To The Moon

Sat Mar 11

The 16th largest bank locked its doors yesterday. They had over 200 billion of assets and a little over 175 billion of deposits. Yes, the Fed guarantees up to 250K for each account. The problem is that 90% of those deposits is estimated to be over 250K. That’s a tough haircut for the depositors. With the tech industry leading the layoffs, this is bad timing indeed. A lot of startups are sweating how to meet their next payroll.

Word has it that the issue was a series of poor investments last year in long bonds with rock bottom low coupon rates. As general rates rose, these investments dropped. The bank attempted to raise over 2 billion unsuccessfully. The rest is now history.

So what does this tell us? We are only beginning to exit the “0%” rate decade enforced by the Fed. We have an entire chunk of our population that has never seen anything but the Greenspan put (now simply the Fed put as Fed heads have come and gone). That rippled into individuals’ perception of stocks, credit and mortgages. The other gorilla in the china shop is corporate dependence on these same low rates. We have an entire economy addicted to easy money.

Why haven’t corporate profits been hit harder lately? I think it has a lot to do with a simple revelation called POV (price over volume). As a result of the pandemic lockdowns and drop in consumer spending, companies began experimenting with simply raising prices regardless of what happens to volume. It has worked. Groceries lead the way. Even cruises are booking less after the pandemic but profits are higher than pre-pandemic. These companies are even raising labor wages to spread some of the wealth internally. Sell less, make more. Who would have thunk it?

Here’s the rub. This all leads to higher excessively stubborn inflation which the Fed has mandated to fight. Higher rates for far longer are definitely in the cards. This goes on until something snaps. It will need to be far more impressive than SVB. As I have always said, when the Fed is finally forced to do a 180 degree pivot, it will not be good for stocks. Bonds are a different story. They could rocket. The Fed has stepped back from its long paper issuance. Those 20+ maturities would normally be higher at this point. Your best bet will be intermediate maturities for raw price delta. The highest yields now are in the 1 to 2 yr range.

I see lots of whipsaw markets. High volatility. If a big move develops in stocks, I believe it will be to the downside. The volatility will make for good trading markets if that’s your thing. If not, buy BILS. Sit back and enjoy some of the highest yields in a long time with the lowest risk possible. And BILS pays monthly. What’s not to like?