Emergency Fed Liquidity Is Pumping The Market, Welcome To Summer: TBL Weekly #50
Who said June was supposed to be boring?
Welcome to TBL Weekly #50—the free weekly newsletter that keeps you in the know across bitcoin, rates, risk, and macro. Grab a coffee, and let’s dive in.
Envoy is an easy-to-use Bitcoin mobile wallet with powerful account management & privacy features.
Set it up on your phone in 60 seconds then set it, forget it, and enjoy a zen-like state of finally taking your Bitcoin off of exchanges and into your own hands.
Download it today for free on the iOS App Store or the Google Play Store.
The summer solstice has just passed, meaning we’ve officially entered the season with the longest daylight hours here in the Western hemisphere—so get out there and enjoy that sunlight over your weekend!
First things first, let’s unpack how despite the Fed’s jawboning, it has enabled stellar stock performance in an otherwise drab season for markets.
On the one hand — this week’s stellar S&P 500 performance in the face of a July rate hike being priced back into the market is an encouraging sign of continued support for the stock market rally during the generally inactive summer season.
On the other hand — the wide gap between the path of bank reserves and the S&P 500 suggests the stock rally may have overextended itself and is due for a secular or cyclical reversal. Bank reserves having finally reversed course this week could suggest that this reversal towards risk-off is upon us:
As for that liquidity drain? It is off to a slow start.
About $140 billion came out of the ON RRP facility; a shift in capital from one risk-free facility into a set of risk-free bills. Since this is cash moving from one sideline to another, essentially, it is a liquidity-neutral move, in that bills bought with money from the RRP won’t draw down market liquidity.
Next, $73 billion came out of bank reserves; a development that is liquidity negative. Since reserves are used by banks to extend credit, their destruction means less credit is extended, and therefore less risk is taken and market liquidity falls; note the nearly 1:1 correlation with the S&P 500 when bank reserves rise and fall:
This is the very, very early stage of the marketwide decline in liquidity now that the Fed and US Treasury are working in tandem to bring down bank reserves.
Deterioration can only be witnessed so far in the most fragile of areas, such as car loans to folks between the ages of 18-29 that are 90+ days delinquent that now sit at their highest level since 2009. A startling figure for sure, but not a relevant data point on economic deterioration—it’s not headline data, so the market isn’t trading off of it.
BTFP usage has risen to $102.7 billion in outstanding loans, as losses continue to be papered over in the banking sector courtesy of the Fed. What happens as this emergency liquidity is siphoned to banks? Risk-taking rises. The credit destruction that comes with bank failures has been averted temporarily, and with credit now supported, markets are loving it. BTFP may as well stand for Buy The F*cking Ponzi:
It’s the summer of love.
Until the fire that has started at the back of the theater reaches the screen, the patrons aren’t going to see it, so they will continue watching the movie.
The economic backdrop may be weakening but as long as liquidity remains supported and corporate balance sheets remain strong thanks to low leverage ratios and no need to refinance until Q3 and Q4, markets can still rally.
Commercial Real Estate is getting dicey
Before we go, how about some fun commercial real estate updates to make your stomach churn?
A CRE concentration ratio measures exposure to commercial real estate loans or securitized assets as a percentage of total risk-based assets. TLDR; total leveraged exposure to CRE. Today, 1 in 6 small banks have a CRE concentration ratio of over 300%—the same average exposure small banks had in Q3 2006 at the peak of housing before the downturn.
Powell has advised small banks to sell CRE exposure, and is closely monitoring a few with dangerously-high CRE concentrations:
“Said the Fed is actively engaging with institutions exhibiting high concentration in CRE loans — urging them to take necessary steps such as increased capital requirements to mitigate potential loss risks.”
Yellen says more bank mergers (and failures) are likely this year due to weak earnings, also citing higher deposit rates denting bank profitability. No mention of CRE…
“There may be some problems from this, but I think it’s going to be manageable… I don’t really think that this is systemic” — Janet Yellen
There is no backstop for CRE losses like BTFP for losses on US Treasury holdings. With $1.5 trillion in total US commercial real estate debt set to mature this year and next, and a great deal of this year’s already past-due, will the Fed create an emergency facility to buy distressed commercial real estate and CMBS off the books of banks whose losses threaten their solvency?
With BTFP now servicing $102.7 billion in emergency liquidity swapped out for distressed US Treasuries, driving up risk-taking and therefore the S&P 500, just imagine the shadow liquidity if the Fed started propping up CRE too.
On the bright side, there are plenty of acronyms to choose from to give it a cool name.
The Week Ahead
In the week ahead, we look to Tuesday’s New Home Sales data and Wednesday’s MBA Mortgage Applications for insight into how the consumer is digesting much higher mortgage rates, and whether the 2% refinancing wave of 2020 and 2021 is still keeping homeowners from moving and buying anew. Singing the same tune, as goes home prices, so too goes the economy, so we will have our eye on Tuesday’s S&P CoreLogic home price data which is expected to make new lows as national averages continue swiftly deflating on a yearly basis. Finally, Friday’s University of Michigan survey data will be key to watch at this stage in the cycle where the focus is on how much longer consumers’ purchasing power can hold out, being one of the final whirring cogs in the engine of stubborn services inflation; personal spending should also tell us how close the economy has been to recession in Q2 (probably close but not quite there):
See what a best-in-class Bitcoin mobile wallet feels like with Envoy.
Download it today for free on the iOS App Store or the Google Play Store.
If you’re enjoying today’s analysis, consider supporting us by becoming a paid subscriber. As a paid subscriber, you get full access to all research as it drops.
Here are your quick links to all of the TBL content for the week:
Monday
In this episode, Nik explores Tuur Demeester’s early bitcoin thesis from 2012, the history of Ethereum as crypto's original snake oil, and Tuur's expectations for bitcoin adoption and price over the coming years.
Check out—Ethereum is the Liar’s Index | Tuur Demeester
Tuesday
The BP Oil Spill just had its 13th birthday, and in the decade-plus since the mess, the water in the Gulf of Mexico is still marred by oil flowing from the wreckage of the now-submerged Deepwater Horizon drilling rig.
Don’t underestimate the staying power of icky black goop.
As the US Treasury issues $1 trillion of new debt for investors to buy over the rest of 2023, we invoke the chemical reaction of emulsification to explain the impact a deluge of new US government debt will have on global liquidity, and therefore global markets: like the oil seeping from the Deepwater Horizon, it will crowd out the water.
Check out—
The US Treasury Oil Spill, UK Gilts At Crisis Levels, and BlackRock's Trojan Horse
Wednesday
In this episode, Nik explains the crowding-out effect of US Treasury yields and issuance. He demonstrates why 5% US Treasury yields are altering investment behavior and what $1 trillion of new securities flooding the market means for risk-taking and the repo market.
Check out—Billions in New Debt Will Drain Market Liquidity: Here's Why
Thursday
Everybody craves a linear connection, especially when bitcoin has one of its hallmark +10% days that leaves many scratching their heads. A reader reached out to us trying to understand the “why” of it all—of course, favorable liquidity conditions due to the modest TGA refill, reignited risk-taking behavior in markets, and a wave of ETF hopefulness started by BlackRock have something to do with it.
Rather than exploring broad market conditions to explain a uniquely bitcoin-native bout of outperformance, let’s analyze and explain precisely how bitcoin’s price cycles have a lot to do with its supply schedule being sliced in half every four years. Sitting on the launchpad with 44,500 blocks to go until the halving, are you ready for liftoff?
Check out—Bitcoin Above $30,000: Why The Rip?
Friday
In this episode, Joe breaks down the immense losses facing the holders of office mortgages around the world, concentrated mostly in the hands of already-embattled small and regional banks.
Check out—World's Empty Office Buildings Become Debt Time Bomb
Our videos are on major podcast platforms—take us with you on the go!
Apple Podcasts Spotify Fountain
Keep up with The Bitcoin Layer by following our social media!
YouTube Twitter LinkedIn Instagram TikTok
That’s all for our bitcoin and macro recap—have a great weekend everybody!
Bitcoin's most intuitive hardware wallet just got cheaper.
Passport is now just $199. Set it up in minutes, take your bitcoin off of exchanges with ease, and experience unmatched peace of mind.
Get it at thebitcoinlayer.com/foundation & receive $10 off with code BITCOINLAYER
insightful, as usual.
I find especially interesting your remark on potential early credit crunch sign (auto loan delinquency), though being aware of my own's confirmation bias.
I also find valuable your thesis about the Fed potentially injecting shadow liquidity into the CRE crisis. In my view, such a scenario could potentially lead not to a remarkable decline in asset prices awaited by many, but to a further U.S. dollar debasement.
Thank you, Nik, Joe.