Looking Backwards …
LB #1
We begin today with a massively important article written by Randall Forsyth in Barron’s. He is discussing that the treasury market reversal helped fuel the boom in stocks and bonds in the last two months, but he writes don’t expect it to continue.
“The Treasury market now is 14% bigger than the U.S. banking system, Wells Fargo economists wrote in a note last month. In 2006, the Treasury market was only 44% the size of the banking system. Its growth has strained the capacity of the financial system to absorb all that borrowing… The bottom line is that the fourth-quarter rallies in bonds and stocks were helped by adjusting the mix of the Treasury’s borrowing to short-term bills… Deutsche Bank strategists see the Fed beginning to phase out quantitative tightening in June as it starts to cut rates in response to a “material” rise in unemployment, they wrote in a client note this past week. In which case, those eager for Fed easing ought to be careful what they wish for.”
Whoa! Just Whoa, what did he just say? In 18 years the Treasury markets went from less than half of the banking business to now bigger than the banking system? Randall then hits us with the reason for the everything rally is the sweet home cooking of Janet Yellen adjusting the mix of the Treasury’s borrowing, which we already knew, but then he hits us with the conversations of the Fed tightening coming to an end. That’s right according to the Fed minutes from the December meeting, several members think it is appropriate to begin slowing down QT. We are at $7T plus. The gang is getting scared of causing something bad, very bad. If you are very bored try reading the Fed minutes, but if you are sane and don’t want to rest assured that I have done so for you. They start out with a bang though…” Financial conditions eased, driven by a decline in interest rates, an increase in equity prices, and a depreciation in the dollar. The rise in equity prices was supported by the decline in Treasury yields and by earnings growth that exceeded consensus expectations. Implied volatility for equities diminished notably. The easing in financial conditions reversed some of the tightening that occurred over the summer and much of the fall.”
LB#2
Speaking of bonds, we have a new development out of the Brics. The Brics backed New Development Bank are issuing bonds. We have talked about how the Brics are floating a gold backed currency or a gold settlement currency, but last summer they decided to pause that initiative. One of the main issues with taking on the US dollar is that the US bond markets are the deepest and most liquid in the world, so they say, and they supply most of the collateral for the swaps and peer to peer lending in the banking industry. Jai Hamid writes for Crytopolitan “In a striking deviation from traditional practices, the BRICS nations are launching ‘Maharaja Bonds’, a new series of bonds that are set to reshape the financial landscape. This initiative is not just another financial maneuver; it represents a significant shift in economic strategies, as these bonds will be purchasable in local currencies, deliberately bypassing the US dollar. This move underscores the BRICS nations’ commitment to de-dollarization, challenging the long-standing dominance of the US dollar in global finance.” We have talked about how other countries are buying oil in other currencies and how the petrodollar system is at risk, but this is a new step. The Brics are determined to paper cut the US dollar. This likely won’t be the death of the US dollar, but more likely one of a thousand paper cuts that reduce dollar hegemony and reduce the America’s “exorbitant privilege.”
LB#3-
St Louis brought back mask mandates and that lasted less than 24 hours. It seems the people are a little less understanding of having the wool pulled over their eyes than before. We go over to Zerohedge “The city of St. Louis reversed course less than 24 hours after reimplementing mask mandates, announcing Friday afternoon that it would no longer require city employees to mask up while working following pushback from hospitals, health experts, and the governor. This came one day after city health director Matifadza Hlatshwayo Davis said that COVID-19, RSV and flu cases in the city justified masking up again.” If you go to the bottom of that article they have a great chart showing how science works in the media and closes with this great quote, “Perhaps, as Ian Miller noted on X, the reversal was because of the sudden realization that masks never made a difference in St. Louis anyway…” Never trust the US government during a crisis, if you don’t believe me just ask any Japanese-American during World War II. Laws and rights are optional.
St Louis mask mandate lasts less than 24 hours
Looking Forwards…
LF#1
Audacy, the nation’s second largest radio company has filed bankruptcy and is looking to reduce their debt by over 80% or just over $1.5 billion. Now folks, there is someone else on the other end of this transaction that is going to lose $1.5 billion due to our bankruptcy laws. Why we allow companies to just walk away from debt like this is beyond me. What are we a nation of scofflaws? That’s another question for another day and probably why Donald Trump had the money to run for president the first time. He’s screwed more people through bankruptcy than Stormy Daniels has in her line of work… The law is the law and perhaps we shouldn’t point blame at those that use it to their advantage. When you think your investments are safe, please take a moment and ask if your counterparty is safe. That could be a bank, a brokerage, a bond, a business, etc. Bankruptcies are rising in this country and quickly and don’t let yourself be a victim of someone else using the US legal code against you and destroying your finances. I will bring you more bankruptcies but here are a few to whet your whistle. There were 128 bankruptcies during the first week of the year, Latigo Properties, Brendan Gowing, Dos Ex Cattle Co., Chicago Equities and more. All were at least $1 million in assets, and even if they are reorganizing, someone is getting a haircut.
Bankruptcies are starting to snowball
LF#2
The strain isn’t just with those filing bankruptcy either, just declining profitability can and is putting a huge strain on this economy despite what the stock market or the magnificent 7 are doing. The middle class businesses are feeling the lags of the higher interest rates, and this is not just affecting public companies but private ones and smaller companies like the ones we mentioned filing bankruptcy. Big companies issue bonds, smaller companies get loans, loans that are needing to be rolled over. Rolled over at a much higher interest rate, whose customers are also facing much higher debt costs and down the daisy chain of snowball hell to the avalanche. Axios’ Kate Marino calls it the riptide economy. “Call it the “riptide” economy. Everything looks great on the surface, but underneath, unseen risks are building. That’s according to a provocative new paper out Monday morning from Marblegate Asset Management, which focuses on distressed investing and private credit. How it works: Marblegate looked at anonymized financial stats for about 1,200 private companies with revenue between $100 million and $750 million. This is representative of the cohort known as the middle market, which accounts for about a third of private sector GDP, and employs about 50 million Americans.” Here is her and their summary. From pre-Covid to the end of 2022, Ebitda down 24% for midmarket companies and up 18% for publicly traded companies. How can this be? When the government allows Wal-Mart to stay open as essential and shuts down Walt the grocer that’s how. When Target can stay open, but the five and dime store down the street has to close, that’s how. The strain, the unrecoverable strain this government under Trump and Biden has burdened small businesses with is unbelievable. They are without a doubt the two worst fiscally irresponsible presidents ever. It gets worse for mid-market companies though ; financial leverage went up 62% for them and publicly traded companies it declined 14%. Marblegate sums it up succinctly “The economic stress that has threatened the margins at large companies appears to have largely been passed on to the suppliers and vendors of the middle market.” I guess it is a lot easier to control a populace that has to shop at 5 stores than a nation of small business owners and entrepreneurs. It is also easier to fix a permanent currency issue, more on that. Great reporting by Marino and great research by Marblegate. We have hit the iceberg, and we are leaking, but no one is getting any lifeboats out yet.
LF#3
Remember when Hertz was bankrupt, and the meme stock crowd rushed to save its stock for some reason, and they kind of did? Then Hertz sold some stock and got a second wind and then they got that great purveyor of business profitability Tom Brady, he of the FTX crypto commercials, to star in their new attempt to rent cars without losing a shit ton of money. They bought a whole bunch of Teslas, and away they went on a Macy’s day parade of hopes and dreams. Well, that didn’t last long. They are selling almost 20,000 EV cars they bought and replacing them with petrol cars. Ross Clark writes for the Telegraph, “Some of the Teslas, which are no more than two years old, have been listed for sale at $14,000 – little more than a third of their $40,000 price tag when new. The company says it will take a loss of $245 million but it seems to have little choice given the lack of demand from customers and the vehicles’ higher repair costs. What a difference from October 2021 when the company ordered 100,000 Teslas, sending the car company’s shares surging by 5 per cent. But it is indicative of a more widespread malaise in the fortunes of electric cars. Over the past year, figures from the Society for Motor Manufacturers and Traders revealed a steep fall in interest from private buyers. Now it seems that fleet buyers are having second thoughts, too.” What is the common theme here, government interference in your lives and trying to push a narrative on the populace. Well, there are streets full of tractors in Berlin right now that are saying “Nein, Nein, Nein.” Hertz has lit money on fire again. They might have a future in government.
The Dow Jones finished trading at ….37, 592
The 10 year Treasury bond is at …3.94%
The price of Brent Crude is …78.29, but broke 80 after the US decided to bomb Yemen.
The price of gold is …2,054
The price of silver is …23.36
One item of note, the 2-year bond and 30 year bond have completed uninverted by 2.9 bps, the highest point in 18 months. Markets don’t tend to sell off when the curves are inverted, but when they uninvert, beware.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.