Dead money
April 26, 2023
–FRC was cut in half (again) yesterday, and now asset sales are going to occur. I guess the $30 billion in “UNINSURED” deposits by JPM, BofA et al, wasn’t enough. The problem of course, is that banks now have to PAY for deposits, unless they are TBTF, in which case depositors forego income for safety. Market cap of FRC is less than $3b. JPM has $5b on deposit. Let the shares go down another 50% or so, and then JPM or someone else will buy it for $1. Then JPM can unload the crap, thereby frontrunning Blackstone’s “orderly” disposition of the FDICs basket of sh-t inherited from SVB. The problem is further illuminated by this headline on BBG: “Carvana was built for low interest rates. Can it survive its $8 billion debt?” Spoiler: NO.
–A LOT of relatively new companies were BUILT for low rates. Loans outstanding to these companies are dead money. It’s all fine, if funded near zero, but it’s been a tough year. If loans to the TREASURY soured as low cost funding ended, then what do you think money lent to NEW CONCEPTS is? Dead, that’s what. So now comes the time to quantify how much of a hike the credit crunch will equate to. I have seen an estimate of 50 bps, maybe more. Well if it’s 50 bps, then FF PLUS the credit crunch premium is sufficiently restrictive relative to inflation to continue to slow things down. MSFT and GOOGL earnings have sparked a temporary reprieve in ESM overnight, but perhaps these results also showcase that the spoils are going to the big companies/banks, and the “little guy” that everyone claims to care about is out-of-luck. Or something like that.
–Huge rally in rate futures yesterday. SFRM4 was the leader, up 27.5 to 9669.5 or 3.305%. New lows in the near 1-yr calendars. SFRM3/SFRM4 is now the most inverted at -169.5 (9500/9669.5), while U3/U4 is -168.5 (9531.5/9700). So the lowest spread has moved to the front slot because the market perceives a sh-t show more rapidly. Vol exploded for the same reason. On Friday the atm SFRZ3 9550^ was 103, and yesterday the new atm 9575^ settled 118! That’s moving higher on the panic meter, though VIX barely budged at 18.77.
–How’s the Fed left for May 3 FOMC? The market is still pretty sure, though obviously less sure, that another 25 bp hike is coming. FFK3 sttled 9499.5, 70-75% odds of a 25 bp hike. But the October’23 contract (FFV3) was up 15 yesterday to 9520.5. Current EFFR is 483 or 9517. So a hike next week and an ease at the Sept 20 FOMC. Makes about as much sense as anything else going on in this world.
–Durable Goods and 5y auction today.
