Category: Markets

US Treasury Bonds: A Safe Haven Investment in Times of Economic Uncertainty

Posted on by phoffman@channelchek.com
Image Credit: US Dept. of Treasury

Are Treasuries the Safe Bet Investors Think They Are?

Are US Treasury bonds worth owning? US Treasury debt is considered one of the safest investments in the world. The securities are issued by the US government and are backed by the full faith and credit of the US Treasury – guaranteed at the same level as the dollar bills in your wallet. These bonds are a popular investment choice for individuals, institutions, and governments in times of economic uncertainty. But, as with other investments, they are market priced by the combined wisdom of the marketplace. So the return, or what is sometimes referred to as “the risk-free rate,” may not measure up to the potential that stock market investors expect.

Why Allocate to Treasuries

US Treasury bonds are considered a safe haven investment because they are perceived to have a low risk of default. This is because the US government has never defaulted on its debt, and it has the ability to raise taxes and print money to meet its obligations. In addition, the US dollar remains the world’s reserve currency, this makes US Treasury bonds highly liquid and easily tradable.

Image: Fmr. Fed Chairman Greenspan, Meet the Press interview, August 2011

During periods of low economic clarity, investors that are not required to invest in low-risk investments will weigh US Treasury returns against expected returns in other markets. As interest rates approach or exceed expected inflation US Treasuries become more attractive to investors, both individual and institutional. This is because they provide a reliable source of income (semiannual interest payments) at times of market volatility, and at maturity, owners know exactly what they will receive (face value plus the last interest payment). For example, during the global financial crisis of 2008-2009, investors flocked to the safety of US Treasury bills, notes, and bonds as a safe haven. This drove down yields and pushed up bond prices.

There are three main Treasury Securities, TIPS are not included below, they are T-Notes and have unique risks, so, therefore, deserve a separate presentation.

Treasury Bills:

Maturity: Typically less than one year (usually 4, 8, 13, 26, or 52 weeks)

Yield: Discounted yield, historically lower than T-notes and T-bonds

Size: Available in denominations of $1,000 or more

Treasury Notes:

Maturity: 2 to 10 years

Yield: Par plus interest historically higher than T-bills and lower than T-bonds

Size: Avaialable in denominations of $1,000 or more

Treasury Bonds:

Maturity: 10 to 30 years

Yield: Normally higher than T-bills and T-notes

Size: Avaialable in denominations of $1,000 or more

Overall, the main difference between these securities is their maturity. T-bills have the shortest maturity and are discounted at purchase to provide the yield, while T-bonds have the longest. T-notes fall in between. Additionally, their yields are calculated on an actual number of days held over the actual number of days in the year. The US Treasury yield curve, above which other bonds are priced, depends on market conditions and economic expectations.  

Can Not Avoid Risk

Despite their reputation for safety, US Treasury bonds are not without risk. In December of 2021, the 10 year US Treasury note had a market yield of 1.70%. Just ten months later the same bond sold at a yield of 4.21%. This represents an actual loss over the ten month period for those selling the bond then. For those holding until maturity, when they will receive full face value, investors would have to hold more than eight years during which they will be earning a measly 1.7%. This is interest rate risk, the time period used to explain was a recent extreme example of how Treasuries still have very real risk. This is why a good bank investment portfolio manager will do stress tests and scenario analysis of the banks portfolio using extreme conditions.

Another risk is credit rating. In 2011, for example, the credit rating agency Standard & Poor’s downgraded the US government’s credit from AAA to AA+. This was the first time and continues to be the only time the US government has been downgraded. The downgrade was based on concerns about the government’s ability to address its long-term fiscal challenges, including high levels of debt and political gridlock.

Similar conditions may be playing out now as the debt ceiling has been raised quite a bit since 2009, and large buyers such as China are seeking alternative investments for their reserve balances.

Inflation is another risk that is quite real. As in the earlier example of the USTN 10-year yielding 1.7% in December 2021, during the following year, CPI rose 6.5%. this is another recent example of how investing in a low-rate environments can erode the purchasing power of the interest income and principal payments from US Treasury bonds. If the rate of inflation exceeds the yield on the bonds, investors can actually experience a negative real return.

If the government is seen as possibly not being able to pay interest on maturing securities, as is the case during debt ceiling standoffs, US Treasuries coming due may experience illiquidity problems as bids for maturing debt that may not get paid on time will be weak.

Although US Treasury bonds are highly liquid and easily tradable, there may be periods when the market for the bonds becomes illiquid. This can make it difficult for investors to sell their bonds at a fair price, especially during times of market stress or uncertainty.

How to Invest in Treasuries

Investors can buy US Treasury bonds directly from the US government (treasurydirect.gov) or through a broker. The bonds are issued and market priced at auctions on a regular schedule. Individual investors typically will bid to own securities at the average auction price. Savvy institutions and individuals may contact their broker and bid at the auction and hope to win an allotment.

Investors can also invest in US Treasury bonds through mutual funds or exchange-traded funds (ETFs). These funds don’t offer the benefit of holding to maturity or some of the tax planning strategies that can benefit those holding a security and not a fund.

Take Away

US Treasury bonds are considered a safe haven investment in times of economic uncertainty. They are backed by the full faith and credit of the US government and are considered one of the safest investments in the world. While they are not without risk, they remain a popular choice for investors seeking a reliable source of income and capital preservation. The US government’s credit rating was downgraded once, but investors continue to have confidence in US Treasury bonds due to the idea that they may not be safe, but they are likely the safest place to store savings.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.realclearpolitics.com/video/2011/08/07/greenspan_us_can_pay_any_debt_it_has_because_we_can_always_print_money.html

https://www.bls.gov/opub/ted/2023/consumer-price-index-2022-in-review.htm

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

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

What Investments Rally During a Debt Ceiling Standoff?

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

The Debate Over the U.S. Spending Limit Opens Investment Opportunities

The U.S. debt-ceiling crisis, as Summer 2023 approaches, can go one of two ways. First, all parties in Congress could quickly meet and vote on fixing it, thus averting a catastrophe; alternatively, the debate could heat up as we approach the day when the U.S. Treasury can’t borrow to pay the country’s bills. At the risk of sounding negative, the timing of Washington finally ironing out a solution is likely to be hours before the moment the country would have been unable to fund maturing debt, minutes before it would have to send workers home and halted other spending.

Okay, so that was a bit pessimistic. But, as investors, we rely on past performance, even though we know it is no guarantee of future results. And past performance by Congress has been that it waits until the 11th hour after all hope seems to be lost.

This has happened many times in the past. The last time it became truly scary was in 2011. For equity investors, stocks became volatile but overall averaged flat in the period. But, there were two investment sectors that attracted positive activity.

What’s Rallied in the Past?

The winning sector was U.S. Treasury bonds out along the yield curve with maturity dates not expected to be impacted by a possible non-payment at maturity. Today, bonds are rallying (rates down) even after the PCE inflation gauge showed little headway over the past two months, so this is an indication that government debt may still be considered an investor safe haven. But, investing in an entity headed toward insolvency is questionable practice, even when the entity speeding toward bankruptcy is the United States of America.

The second is precious metals (PM), a currency alternative – the longest-running safe haven of all. By precious metals, I’m speaking specifically of gold, silver, and the stock of companies whose main business it is to mine these metals.

The most recent nail-biting standoff was in 2011. It was a politically contentious time in Washington, arguably, today’s climate is even less agreeable. At the time, the U.S. government had reached its borrowing limit of $14.3 trillion and needed to raise the debt ceiling in order to continue paying its bills and avoid default. Congress, and the White House eventually agreed to a last-minute compromise, which included some spending cuts but avoided a U.S. default.

Between July 1 and September 8, 2011, PM investments trounced the S&P 500 (Koyfin)

During this time, the financial markets whipsawed investors. However, gold-related investments, along with silver related, turned dramatically upward until a deal was struck the second week of September. Gold rose to an all-time high of around $1,900 per ounce in September 2011. Investors used gold as a hedge against the same concerns we are experiencing in 2023, namely inflation and currency debasement.

Silver also saw its price rise, although not to the same extent as gold. The price of silver reached a high of around $48 per ounce in April 2011, before retreating to around $30 per ounce by the end of the year.

Mining stocks also benefited from the uncertainty in the financial markets (see above graph). Shares of companies like Barrick Gold, Newmont Mining, and Goldcorp all saw significant gains while other industries were getting whipsawed. Junior miner Coeur mining (CDE) rose 25.7% during the period between July 1 and September 8, 2011. Endeavour Silver (EXK) rose a full 30% in the same period.

Mark Reichman the Senior Research Analyst covering Natural Resources at Noble Capital Markets pointed to additional macroeconomic events shaping precious metals investment, “We remain constructive on precious metals. Year-to-date, gold prices have risen more than silver, and the gold-to-silver ratio has widened since the beginning of the year. Mr. Reichman suggests, “Two things to track are changes in monetary policy and the strength of the U.S. dollar.”  Outside of the U.S., Reichman informed,  “Global demand for precious metals, particularly in Asia, is very strong, and is driven in part by global uncertainty.”

Take Away

Historically, investors asking, “what happened last time?” can be helpful when choosing a direction. The U.S. may avert a showdown on the debt ceiling/spending limit issue. But the month of June, when analysts expect the U.S. to run out of money, is fast approaching. There doesn’t seem to be any headway at this point.

Every challenge brings opportunities to investors. Market participants interested in precious metals mining companies can get detailed information on many companies here on Channelchek by clicking here.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://en.wikipedia.org/wiki/History_of_the_United_States_debt_ceiling

Will the Fed Tighten in May and Walk Away?

Posted on by phoffman@channelchek.com
Image Credit: Focal Foto

A Bull Market Across Sectors May Come Out of the Next FOMC Meeting?

As U.S. GDP for the first quarter of 2023 showed a significant slowdown, expectations that the Federal Open Market Committee (FOMC) is near the end of the tightening cycle have increased among investors. The Fed announcement after the May 2-3 meeting could change the mindset of the stock, bond, and real estate markets. While a strong consumer is still fueling economic growth, as indicated by the most recent Consumer Spending numbers, government spending is also high and less related to economic momentum, yet it helped support the declining Gross Domestic Product figure.

The U.S. economy slowed at the start of 2023, which implies that the bold Fed moves have worked to cool business activity. During this same period, stock market values have risen after a dismal 2022, bonds have become stronger, and housing prices have shown signs of life.

Background

U.S. Gross Domestic Product grew by a 1.1% annualized rate during the first three months of the year. This is less than half the pace of the 2.6% growth reported for the previous quarter – which was slower than the previous quarter. The slowing trend is certainly expected and undoubtedly being monitored by FOMC members.

The slowdown from the previous quarter was largely the result of a decline in business investment and residential fixed investment, which includes money spent on home buying and construction, according to the data set. While layoffs made headlines, the job market remained strong during the first quarter.

The banking system showed weakness as asset values plummeted and deposit levels decreased. Also impacting banks is commercial real estate. The risk of default in the commercial real estate market has grown as office and retail property valuations are seen as headed lower by as much as 40%, with nearly $1.5 trillion in debt due for repayment by the end of 2025.

Could a Full-Fledged Bull Market Follow?

While there is a Wall Street adage that says, “sell in May and walk away.” A post-meeting announcement that suggests the Fed is finished taking shots at the economy could cause a relief rally as worry about increasingly expensive capital abates. Unless this worry is replaced by a new one, a broad-based upward trend may develop.

The trend in economic growth is slowing, perhaps even headed for a recession, but markets are no longer expecting a hard landing. Ashard-landing expectations work their way even further out of the market psyche, more willingness to buy should lead to higher stock prices.

Bond markets and real estate have also been positive recently. The direction in interest rates, when the Fed does indicate it is done hiking Fed Funds levels, would either fall because of knowledge that the Fed is done, or generate inflation fears which cause concern that would be reflected as higher rates along the curve. Real Estate values are tightly linked to interest rates and could take its direction from the bond market direction.  

Take Away

We’re in the part of the economic cycle where bad news (lower GDP) is seen as good news. The economy has been slumping for a few quarters, and the markets are continually forward-looking. This slump may be cause for the Fed to suggest an end to its relentless tightening phase. Equity markets could rid themselves of a year-long worry.

Nothing is certain; however, the markets that have already been rising this year in anticipation of an end to the Fed moves could make an even more decisive move upward.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://fred.stlouisfed.org/series/CPIAUCNS

https://ycharts.com/indicators/10_year_treasury_rate_h15

https://www.google.com/search?q=are+commercial+real+estate+defaults+rising&rlz=1C1CHZN_enUS934US934&oq=are+commercial+real+estate+defaults+rising&aqs=chrome..69i57j33i160l2.10358j1j15&sourceid=chrome&ie=UTF-8

Bed Bath and Beyond, Why Companies Delist, and Investor Impact  

Posted on by phoffman@channelchek.com

Do Investors Take a Bath When Stocks Delist?

One popular meme stock, Bed Bath & Beyond (BBBY) is being delisted from the Nasdaq exchange, according to a company announcement. There are a number of reasons a public company can delist from an exchange. In BBBY’s case it is related to their recent bankruptcy filing, according to management. Below are examples of the many reasons a company would delist, what happened in BBBY’s case, and what delisting means for investors.

Many Reasons to Delist

Delisting from the stock exchange refers to the removal of a company’s shares from public trading on a particular exchange. It occurs by management choice or at the exchange’s request. The process can happen for various reasons, such as regulatory violations, bankruptcy, or a company’s decision to go private. Delisting can have significant consequences for the corporation and its investors, including decreased liquidity and visibility in the market.

A common reason for delisting is regulatory violations. For example, if a company fails to comply with the reporting requirements of the Securities and Exchange Commission (SEC), it may face delisting from the stock exchange. This was the case with Chinese tech giant Alibaba, which was delisted from the Hong Kong Stock Exchange in 2020 because of regulatory violations.

Sometimes, companies have a reason to take themselves private and delist as part of that process. Going private means that a corporation’s shares are no longer traded on public stock exchanges. In 2013, computer maker Dell was taken private in a deal worth $24.9 billion. The company’s delisted its shares from the NASDAQ exchange. Twitter was recently purchased and taken private.

As is the case with Bed Bath and Beyond, bankruptcy often causes shares not to meet the exchange’s criteria, forcing a delisting. Another retailing example is Toys R Us in 2018. It filed for bankruptcy and was subsequently delisted from the New York Stock Exchange (NYSE).

Delisting can have significant implications for a company and its shareholders. One of the main consequences is a decrease in liquidity. When a company is delisted, its shares are no longer traded on public stock exchanges, which means that investors may have a harder time finding buyers or sellers for their shares.

Additionally, delisting can impact a company’s visibility in the market. Without a public listing, a company may find it more difficult to attract investors and raise capital. This can be particularly challenging for small and mid-sized companies that rely on the stock market to raise funds.

Bed Bath and Beyond’s Delisting

Trading in BBBY common stock will cease at the opening of the trading day on May 3 – according to a filing with the Securities and Exchange Commission (SEC).

In its bankruptcy announcement, the company said trading of shares would halt on the Nasdaq exchange. Nasdaq and the NYSE have standards companies need to meet for their stocks to be listed and stay listed. This includes minimum levels of liquidity, market value, or price level.

Back in January, Nasdaq warned the company its shares would be delisted after it failed to report quarterly results in a timely manner. The company eventually filed the report and returned to compliance. This time Bed Bath and Beyond said it doesn’t intend to appeal.

Shareholders will still own the stock and fractional shares of the company after May 3. However, without the help of a major exchange, trading between stockholders and speculators is usually much more difficult. Some bankrupt companies’ stocks continues to trade in over-the-counter markets (OTC). They typically have the letter “Q” at the end of their stock symbol. It isn’t yet clear if BBBY will trade as BBBYQ.

After a company files for Chapter 11, unsecured creditors—including suppliers and leaseholders—line up in an attempt to get repaid. How much creditors get paid back depends on how much money Bed Bath and Beyond can raise from the sale of either parts of its business or the chain itself.

Take Away

Delisting from major stock exchanges can happen for various reasons and can have significant consequences for investors. While regulatory violations and bankruptcy can lead to forced delisting, companies may choose to delist voluntarily to go private or for other strategic reasons. Regardless of the reason, delisting can impact a company’s liquidity and visibility in the market, making it important for investors to carefully consider the implications before investing in delisted companies or those facing delisting.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.sec.gov/edgar/browse/?CIK=0000886158

https://www.investopedia.com/ask/answers/10/stock-holder-lose-equity-chapter-11.asp

https://bedbathandbeyond.gcs-web.com/news-releases/news-release-details/bed-bath-beyond-inc-receives-nasdaq-delisting-notice

https://bedbathandbeyond.gcs-web.com/news-releases/news-release-details/bed-bath-beyond-inc-files-voluntary-chapter-11-petitions

If Bad Expectations are Fully Priced Into Stocks, Which Ones Could Outperform This Year 

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

Highly Regarded Analyst Tells Investors How to Position for the Upturn   

Are recession worries fully baked into stock prices? At least one Wall Street analyst has publicly made her case this may be accurate. And she offers tips on what sectors may have more upside and on those that have factors working against them. While a recession still may occur before year-end, forward-looking stock investors may have fully priced that risk in – forward-looking investors may also be the reason the overall market is up on the year despite greater expectations of a recession. They are looking past any slowdown.

Stock market participants, many still down on last year’s price moves, have been extremely cautious in front of a Fed that is playing catch up in a fight against inflation. The rapid Fed Funds rate increases that began in March 2022, coupled with quantitative tightening, sank stocks, bonds, and even cryptocurrency holdings. While the economy did shrink for two consecutive quarters last year, there are many that expect a mild recession will begin at some point this year.

Those that do expect a bumpy economic ride and a rough landing point to high-interest rates, a weakening dollar, tech industry layoffs, and a Federal Reserve that is resolved to get inflation down as soon as possible.

Savita Subramanian, equity and quant strategist at Bank of America Securities, proposed to investors in a research note published on April 24, that these fears and recession worries have been in place for a while and may be largely baked into the market. She says, barring a sudden shock to the economy, it makes sense for investors to reintroduce riskier assets into their portfolios.

Her guidance on finding value is well thought out. Subramanian, proposes investors own stocks over bonds and cyclical stocks over defensive names. The reason given is that hedge funds and long-only funds are near maximum exposure in defensive industries such as health care, utilities, and consumer staples. The suggestion here is that the probabilities would lean toward a better risk-reward payoff for cyclical names.

Ms. Subramanian does not say an economic slowdown won’t occur; instead, her thinking seems to be that after raising the Federal Funds rate from near-zero to a range of 4.75% to 5%, there is more control should a downturn need to be dealt with by easing. When rates are at or near zero percent, there is less the Fed can do to stimulate growth. So far, we’ve made it through the first quarter, and now April with only a few disruptions in the banking sector.

“Even if a recession is imminent, the Fed has latitude to soften the impact after pushing rates up by 5%. And after the fastest hiking cycle ever, the only thing to ‘break’ so far is SVB,” Subramanian wrote.

In an article published in Barron’s this week the investment news publication wrote, “Some corners of Wall Street are feeling confident that there will be no recession and that the very things that make a recession appear likely–the inverted yield curve, inflation, and the recent banking crisis–actually guarantee that one won’t happen.”

This could be good news for investors that have been nervous about having money in a market that has been given much to be concerned about, and ver little to be jubilant about.

On Thursday, GDP (Gross Domestic Product) for the first quarter will be released. No one expects this to indicate a recession began then. Forecasters expect that the economy will show 2% growth, following growth of 3.2% and 2.6% in the third and fourth quarters of 2022. This is one of the cases where if the number surprises much higher, the market may expect the Fed to make bigger rate moves. If it surprises on the low side, markets may see it as a sign of an approaching recession.

Take Away

A highly regarded analyst joins others with thoughts that the market could be priced for a recession; this could be good for stocks. If true, investors may want to start looking past a recession. Those she is most positive on are riskier names. While funds and other investors are near maxed out in lower-risk holdings, there is far less upside for them. The bigger upswings can occur in the industries, market-cap sectors, and companies that have been given less attention due to recession fears.

Paul Hoffman

Managing Editor, Channelchek

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.

Why the IPO Market is Picking Up

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

IPO Market Accelerating – Especially Overseas

The amount of investment in initial public offerings (IPOs) during March-April has jumped from January-February levels. Globally, the pick-up in IPOs is linked to the uptick in stock prices, which has allowed companies to tap into investor appetite for newer listings. A sizeable percentage of the offerings are in Asia, but Europe and the U.S. have experienced a surge as well. Activity during the first two months of 2023 had ground to a halt; new data compiled by Bloomberg demonstrates a much faster trend.

To date, there has been $25 billion worth of IPOs worldwide in March and April; this is nearly twice the amount transacted during the prior two months of the year. Companies headquartered from Hong Kong to Milan have put up their “Going Public”  signs up as market volatility declined. The uptick in IPOs in Asia substantially moved the needle as non-U.S. exchanges accounted for nearly 80% of new share sales during April.

The uptick in Europe can’t be ignored either; European listings are higher by a wide margin compared to earlier in the year. The activity in the U.S. is not as robust but also noteworthy, as concern about a recession had been creating caution among potential U.S. issuers.

In a quote published by Bloomberg News, Jason Manketo global co-head of the law firm Linklaters’ equities practice said, “We are beginning to see green shoots of activity with companies restarting processes that were on hold, but there is still a fair degree of uncertainty in the market.” Mankel added, “The buy side is keen to see results for a couple of quarters before committing to an IPO. This means the potential pipeline of some 2023 deals has been moved out to 2024.”

Leaders

Statistically, Asia is where a great deal of the action is in the world today. But the activity is different, perhaps more appealing, than last year. In 2022 the vast majority of large deals were concentrated in mainland China; over the past two months, issuance is coming from a broader representation of Asia.

“The IPO market is coming back gradually and slowly. It is not 100% back yet, but there are signs of life and renewed vigor,” said James Wang, co-head of equity capital markets at Goldman Sachs Group Inc. in Asia ex-Japan.

A couple of nickel producers from Indonesia surged as they went public. And in Japan, as part of the country’s largest IPO since 2018,  Rakuten Bank Ltd. soared after it raised 83.3 billion yen ($623 million). And KKR & Co.-backed Chinese liquor company ZJLD Group Inc. as recently as April 20th, priced Hong Kong’s largest offering in 2023.

Europe Wakes Up

Europe’s IPO market had been dragging, with activity in 2023 down about 12% from the same period last year as Russia’s invasion of Ukraine brought new listings to a screeching halt.

Also weighing on the market, poor IPO returns have been a deterrent for investors. Portfolio managers had been in the drivers seat insisting on bargains for less proven companies. In  March the sudden meltdown of financial firm Credit Suisse, ignited a global market rout, this added to investor worries about interest rates and inflation; the event also made it less attractive for companies to try and attract a favorable price.

But there are growing signs of fear lifting. Most notably, Lottomatica SpA, the Italian gambling company backed by Apollo Global Management Inc., opened the books last week for a €600 million ($657 million) IPO, becoming the third large firm to tap European exchanges this year. Additionally, German web-hosting company Ionos SE and electric motor component maker EuroGroup Laminations SpA have managed to raise more than $400 million in the region, though both stocks have struggled after debuting.

U.S. Uptick

While IPO activity in the U.S. is not as robust, there has been a huge uptick as well. The IPO calendar for U.S. exchanges shows 20 priced deals totalling $751.5 billion, and 29 new filings. This is an acceleration after only $4.1 billion had been raised for companies listing on U.S. exchanges during the first two months of 2023.

Take Away

Globally companies are finding it more worthwhile to tap capital from the equity markets via IPO. While the most growth is greater Asia, Europe and the U.S. see a significant uptick as well. Whether this trend continues and represents, a buying opportunity seems to hinge on recession concerns. Many forecasters are now calling for a much more mild recession than previously expected.

Paul Hoffman

Managing Editor, Channelchek

Sources:

https://www.bloomberg.com/news/articles/2023-04-23/ipo-market-shows-signs-of-life-even-as-recession-fears-persist?srnd=markets-vp&sref=8GWybyo5&leadSource=uverify%20wall

https://www.nasdaq.com/market-activity/ipos

https://www.bloomberg.com/profile/company/LTT:IM

Russell Reconstitution 2023, What Investors Should Know

Posted on by aweinsoff@channelchek.com
Image Credit: SL (Noble Capital Mkts)

 The Annual Russell Index Revision and Dates to Watch (2023)

The yearly process of recasting the Russell Indexes begins on Friday April 28 and will be complete by market opening on June 26. During the period in between, FTSE Russell will rank stocks for additions, for deletions and evaluate the companies to make sure they conform overall. The methodology for inserting and removing tickers in the Russell 3000, Russell 2000, and Russell 1000 is intentionally transparent to help eliminate price shocks. Price movements do of course occur along the way, and investors try to foresee and capitalize on them. Channelchek will be providing updates that may uncover opportunities, or at least provide an understanding of stock price swings during this period.

Background

Russell index products are widely used by institutional and retail investors throughout the world. There is more than $20.1 trillion currently benchmarked to a Russell index. This includes approximately $12.1 trillion benchmarked to the Russell US Equity indexes. The trading volume of some companies moving into an index will heighten around the last Friday in June as fund managers seek to maintain level tracking with their benchmark target.

Opportunity

For non-passive investing, determining which stocks may benefit from moving up to a large-cap index, down to a smaller one, or into or out of the measurements is an annual event causing volatility around stocks. There has, of course, the potential for very profitable long and short trades. And the potential for an unwitting investor to be holding a company moving out of an index, which could cause less interest in the stock, and perhaps unfortunate performance.

Active investors should make themselves aware of the forces at play so they may either get out of the way or determine if they should become involved by taking positions with those being added or those at the end of their reign within one of the Russell measurements.

Dramatic Valuation Shifts

The leading industries and altered market-cap of companies of a year ago have changed dramatically from last year’s reconstitution. This will be reflected in the 2023 rebalancing and is going to impact a much larger number of companies than most years. That is to say, a higher percentage of companies than normal will move in, out, or to another index, and may be subject to amplified price movement.

The 2023 Russell Reconstitution Schedule:

• Friday, April 28 – “Rank Day” – Index membership eligibility for 2023 Russell Reconstitution determined from constituent market capitalization at market close.

• Friday, May 19 – Preliminary index additions & deletions membership lists posted to the FTSE Russell website after 6 PM US eastern time.

•   Friday, May 26th, June 2nd, 9th and 16th – Preliminary membership lists (reflecting any updates) posted to the FTSE Russell website after 6 PM US eastern time.

• Monday, June 5th – “Lock-down” period begins with the updates to reconstitution membership considered to be final.

• Friday, June 24 – Russell Reconstitution is final after the close of the US equity markets.

• Monday, June 27 – Equity markets open with the newly reconstituted Russell US Indexes.

Take-Away

The annual reconstitution is a significant driver of dramatic shifts in some stock prices as portfolio managers have their holding needs shifted within a very short period of time. Longer-term demand for certain equities is altered as well. Sizable price movements and volatility are expected, especially around the last week in June. In fact, the opening day of the reconstitution is typically one of the highest trading-volume days of the year in the US equity markets.

The market event impacts more than $9 trillion of investor assets benchmarked to or invested in products based on the Russell US Indexes. Portfolio managers that are required to track one of these indexes will work to have minimal portfolio slippage away from their benchmark.  The days and weeks from April 28 through the last Monday in June can create opportunities for investors seeking to benefit from price moves, Channelchek will be covering the event as stocks to be added to, or removed from this year’s Russell Reconstitution and other information plays out.

Be sure to register to receive Channelchek updates and information.

Paul Hoffman

Managing Editor, Channelchek

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

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