Watch: After the Open | Updated Daily
Sign up for our content

Your Quiver | Friday, March 24, 2023

CIO | Nadine Terman @SolsteinCapital details what she's seeing in global financial markets.

DB’s Default Dilemma

Deutsche Bank is in focus this morning after a spike in its cost of insuring it against default. DB announced it would redeem a tier 2 subordinated bond early, which is something typically done to demonstrate confidence in your balance sheet. This past week’s CS rescue is causing investors to dump first, ask questions later, though. Plus, it didn’t help that CS and UBS were in the group of lenders that the DOJ is probing for sanctions evasion. [Please enjoy this little video below on the banking system]

Piling On

Gundlach is out, piling on Powell. He (and markets) are suggesting that Powell is going to have to cut rates, not raise and hold them. Yields on shorter term UST have declined over the past couple of week, given concerns around the banking system and overall economic pressures. As we mentioned earlier this week, swap markets are assuming the Fed is done hiking—and will cut. Gundlach is doubling down, though, with his call—saying that they’ll have to cut rates “substantially” soon.

Risky Business

BBG is out with a story about quick double-digit losses from a bunch of star traders (Pierre Andurand, Said Haidar, Chris Rokos), versus more muted returns or losses by big, multi-strat hedge funds (Citadel, Eisler Capital, Millenium). Supposedly Adam Levison lost more money than he ever earned since he spun off his hedge fund in 2015, and now is shutting down. Big moves in bank stocks, corporate debt, commodities and Treasuries at the same time caused the extreme hit to returns.

Cash is King

Global cash funds had inflows of ~$143bn in the week through Wed (biggest haul since Mar 2020), attracting >$300bn over the past four weeks alone, per EPFR Global. Money market funds are now at >$5.1 trillion.

Calculated Risk

Cathie Wood bought more Block and Coinbase after their big declines, caused by the short-seller allegations and SEC Wells notice, respectively. It reminds me of my time as an activist investor, when the firm would feel compelled to double down on portfolio companies after negative news/events caused further pain. When you don’t have more insights into potentially devastating developments, it is simply risk taking, not calculated risk taking. Sometimes humans forget that lesson.

Bye Bye Buyback

Per Nadine Terman’s point on RealVision yesterday (video linked below), buybacks will decline as the economy deteriorates. GS noted that the outlook for US corporate spending is under pressure from bank stress, worsening an existing trend. GS’ Buyback Desk flows show that YTD executions are well below 2022 levels, even after a record $360 billion in authorizations. Plus, bank lending standards have tightened to levels consistent with recessions, meaning that shareholders should expect buybacks to decline.

This Can't Be Good

NOSO reported on South Korea’s tenants who stump up outsized deposits known as jeonse for landlords, instead of paying monthly rent means that they are paying property owners with leveraged cash. So, the property market risks are accelerating.

Did You Know About This?

The Fed (yes, our Fed) has a facility that gives foreign central banks access to dollar funding. It was tapped for a record $60 billion during this past week’s banking crisis. The Fed didn’t say who took the money. But, I guess we’re now helping out our banks and their banks. The facility allows foreign central banks to post their UST holdings as collateral in exchange for dollar liquidity, which they need during stress periods. Also, the rate across key cross-currency basis swaps (which tell how expensive it is to get USD) tightened.

Pet Project

The “pet economy” (yes, it’s a new term) is expected to increase by >50% over the next few years, given the rise in pet ownership during the pandemic, and owners’ interest in sophisticated drugs, treatments, pet pampering, and everything else. BBG expects the market to reach almost $500bn by 2030—a size similar to cybersecurity and fintech. MS reported that there were about 5mm more pets in the US in 2022 versus 2019. With two beloved dogs, our family is doing its fair share to keep this market alive and well.