Who Doesn't Love a Contradiction? | The Daily Peel | 3/20/23

Mar 20, 2023 | Peel #422

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Market Snapshot

Happy Monday, apes.

Somehow, someway, the banking system survived another week. Hopefully, we can say the same thing next Monday, but if not, I’ll see you in the bunker.

Markets closed last week on a decidedly negative note as the scared and feeble Mr. Market spent Friday balled up, crying in the corner. Equities sold off all session as we decided the banking crisis was back on, with the Russell 2k losing nearly 3%. Despite the rescue efforts in place from Washington to Zurich, a crisis of confidence in banking is like a musketeer facing off with a nuclear bomb, so markets now think we made a whole lot more $$$ to stem the contagion.

Still, that didn’t stop the theme from loading the f*ck up on treasuries as yields sank precipitously throughout the day. The safety trade was the name of the game, never ideal for us degenerates, but great for other assets like Gold, which rallied almost 4% on the day. It’s gonna be a fun week, so…

Let’s get into it.

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Banana Bits

• TikTok CEO Shou Zi Chew tells Joey B he’s got it all wrong with the rumored ban of his app
• An OpenAI cofounder finally expanded on the massive elephant in the room: how an open “foundation” becomes a closed for-profit company
• Days after an (honestly pointless) arrest warrant was slapped on Putin’s head by the International Criminal Court, this guy has the balls to travel to an occupied city of Ukraine for the first time
• Did not take long at all for March to really get into the Madness, especially as no-name 16-seed Fairleigh Dickinson upsets the #1 ranked Purdue

Macro Monkey Says

More Fed BS

Super Bowl Sunday, the Moon Landing, Will Smith slapping Chris Rock at the Oscars, and the Fed’s balance sheet increasing: these are the moments that really get people talking, apparently.

At least, that’s what the Finternet showed us this weekend. As you’ll notice in the chart below, the Fed’s balance sheet has expanded in recent weeks, gaining $297bn to a level of $8.63tn at the close of last week, the Central Bank’s largest asset base since November.

But wait a minute; isn’t the Fed trying to reduce its balance sheet? Yes, you’re right, apes; that is still the goal. Despite what dumb*ss catastrophists behind keyboards might be espousing, these dynamics aren’t necessarily mutually exclusive.

Well, I guess growing the balance sheet while trying to reduce it is, by definition, mutually exclusive, but it’s not what you think. JPow and the gang aren’t yoloing into random treasuries, MBSs, ABSs, and even ETFs again or anything, so let’s see wtf is going on.

Basically, there’s been a little bit of news lately around some banks for pasty virgins in the Bay Area called SVB or “Hipster Soy Capital” or something. Anyway, this trainwreck run by idiots sparked a mini-panic that has the whole world on the edge of its seat to see how far and wide the alleged contagion will spread. To stop the contagion as quickly and easily as we did with C-19, JPow and the homies stepped in.

Programs like the Bank Term Funding Program (BTFP) have been launched to give these naughty bankers some extra liquidity when they need it most. The program allows the Fed to offer up to 1-year loans to struggling banks with high-quality instruments like t-bills valued at par posted as collateral.

Moreover, the OG programs offered at the Fed for struggling banks have been used and abused at record rates recently as well. Thus far, only about $12bn has been put to work out of the BTFP. Meanwhile, the discount window has been popping off with all-time records.

Known as the lender of last resort, the discount window is part of the Fed’s normal toolkit, offering loans to banks at rates slightly higher than that on repo loans. Like trying in gym class, using the discount window carries a heavy stigma, although it’s actually not that bad.

Banks don’t like to use the discount window because it’s a sign that the bank in question couldn’t get funding from anywhere else and was forced to borrow at the discount window’s higher rate. The Fed hates the beef around the discount window because it makes banks do other sus sh*t instead, so as a result, many analysts see the wild upswing in the usage of this standing facility as a good thing.

Compared to the $112bn previous record set during the height of the GFC, the $153bn taken from this program last week smashed records and contributed the majority of the Fed’s balance sheet growth last week. That might not sound great, but it’s not like using this facility will lead to horrific outcomes. We want the banks to have the money they need, and using standard programs like the discount window is always preferred to taking funds from the “extraordinary measures” offered by things like the BTFP.

Honestly, the data suggests the BTFP wasn’t even needed. The discount window’s $53bn combined with the $143bn lent through the FDIC to new bridge banks look to be more than enough.

And the best part is the Fed can support the banking system in this way without abandoning its War on Inflation. Balance sheet expansion driven by increased lending, as opposed to JPow buying up treasuries and MBSs, isn’t a direct injection of liquidity into markets. It does expand liquidity but does so idiosyncratically and in a more controlled manner (allegedly).

So, as usual, the Twitter people freak out, and then anyone willing to spend more than 2 minutes to actually find out what is going on realizes that the freakout is similar to that of a candy-deprived toddler at the grocery store checkout. Then again, anything can happen.

What's Ripe

Coinbase ($COIN) ↑ 10.62% ↑

• Looks like the “have fun staying poor” crowd was right because, despite the crypto market’s catastrophic fall over the last year, the laser eyes are back on top, for now.
• While the traditional banking system experiences a fall of its own, Cryptobros have been hailing the recent rise in the value of digital assets and their associated equities as “proof” that BTC is the only “true currency” (whatever that means).
• Yeah, let’s pump the brakes on that one. It just so happens that simultaneously with the above, liquidity out of the Fed was sharply on the rise, as we discussed above and shown in the below chart.
• But if that’s not enough for you, consider how rate expectations have gone from almost definitely 50 bps to a 38% chance of 0 bps in less than two weeks. Thus far, digital currencies have been and still are liquidity trades, nothing more. Celebrating the rise is like celebrating bread for rising when it’s baked, which, to be fair, is pretty sick.

XPeng ($XPEV) ↑ 6.12% ↑

• It’s official. In 2021, the key to a solid earnings day was to say some sh*t about NFTs, blockchain, or 16-year-olds promoting your brand on the internet. In 2023, the password to a solid earnings day is just two words: cost cutting.
• Perhaps no stock has displayed this more than XPeng. Basically, the EV maker came out with a report so trash it was honestly disrespectful. Rather than taking the insult, traders got hyped, and shares gained as if something good had happened.
• For U.S. listed ADRs, EPS losses widened to -$0.40 for the quarter, while sales posted a huge miss of nearly 20%. Still, Mr. Market heard the word “cost cutting,” subsequently turned off its brain, and bought hand over fist. Can’t hate.

What's Rotten

First Republic ($FRC) ↓ 32.80% ↓

• Imagine being so disgustingly broke that $30bn isn’t even enough to save you. That’s the situation First Republic finds itself in now.
• Confidence is everything in banking, but despite a $30bn vote of confidence from 11 of the largest banks in the United States, First Republic still absolutely cannot get people to believe in them again. At least, that’s what Mr. Market thinks.
• As a noted schizophrenic lunatic, Mr. Market might not be the best judge in this situation, but it’s the only one we’ve got, and Friday’s loss of 1/3rd of First Republic’s market value is as clear a judgment as we’re gonna get.
• The lesson here is that the situation is still very fluid, and any solutions are still very, very up in the air. Expect random fluctuations to continue as any headlines on the subject will be taken to their extremes. Stay safe out there, apes.

Meta Platforms ($META) ↓ 4.55% ↓

• If tech CEOs were steak dinners, Mark Zuckerberg would be so well done he might just be straight-up burned. Guy gets grilled by Congress, every single person on the internet, and now employees, too.
• Meta announced yet another round of layoffs early last week, cutting 10k jobs and 5k job openings. At a company town hall towards the end of last week, Zuckerberg was grilled from every direction by his army of employees, all questioning their faith in the firm after friends continue to get fired.
• Worse yet, now analysts now think Meta may have gone too far, with hella coverage this weekend alleging the latest job cuts will also bring a knife to productivity.
• But, it’s the year of efficiency out in Menlo Park, meaning employees are going to have to find some way to get through the workday without dozens of free coffees per day, therapy dogs, and, worst of all, massages. Oh, the humanity!

Thought Banana

Bring Out the Big Guns

Few people on the planet right now are happier than Ralph Hamers, the CEO of UBS and a guy who just bought his number one rival for less than 1/10th the value of the firm a year ago. Not bad, Ralphie.

But, of course, it doesn’t stop there. In normal times, a buyout of one banking titan by another would trigger hella antitrust concerns, even among the Swiss. Not only is the Swiss government not challenging the deal, but they’re also actually offering UBS a $100bn liquidity buffer to absorb undue losses on the deal. Just…wow.

As we discussed recently, UBS’s (former?) little brother Credit Suisse has been under major stress since last fall, when clients began to pull funds at record rates as confidence in the institution all but disappeared. I mean, from spying on departing wealth management boss Iqbal Khan (who ironically now runs UBS’s wealth management division) to getting caught up in Bulgarian cocaine deals, Credit Suisse didn’t exactly exude competence and responsibility.

But it was the damages from the Archegos and Greensill sagas that really put Credit Suisse in the hot seat over the last 2 years. So, when a crisis of confidence emerged across the global banking sector thanks to SVB, Credit Suisse’s already low heart rate went into a full-on flat line.

Now, UBS is picking up what’s left of the firm for a cool $3.2bn. Normally, UBS investors would get 6-weeks to ponder the deal and vote on its approval, among other regulatory rules imposed on large acquisitions.

But because of how utterly f*cked CS is, the Swiss National Bank and the financial regulator FINMA have decided to rewrite the rules to bypass this requirement. Some UBS investors aren’t exactly pumped about this, but given the dirt cheap offer price and the small loan of $100bn as a backstop, they shouldn’t be too mad for long.

Meanwhile, coming back stateside, the U.S. government is looking to work a deal of its own to soften the blow currently levied against the regional banking sector. For this, they had to bring in the ultimate big gun.

Reports swirled this weekend that Uncle Joey B and his team contacted none other than Mr. Warren Buffett for advice and dollars to heal the roiling sector. Nothing is certain yet, and details are scarce, but honestly, any investment in any regional bank by Buffett would arouse the sense of confidence the sector desperately needs.

And it wouldn’t be Buffett’s first time saying the day, either. Back in the GFC, Buffett put $5bn into Goldman and another few billion in Bank of America, both of which turned out to be damn good investments.

Ironically enough, that saving grace by Buffett and others back in ‘08 came almost exactly 100 years after John Pierpont Morgan (yes, that J.P. Morgan) and other wealthy Wall Street bois saved the U.S. from the panic of 1907.

The point is, this is some crazy sh*t, but banks and rich bankers saving struggling banks isn’t exactly something new. Boys will be boys, apes will be apes, and most of all, banks will be banks. Isn’t capitalism fun??

The big question: This Thought Banana was written at 3:34 pm yesterday. What more details came out between then and you reading this now? How will the UBS deal change banking in Europe and globally? Will Buffett save the U.S. economy once again? Are other banks in similar trouble that we haven’t noticed yet?

Banana Brain Teaser

Friday — You can hold me in your hand, and yet I can fill the entire room. What am I?

A light bulb.

Today — It’s 150 bananas off the Private Equity Master Package for the first 3 correct respondents. LFG!

Tim and Mel are long distance lovers. Tim has just purchased an engagement ring for Mel and wants to mail it to her. Unfortunately, the only way to ensure the ring will be received is to place a lock on the package. Tim has locks and Mel has locks but neither have keys for each other's locks. How can they ensure the ring isn't stolen?

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

Wise Investor Says

“Liquidity is like oxygen. You don’t notice it until it’s gone.” — Chuck Royce