Another Pezzonovante
December 11, 2022 – Weekly Comment
“Now listen. Whoever comes to you with this Barzini meeting, he’s the traitor. Don’t forget that.”
-Don Corleone to his son Michael
I was looking over old Godfather clips this weekend, for personal reasons that are probably clear to the euro$ pit community.
Vito Corleone knew the signals before they even occurred. As he’s talking to Michael, lamenting that this son has been pulled into the family business instead of becoming a Senator or Governor, Michael responds, “Another pezzonovante” (another bigshot).
It’s a lame analogy, but the financial pezzonovante will have a press conference this week, with signals for the future of monetary policy. The yield curve has been projecting economic trouble ahead, and there are more indications that the vice is tightening. Blackstone’s nontraded real estate investment trust (BREIT) was forced to limit redemptions as did Starwood’s. Blackstone’s private credit fund BCRED also hit its 5% cap as it “…saw redemptions worth around 5% of its outstanding shares in the quarterly withdrawal window that ended Nov 30.” (BBG). I have linked several articles below and won’t go into details here. As one article from SL Advisors notes: “The Vanguard Real Estate Index Fund (VNQ) was down 26% for the year through October. BREIT reports it is up 8.5% over the same time period…” Blackstone stock (BX) is down about 50% from the high posted in November 2021. As the SL article concludes:
But investors in Blackstone’s stock (BX) see a closer relationship with public real estate values as measured by VNQ rather than the private valuations represented by BREIT. Blackstone created the appearance of public market liquidity for privately held assets and asserts valuations remain strong. Their bluff is being called.
The question of course is, are these private market issues large enough to affect policy? Does the Fed have a good handle on liquidity and valuation issues? This week the Fed reported in its Z.1 quarterly report that Household Net Worth declined by another $392 billion in Q3. However, the real estate component ROSE $820 billion in Q3 (swamped of course, by the $1.94 trillion decline in corporate equity). Does it really make sense that real estate values are increasing, against the backdrop of nontraded REIT redemptions that are surging?
The signal of cycle lows in many yield curve measures remains important. Our system is based on the transformation of savings into longer maturity projects and investments. People accept lower yields on short-term investments, in part for access to instant liquidity and in part because they don’t have the knowledge or wherewithal to create greater value through long-dated investment projects. We place our savings with intermediaries: they’re the ones that have the expertise. The Fed’s zero rate policy accentuated a reach for yield, and many investment funds were happy to present a façade of instant liquidity. (As Mario Puzo wrote in the Godfather, “One lawyer with a briefcase can steal more than a hundred men with guns…”) Short term rates higher than long rates suggest that opportunities are ever more rapidly moving in reverse.
Bloomberg reported last month that President Jon Gray had put $100 million more of his own money in BREIT since July, as had Chief Executive Officer Steve Schwarzman, a person familiar with the matter said at the time. (wealthmanagement.com)
Now listen, when the company uses its own capital to attempt to shore up the nontraded funds (and the investments of top executives) that’s when you know it’s close to the end game.
In June 2007 Bear Stearns announced that its mortgage funds were wiped out and that they would recapitalize them. That was Tessio, coming to Michael to propose a Barzini meeting. SPX broke down after that, losing about 10% into a spike low in August. Then it made a new high into October. From there the unraveling played out, with the Lehman bankruptcy in September 2008 (Moe Greene shot through the eye).
The critical point is that the Fed was wrong in its early projections of inflation. It now seems to be using farcical valuations on real estate; sort of using the Blackstone model instead of measuring against the yardstick of other more liquid assets. Interest rate markets are registering a protest in the form of severe inversion. Several Fed officials, including Powell, have said they don’t want to over tighten. It might end up just like 2018, with the last hike of the cycle occurring in December.
This week CPI is released on Tuesday, expected 7.3% yoy vs 7.7% last. Core expected 6.1 vs 6.3. Auctions are crammed into the beginning of the week, with $40b 3-yr notes and $32b tens on Monday, followed by $18b 30-yr bond reopening on Tuesday. The FOMC result and press conference is Wednesday. ECB and BOE both expected to hike 50 on Thursday. At the Sept FOMC, projections for year-end 2023 FF target had 1 participant at 3.875-4.125%, 6 at 4.375-4.625%, 6 at 4.625-4.875% and 6 at 4.875-5.125%. Peak rate in 2023 as projected by the lowest FF contract is FFM3 at 4.955% (95.045), but the Dec’23 contract is back down to 4.575%. On an expected 50 bp hike EFFR will move to 4.33%.
Pezzonovante is Sicilian for a big gun, 90 caliber… a big shot. For TS: “Leave the gun. Take the cannoli.”
| 12/2/2022 | 12/9/2022 | chg | ||
| UST 2Y | 427.8 | 432.8 | 5.0 | |
| UST 5Y | 366.6 | 375.3 | 8.7 | |
| UST 10Y | 350.4 | 356.5 | 6.1 | wi 357.0/356.5 |
| UST 30Y | 356.0 | 354.7 | -1.3 | wi 355.0/354.5 |
| GERM 2Y | 211.0 | 216.0 | 5.0 | |
| GERM 10Y | 185.6 | 193.3 | 7.7 | |
| JPN 30Y | 148.7 | 140.1 | -8.6 | |
| CHINA 10Y | 291.1 | 292.1 | 1.0 | |
| SOFR Z2/Z3 | -22.3 | -9.5 | 12.8 | |
| SOFR Z3/Z4 | -137.5 | -133.0 | 4.5 | |
| SOFR Z4/Z5 | -21.5 | -18.5 | 3.0 | |
| EUR | 105.38 | 105.34 | -0.04 | |
| CRUDE (CLf3) | 79.98 | 71.02 | -8.96 | |
| SPX | 4071.70 | 3934.38 | -137.32 | -3.4% |
| VIX | 19.06 | 22.83 | 3.77 | |
http://creditbubblebulletin.blogspot.com/
https://blinks.bloomberg.com/news/stories/RMHC97DWRGG0
https://www.federalreserve.gov/releases/z1/dataviz/z1/changes_in_net_worth/chart/
