soon. April 18, 2023 is tax date; the U.S. Treasury will then have more precise revenue numbers. This will give the department a much better understanding of when the U.S. would default on its debt if Congress doesn’t allow a higher borrowing limit.

Congress tends to let these issues come down to the eleventh hour before acting. All parties involved know a default would be catastrophic, so the down-to-the-wire drama frustrates markets but tends to allow Congressional representatives to carve out deals on what is important to them. Some expect the actual deadline will be as early as mid-June, others forecast it to be just after summer. The answer will come into clearer focus as tax receipts are taken in over the coming week. Once the time-frame is more certain, the markets are likely to begin to then react as concern amps up.

The Treasury’s $31.4 trillion borrowing cap plus tax receipts will give a clearer idea of how much cash it will have available, which it can weigh against its spending rate. In a note to clients, Bank of America’s analysts, Mark Cabana and Katie Craig wrote “we maintain our current base case for a mid-August X-date but see risks skewed toward earlier.” This four-month or earlier period would end near the scheduled recess for both the House and Senate.

In the analysts view, an influx from taxes of more than $200 billion following tax day would be a relief, while a figure of less than $150 billion would be concerning. Meanwhile, U.S. House Speaker Kevin McCarthy is preparing to roll out his proposal this week for a one-year debt ceiling suspension, according to sources reported by Bloomberg. Republicans have long sought to make any deal contingent on spending cuts, while President Biden has insisted that budgetary needs and debt ceiling should be viewed separately. 

Over the coming months markets and US Treasury officials culd encounter:

T-Bill Yield Increases

Investors could expect higher yields on securities maturing in the very short end of the curve. The fear driving the rate increases is the knowledge that should the U.S. runs out of borrowing capacity, it may not be able to borrow to pay the maturing debt.

This could begin to create an unusual one-year and shorter yield curve as investors either want maturities well ahead of any possible default or well after to give the Congress time to act.

Insuring Against Default

A key market to watch is what happens in credit default swaps for U.S.-issued debt. There has been an increase in activity in recent months as pricing has moved past levels seen in previous debt-cap crunches; this is viewed as the market’s increased expectation of a higher probability of default.

Treasury Cash On-Hand

The measures Treasury Secretary Yellen deployed in late January to address the debt limit issue involve in part, spending cash it doesn’t need to borrow. Last week this cash dropped to $87 billion. This is the lowest level since December 2021 during the debt ceiling battle. However, with the tax payment infusion and other tax revenue, this amount is viewed as a safe cushion for the time being.

The amount of revenue received in taxes this week is critical in that market participants can gauge how far off the debt ceiling debate will be. The concern that the negotiations can cause short-term shifts in interest rates and impact the U.S. dollar and other markets generally has investors on edge.

The situation is not likely to be resolved until the eleventh hour with the current split Congress – when the peak period of drama occurs will be better known very soon.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.nab.org/documents/advocacy/2023CongressionalCalendar.pdf

https://www.bloomberg.com/news/articles/2023-04-17/tax-day-cash-will-indicate-just-how-close-the-us-is-to-default?srnd=premium#xj4y7vzkg

The Week Ahead –  It’s the Quiet Weeks You Have to Look Out For

Posted on by phoffman@channelchek.com

This Week Earnings Season Builds and the World’s Second Largest Economy Reports GDP

There are multiple real estate-related reports this week that are expected to conflict with one another. Otherwise, it is a slow week for economic numbers, but earnings season, with banks still in the spotlight, will begin to build. With few U.S. economic reports, an elevated amount of attention may be paid to a Tuesday release of Chinese GDP. Expectations are for 3.9% growth. The Beige Book on Wednesday sets the table for the May FOMC meeting; surprises will be magnified in a slow economic data week.

Monday 4/17

  • 10:00 AM ET, The Housing Market Index has been trending upward following a severe downward spiral throughout 2022. The April consensus is 45 which would add 1 point to March’s 7 point increase to 44. This reflects home builder assessments of housing across the U.S. It is used as not just a gauge of current demand for housing, but also economic momentum which spins off of home purchases. This seemingly unrelated data has an unmistakable multiplier effect on the economy, which impacts markets.
  • 12:00 PM ET, Richmond Fed President Thomas Barkin will be speaking. This has the potential for a market mood change as Barkin has been among the more hawkish of Fed district Presidents. After the last FOMC meeting in March, Barkin said he had no second thoughts on the Fed’s decision to raise rates at the meeting.

Tuesday 4/18

  • 6:00 AM ET, Housing Starts, in March is expected to decline a bit to a 1.40 million annualized rate. As reported for February Starts increased sharply to a 1.450 million annualized rate from January’s 1.321 million. Permits, at 1.524 million in February, also jumped sharply and are expected to fall back to 1.431 million in March.

Wednesday 4/19

  • 2:00 AM ET, The Beige Book is produced a couple of weeks before each FOMC meeting. The next meeting is May 2-3. Despite the name referring to it as a “book,” it is actually 12 individual reports of what each Federal Reserve district sees occurring economically in their region. It serves as the starting place of discussion at each of the ten annual FOMC meetings. For this reason, economists, investors, and Fed watchers pour over the details.

Thursday 4/20

  • 8:30 AM ET, Jobless Claims Jobless for the April 15 week are expected to come in at 245,000 versus 239,000 in the prior week. With a very light economic calendar, this may turn out to be the focus for the week. Better than expected could cause rate fears to grow in stock market participant’s psyche, a surprise on the low side will cause news reports and market pundits to declare the Fed is done tightening.
  • 10:00 AM ET, Existing Home Sales represents yet another real estate economic report this week. After February’s sharp jump to a 4.58 million annualized rate, existing home sales in March are expected to fall back to a 4.485 million rate.
  • 10:00 AM ET, the Index of Leading Economic Indicators is expected to drop again to 0.4 percent for March. The index has been in steady decline, signaling a pending recession. For investors, this index seldom surprises since it is comprised of ten preciously released components, the results of which are already known. The trend is important to investors, the number has low potential to move markets when released.
  • 4:30 AM ET, The Fed Balance Sheet is released at this time each Thursday. Investors are paying more attention so they can discern whether what the Fed says and what the Fed does are one in the same. Quantitative tightening is the Fed reducing the securities it owns on its balance sheet. It paid U.S. dollars for the securities. If it let’s them mature and does not repurchase securities, that money is taken out of the economy. Money is stimulative, reduced money in the system is a drag on growth.

Friday 4/21

  • 9:45 PM ET, Purchasing Managers Index composite (PMI) provides an early estimate of current private sector output by combining information obtained from surveys of 1,000 manufacturing and service sector companies. A number above 50 indicates shows rising output relative to the previous month. Services moved back to the 50 demarcation in February for the first time in eight months and improved further in March to 52.6; the consensus for April is 51.5.

What Else

Taxes are due April 18 this year. This typically creates a wave of new IRA deposits and the investments that follow.

The U.S. Supreme Court will hear arguments on Monday in Slack vs. Pirani, a complex securities law case that could set a precedent for how easy it will be for investors to sue companies over alleged misstatements or omissions in their registration statements during direct listings. The case may have major implications for direct listings—either making them a more attractive option or removing them as a viable option.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.richmondfed.org/conferences_and_events

https://www.reuters.com/markets/rates-bonds/feds-barkin-says-case-rate-increase-was-pretty-clear-2023-03-24/

https://us.econoday.com/

Where Investors Might Hide in a Storm

Posted on by phoffman@channelchek.com
Image Credit: DonkeyHotey (Flickr)

Doomsday Investor Sees Ongoing Moves by Policymakers as Destructive

We’d all like to think that global decision-makers responsible for economic conditions have the best interest of the world’s citizenry in mind when making decisions – but doubts and concerns are growing. Among the most concerned are economic stakeholders that don’t believe “bad” things should always be prevented. One very credible voice highlighting this idea is hedge fund manager Paul Singer. He’s the CEO of Elliot Investment Management and recently moved his firm’s offices out of NY, NY, to the more business-friendly West Palm Beach, FL. Singer says a credit collapse and deep recession may be needed to restore financial markets.

Paul Singer is the founder and CEO of Elliott Investment Management. Its year-end 13F reportable AUM was $12.25 billion. The firms opportunity-based investment style allows Singer and Company, known for their corporate activism, to move to wherever profit may lie.  

The current thinking of Singer, a registered Republican, has been making headlines. This includes a widely circulated opinion piece published in the Wall Street Journal last week. In it, he discusses more than a decade of what he believes are damaging easy-money policies and how a deep recession and even credit collapse will be necessary to purge financial markets of excesses.  

“I think that this is an extraordinarily dangerous and confusing period,” Singer told The Journal, in his interview, he warns that trouble in markets may only be getting started now that a full year has passed from the start of tighter monetary policy.

One of the more chilling quotes from Singer is, “Credit collapse, although terrible, is not as terrible as hyperinflation in terms of destruction wrought upon societies.”

The idea that we are headed down either one path or the other, he doesn’t mention a third option, may be why the New Yorker magazine calls him “Doomsday Investor.” He explains,  “Capitalism, which is economic freedom, can survive a credit crisis. We don’t think it can survive hyperinflation.”

The Doomsday Investor has been outspoken against government safety nets for a while, including the sweeping banking regulations from the Dodd-Frank Act of 2010. This act created the Financial Protection Bureau (CFPB) and established the Financial Stability Oversight Council (FSOC). Singer strongly opposed prolonged market interventions by global central banks following the 2008 global financial crisis. Interventions that still haven’t been drained from the U.S. monetary system.

Singer, who is 78 called crypto, “completely lacking in any value,” in his WSJ interview. He also said: “There are thousands of cryptocurrencies. That’s why they’re worth zero. Anybody can make one. All they are is nothing with a marketing pitch—literally nothing.”

While his funds performance have placed him near the top of hedge fund manager performance, Singer personally worries the Fed and other central banks will respond to the next downturn by referring to the failed playbook of slashing interest rates and potentially resuming large-scale asset purchases. The point was shown to be current, as Singer called the regulatory response to the collapse of Silicon Valley Bank and Signature Bank, including the guaranteeing of all deposits from the two lenders akin to “wrapping all market movements in security blankets.”

He complained, “…all concepts of risk management are based around the possibilities of loss.” He encouraged decision makers to, “Take it away, it’s going to have consequences.”

Where Can Investors Hide

Paul Singer said in his interview there may be a few places for investors to ride out what he sees as a coming storm. One place comes as no surprise, “At such times, some consider the safest bet to be relatively short-term U.S. government debt,” he said, adding that “such debt pays a decent return with virtually no chance of a negative outcome.” He is likely speaking of U.S. Treasuries two years and shorter as the longer duration bonds would be more volatile as rates shift, and other government debt like GNMAs are fraught with extension risk.

Singer also believes some gold in portfolios may make sense.

Take Away

Without some rain, nothing could flourish. Without an occasional brush fire, the risk of massive forest fire greatly increases. Paul Singer, in his interview with the WSJ, indicates he believes the economic brushfires that decision-makers have been preventing should have been allowed to run their course. Preventing them is a big mistake and a collapse may not be far off.

This collapse in easy credit and crypto, among other bubble-type excesses Singer believes could be destructive but preferred by society over continuing to move toward hyperinflation.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.wsj.com/articles/the-man-who-saw-the-economic-crises-coming-paul-singer-banking-signature-svb-financial-downturn-asset-hyperinflation-recession-debt-federal-reserve-cd2638fe

https://www.newyorker.com/magazine/2018/08/27/paul-singer-doomsday-investor

https://opencorporates.com/companies/us_fl/B21000000006

https://www.marketwatch.com/story/hedge-fund-billionaire-paul-singer-still-sees-dangerous-bubble-securities-bubble-asset-classes-in-markets-4cd81a76?mod=search_headline