Money Market Fun | The Daily Peel | 3/27/23

Mar 27, 2023 | Peel #427

Market Snapshot

Happy Monday, apes.

Like every single email sitting unread in your inbox, we’ll start by saying that we hope you had a nice weekend, even though, just like the senders of those emails, we really couldn’t care less.

Markets do care, however, especially given the nice weekend sendoff that Friday presented. Equities rallied into the weekend with modest gains seen across the board following a staircase-like trading pattern set on Friday. Disgusting levels of uncertainty continue to rage, but I guess we’re vibing with it now.

Meanwhile, treasury yields climbed, making up for some of the declines set earlier in the week. The flip-flopping attitude on deposit backstops coming out of Washington has really thrown investors for a loop, getting us to the point where we’re starting to question if we can even trust the bond market anymore or if, from now on, we can solely trust dogs. Well, we’ll see, I guess.

Let’s get into it.

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Banana Bits

• TikTok CEO Shou Chew put up a horrible stat line in his matchup against Congress last week, leading Congress to take the next steps toward a potential ban
• WSJ goes full stream of consciousness in trying to summarize the financial world’s fearful woes in just 12 charts
• Credit Sus is SVBing the rest of European banking
• Russian President and bona fide scumbag Vladdy P slides his boys in Belarus just a couple, oh idk, nuclear f*cking weapons

Macro Monkey Says

JPow’s Best Guesstimates

Warren Buffett told us to “beware of geeks bearing formulas.” Well, forecasting requires quite a lot of formulas, and the Federal Reserve, JPow especially, are the biggest geeks in America.

Naturally, then, when the Fed comes out with its latest economic forecasts like it did last week, we have to talk about it.

The Fed has a long history of forecasting. As you likely would’ve guessed, their track record with these forecasts is embarrassingly bad and arguably enough to question why they even do them. I mean, remember the whole “inflation is transitory” thing or JPow saying, “we’re not gonna hike by 75bps.”? Yeah, exactly.

Much of the value in reading a forecast comes not from the actual numbers being projected but from the glimpse into the psychology of the forecaster. Given that the forecaster here is the most powerful economic institution to ever lurk around this planet, it’s probably worth paying attention to at least a little bit.

Basically, the Fed’s quarterly updates to their economic forecasts focus on three key topics: GDP, Unemployment, and, of course, Inflation. Members of the FOMC all give their takes on these readings for the next 3 years and into the “longer run,” all tied up in a cute, little, chart-filled, 17-page report. Let’s check it out.

Gross Domestic Product

Trying to forecast gross domestic product for this +$23tn ship we call the economy is itself just that, gross. But, nevertheless, JPow presses on.

FOMC members currently have 2023 full-year GDP growth in a range of -0.2% to 1.3%, a narrowing of the range when compared to December’s -0.6% to 1.1%.

Despite the narrowing range, the confidence in these forecasts seems to have shrunk as the modal projections flattened. Altogether, this could suggest that now that we are almost a full quarter through the year, FOMC members are more confident that GDP growth will be positive but less confident about the level of that growth.

However, like in December, risks remain heavily weighted to the downside, meaning that the FOMC sees a far higher chance of negative shocks impacting their forecasts than positive ones.

Looking forward, GDP growth is expected to normalize around a 1% - 1.5% level in 2024, with one FOMC member still foreseeing a contraction of around -0.2%. 2025 is when we start to normalize back to that ~1.8% level our economy is used to.

Unemployment

Nobody tell Elizabeth Warren, but the Fed’s forecasts for unemployment are not ideal.

The 3.6% unemployment we have now is incredibly low and symptomatic of an economy growing above potential, aka “too fast.” The one clear projection in this report comes around this topic, as not a single FOMC member sees unemployment staying that low - or even below 3.8%, for that matter - by the end of 2023.

Basically, there are waves seen in unemployment numbers going forward. Most participants expect 2023 to end in the range of 4.4% - 4.7% unemployed, with 2024 figures creeping up to 4.5% to 5% and one member projecting as high as 5.3%.

2025 and the longer run, however, are (of course) anticipated to see unemployment back in a comfy neighborhood of high 3% to low 4% range. To get there, somewhere in the range of 800k, 1.7mn Americans need to lose their jobs. Anyone wanna volunteer to go first?

Inflation

Requiring unemployment to rise that much in order to heal the economy might seem strange, but I think this guy might have something to say here.

The FOMC splits inflation projections into PCE and Core PCE, Directionally, they move together, but comparing projections of each over the same period can give us a little extra flavor.

Much more confidence is seen in the Core projections, apparently, as estimates sit in a far narrower range, with FOMC members clustering their guesstimates more. 3.5%-3.6% is the magic number for Core by 2023’s end, while regular PCE inflation estimates span a range from 2.7%-4.2%, a clear indication that the FOMC has no clue what could happen.

In the longer run, inflationary pressures are almost universally expected to abate by late 2024 and/or early 2025, back to that beloved 1.8%-2% range.

Conclusion

Remember when we said forecasting tells you more about the forecaster than the topic they’re forecasting? Well, this is a prime example. The one thing we can learn here is that the Fed is also dripping with uncertainty around the macro environment’s short-term future.

But, appearing confident in the projections they give is a key part of the Fed’s quarterly updates. If the Fed can show the market that they at least think they know what is happening, this should, in theory, lower the degree of uncertainty plaguing asset prices.

TLDR: No one knows what’s going on, but the Fed wants to think that you think that they think they know what they’re doing. Nice and easy, right?

What's Ripe

Activision Blizzard ($ATVI) ↑ 5.91% ↑

• From friend to foe and right back to friend again. With a shrug and a reluctant thumbs up, U.K. regulators gave Activision the thumbs up they’ve been waiting for.
• Kind of. A few weeks ago, regulators in the United Kingdom indicated they had beef with Microsoft’s deal to buy Activision Blizzard. But on Friday, the Competition and Markets Authority dropped some of its biggest concerns.
• Stating they no longer see monopolistic risks in the console market as a result of the proposed deal, the CMA is now expected to give delayed, reluctant approval. Needless to say, shareholders loved it and sent shares on a 6% ride.

Movie Theaters ($AMC, $CNK, $IMAX)

• Add this to the list of things no one saw coming in 2023. Remember in 2021 when streaming platforms were dancing on the graves of movie theaters? Well, just like Amazon did to brick-and-mortar retail, it turns out those same grave-dancing companies are trying to breathe life back into the deceased.
• According to Bloomberg, Apple plans to spend $1bn/year on blockbuster movies meant for theatrical release. Naturally, theater chains like those listed above were poppin’.
• Apple and others like Amazon have decided to make the leap back into theaters for a few reasons, but the primary one seems to be to make their films eligible for awards like the Oscars. They already took over Silicon Valley, and now these companies are continuing their quest to conquer Hollywood.

What's Rotten

Scholastic Corp ($SCHL) ↓ 22.27% ↓

• Y’all don’t f*ck with Japanese erasers and smelly markers anymore?
• Shoutout to the literal best days ever in elementary school when for a sweet, idyllic 45-minute period, we were blessed with the Scholastic Book Fair. Apparently, however, it’s not as hot as it once was.
• The company behind producing the 4th-grade Mecca got hammered on Friday, and not in a good way. Shares tanked as the company’s losses widened from a year earlier to $0.57/sh on declining revenue, falling $20mn to $325mn.
• Pouring salt in the wound, Scholastic added a lackluster projection for this year’s earnings profile, too, seemingly begging the market to sell off. Well, they certainly did, with shares plummeting over 1/5th of the company’s value at close on Thursday.

Deutsche Bank ($DB) ↓ 3.11% ↓

• Deutsche Bank has been putting the D and B in “douche bag” for decades, even centuries now. But at the close of last week, markets were concerned the German-branded douchebaggery would be coming to a close.
• Credit default swaps spiked, and shares tanked, exactly what you’d expect in the event of yet another potential bank downfall. Like SVB in the U.S., the collapse of Credit Suisse has caused the same fear of contagion we have here to run rampant across the pond.
• As the newly appointed and proud holder of the title of Europe’s scummiest bank, those contagion fears centered around Deutsche Bank. No one’s calling for total bankruptcy just yet, but even having your name associated with that sentence is a red alert situation for any bank.

Thought Banana

Money Market Fun

Never let a good crisis go to waste. To money market funds, the SVB collapse and the sh*tstorm across banking that its downfall sparked has been the best crisis since the outbreak of a certain virus 3 years ago.

While the outbreak of C-19 was just fantastic and one of the best things to happen in the money market industry since the invention of U.S. government debt, this banking crisis has been pretty sweet too.

In March alone, an enormous $286bn has flown from bank accounts into these ultra-safe vehicles. At the same time, deposits at the U.S.’s largest banks have fallen from $17.6tn to $17.5tn. Smaller banks have seen deposit outflows as well, watching levels drop from $5.6tn to $5.4tn this month.

It doesn’t exactly take a genius to see where that sweet green has gone.

We briefly discussed this earlier, but deposit flows exiting bank accounts and hitting money market funds is a market-driven form of liquidity tightening that could offer a helping hand to the Fed.

When sitting in checking and/or savings accounts, banks will take those deposits and try to earn a yield on them, whether that be through lending or buying permissible securities like U.S. treasuries, MBSs, ABSs, and a few others.

Money market funds, on the other hand, directly invest that cash in a portfolio of short-term, ultra-safe assets. These include the assets listed above as well as things like commercial paper, banker’s acceptances, repos, CDs, and much more. In other words, these funds are definitely not being lent out to businesses or individuals, meaning there is less money available across the economy for those lending purposes.

Part of this is a quest for yield now that rates are sky-high, but the recent enormous uptick has to be event-driven. Yields in these funds have been elevated for a few months now, following the path of the fed funds rate, yet the drastic uptick has only been seen since SVB’s idiotic downfall.

If JPow and the FOMC aren’t factoring this into their “data dependent” gospel around monetary policy, then we might as well have a headless chicken as the chairman of our economy. Some would argue that we already do, but following these flows before the next FOMC rate day on May 3rd. We’ll see you there.

The big question: How will deposit outflows into money market funds impact the path for rates? Can wiping nearly $300bn away from banks’ lending base help push the economy into recession?

Banana Brain Teaser

Yesterday — I have hands that wave to you, though I never say goodbye. It’s cool for you to be with me, especially when I say HI. What am I?

A fan.

Today — It’s 100 bananas off the WSO's Elite Modeling Package for the first 3 correct respondents. LFG!

What is something that you always have but you always leave behind?

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Wise Investor Says

“Forecasts are like a bikini: what they reveal is suggestive, but what they conceal is vital.” — Nassim Nicholas Taleb

Happy Investing,

Patrick & The Daily Peel Team

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