Make or Break the Economy | The Daily Peel | 3/22/23

Mar 22, 2023 | Peel #424

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Market Snapshot

Happy Wednesday, apes.

And Happy Fed Day, of course. Regardless of how you choose to celebrate, markets decided their preferred method was to put the risk-on trade right back in place, at least for the day prior.

Equity indices have gotten over their fear of regional banks for the time being. The S&P, Dow, and Nasdaq each gained strongly, with the Nasdaq leading the way 1.58% higher. Honestly, unless you hold utility shares, your portfolio almost had to have gained yesterday.

Unless, of course, you own bonds (nerd) for some reason. 2-year yields gained 15% from lows hit on Monday at the extreme while longer-dated yields gained strongly, but slightly less so. Meanwhile, the dollar took another step higher as FX traders got jitters for the glorious day that is today. Can’t wait to see you later, JPow.

Let’s get into it.

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Banana Bits

• In one of their first acts as new owners of Credit Suisse, UBS seeks to unwind a deal set to sell the company’s Fist Boston unit to Michael Klein after alleging that the terms of the deal are “too generous”
• European markets are having an arguably understandable hissy fit - to use the technical term - over the decision by the government of who bears the brunt of the losses
• Bard is on the loose as Google rolls out its own AI chatbot in the US and the UK, with other countries planned down the line
• Shohei Ohtani and the rest of the Japanese National Team embarrassed the US by taking the crown in this year’s World Baseball Classic

Macro Monkey Says

The Day of Days

Paraphrasing the classic American film Dodgeball, today is set to be bigger than the Super Bowl, the World Series, and World War II combined.

That’s right; it’s JPow day again. After 7 long, hard weeks of useless guesses on the Fed’s next move plaguing Twitter and CNBC seemingly ‘round the clock, JPow can finally put a stop to all this madness (for now).

As I write this, markets are calling for about an 87.1% shot of a 25 bps hike to occur later today or a few hours ago, depending on when you wake up (no judgment).

With some quick math, we can infer that markets may have priced in a hike of 21.78bps, essentially, and could certainly act accordingly depending on our economic overlords’ decision.

Going by implied probabilities, there are two scenarios that could play out, and with that likely, a big bag of volatility along for the ride. For most of the past 7 weeks, the ship had been sailing pretty smoothly, all things considered. Then, SVB pulled a nasty prank on the global sector, and well, you get the point.

Now, it’s anyone’s guess. But let’s at least go over the two scenarios and what could be rolling around JPow’s dusty, old skull.

Scenario 1: 25 bps hike

Powell & Co. stay the course. If the Fed raises by 25 bps, this will be the most glaring sign yet that JPow is willing to throw market dynamics to the wind in order to trample this beast called inflation. It would be the Fed’s “read my lips” moment, one way or another.

If JPow is willing to stare down a banking crisis partially caused by his rate-hiking escapade and fearlessly continue to jack it up, he’ll be a confirmed gangster and could cement himself a Volcker-like reputation.

Then again, the guy could still wreck the entire economy with additional hikes, so we can’t be too sure. The point is that the sign this scenario would send to the markets would be unmistakable and resolute.

Scenario 2: No hike

Less likely, as guided by market-implied probabilities, is the no-hike scenario. It would be the Fed’s “mom, come pick me up; I’m scared” moment, not one way or another.

This outcome currently has about a 12.9% chance of occurring, so it’s not like Mr. Market is throwing a whole lot of weight behind this view. The belief might be there, but the implications sure would be as a no-hike day would tell the market one thing: JPow’s worried.

I mean, alongside an ongoing crisis of confidence in the banking sector, the absolute last thing behavioral economists would tell you that’s needed is concerns stemming from the Fed. It might help quantitatively, but far from it psychologically.

Further, victims and would-be victims of potential further bank runs are low-key already doing Powell’s job for him.

At the end of the day, the Fed simply seeks to tighten up lending conditions by lowering the amount of liquidity available to be lent, or lent cheaply, at least. Customers, both big and small, from banks to brokers, have been rotating from checking and sweep accounts into similarly safe instruments that banks can’t lose for you: money market funds.

When you take your deposits out of a checking account or sweep program and move it into a money market fund, you are taking cash that banks would otherwise loan out and essentially investing it yourself. This act alone tightens liquidity by reducing the base of deposits that can be lent out, thus having a similar effect (in theory) as rate hikes themselves.

JPow might be a Zeus-like figure from sea to shining sea, but never forget who really controls the economy (or 70% of it, at least): the consumer. Tune in at 2 pm (or go rewatch the video, again, no judgment).

What's Ripe

UBS Group AG ($UBS) ↑ 11.88% ↑

• Like John Cena entering the ring, UBS shares ripped from start to finish yesterday, indicating markets are feeling much more comfortable with their deal for Debi- , excuse me, *Credit Suisse.
• Now that UBS’s invested assets are estimated to sit at 6x the damn GDP of its home country, who’s really in charge? After digesting the news throughout Monday and into Tuesday, Mr. Market appears to be vibing with the deal (at least for now).
• The balance of power just seems a little off, but despite the spades of scandals and fledgling asset base CS has dealt with in recent years, using UBS and its $100bn line of credit with the Swiss central bank to fix things up is kind of like dropping a nuke on a small village. Emphasizing the “for now” here…

Tesla ($TSLA) ↑ 7.82% ↑

• From a behemoth of one industry to a “behemoth” of another, Tesla holders saw their shares surge yesterday on the back of a long-awaited “Attaboy!” from Moody’s.
• Yesterday, the EV maker’s credit rating was officially bumped up to Baa3 by Moody’s. That’s investment grade, baby!
• In doing so, Tesla grew out of its junk credit rating and into what some would call a blue-chip company. At the same time, this could certainly allow Tesla to acquire debt financing at far cheaper rates than before, and in a time where it’s much needed to say the least.

What's Rotten

Volatility ($VIX) ↓ 11.47% ↓

• Like a dog getting its belly rubbed, markets appeared to be massively satiated for the day, largely thanks to Treasury Secretary Janet Yellen.
• As we recently discussed, the VIX and volatility, in general, can be thought of as measuring uncertainty, aka the “fear gauge.” Yesterday’s massive decline comes on the back of a nearly 27% increase since midday Monday.
• Approaching the holy Day that is Fed Day this time around, it appears that markets are, for the day at least, comfortable with the response governments and private financers have given and/or pledged to mellow out the banking crisis as quickly as they can. Safe to say, removing uncertainty will help with that.

Sigma Lithium Corp ($SGML) ↓ 3.37% ↓

• Compared to the Adani Group, Sigma Lithium is having a walk in the park, but no one likes being sh*t talked by a short seller.
• Late Monday night, famous but way-less-famous-than-Hindenburg short seller Grizzly Research announced a short position in the lithium miner that Tesla and other large lithium companies/customers were rumored to once have an interest in acquiring.
• Ever diligent, the short sellers at Grizzly addressed this upfront. Basically, the analysts argue that the lithium company’s valuation is just way too damn high. There’s a whole lot more in the report that we don’t have time for here, but after yesterday’s 3.4% fall, it’s clear the market is a little nervous but noticeably, not that nervous.

Thought Banana

Best Friends Forever

Xi Jinping and his apparent homie Vladimir Putin came out on Tuesday and reaffirmed for the whole world that they are, in fact, BFFs.

In a meeting in Moscow held yesterday, the Chinese and Russian leaders met once again and managed to once again not really do anything of significance besides a full frontal display to the western world of their purported commitment to each other.

Basically, the two signed a joint statement, essentially gassing each other up and throwing a whole lot of shade at the US and others in doing so.

Specifically here, Putin is vying heavily for authorization from Xi to re-route a bulk of the Russian gas exports that formerly would’ve gone into Europe. Called the Siberia 2 pipeline, the plan seeks to supply a sizable portion of natural gas exports from Russia into China through pipelines running through Mongolia.

Putin was acting pretty ballsy about the whole thing overall, speaking almost as if the deal was a sure thing. Meanwhile, his “pal” Xi was a lot more…vague…on this subject, barely saying anything about it and seemingly steering the conversation away from the topic.

Anyway, it almost doesn’t matter, at least at this point in time. The primary yet unsaid goal of the meeting was almost definitely for sure to give the US the nod that despite not having many obvious signs or history of what we’d call “strong relationships” between the two countries, one thing remains true: nothing unites people more than a common enemy.

Now, as we sit now, the US isn’t overly concerned about the talks in an explicit sense. Diplomatic developments for power moves with big huge geopolitical implications like this take time, but it’s probably not the direction that, say, the Pentagon would like things to go.

The big question: What does the seemingly strengthening relationship between Russia and China mean for the balance of global power?

Banana Brain Teaser

Yesterday — A claustrophobic lady gets on a train. The train enters a tunnel just as it is leaving the station. Where should she sit?

At the back of the train. By the time she reaches the start of the tunnel the train will have accelerated and will now pass through the tunnel faster.

Today — It’s 100 bananas off the PE Master Package for the first 3 correct respondents. LFG!

It can be cracked, it can be made, it can be told, it can be played. What is it?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser” or simply click here to reply!

Wise Investor Says

“Central banks have become the market.” — Ray Dalio

Happy Investing,

Patrick & The Daily Peel Team

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“Net Return" refers to the annualized internal rate of return net of all fees and costs, calculated from the offering closing date to the date the sale is consummated. IRR may not be indicative of Masterworks paintings not yet sold and past performance is not indicative of future results. See important Regulation A disclosures at: Masterworks.com/cd