Meme Stocks Return & Banks Beat Earnings: TBL Weekly #54

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Jul 22, 2023

Welcome to TBL Weekly #54—the free weekly newsletter that keeps you in the know across bitcoin, rates, risk, and macro. Grab a coffee, and let’s dive in.

See our Bitcoin & Macro Term Glossary for definitions

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Bitcoin has shown exceptional strength so far in 2023, up 83% since the start of the year and holding steady above the three key levels we monitor. The average network purchasing price (Realized Price), the 200-week moving average, and bitcoin’s average production cost are all below bitcoin’s spot price, highlighting the strength, albeit low relative to previous cycles, of the current market:

In equity land, AMC surged 81% just 15 minutes after the market closed at 4pm EST on Friday. The surge came in the wake of a judge ruling that blocked the conversion of private equity shares in AMC to be converted into common stock, a move that would’ve diluted the value of existing shares. While we’ve witnessed plenty of bullishness over the past nine months, this overnight doubling of an illiquid stock in an otherwise forgettable company is certainly one of the most euphoric moves in stocks this cycle.

No, value investing is not dead, we have simply reached the phase of the bull market where growth-above-all-else investing and feverish speculation become the norm. Fight it at your portfolio’s peril.

The KBW bank index has rallied 23% off of its lows set back in March following the transient banking shock. This strength comes after seven straight weeks of stagnant BTFP emergency lending from the Fed, better-than-expected bank earnings, and other non-liquidity factors. Banks have almost caught up to the S&P 500’s rally:

Banks are hunky-dory at face value. Behind the scenes, the picture is worsening.

Deposits at US commercial banks fell $108.5 billion this week, marking the largest bout of outflows since the fallout of the March 2023 panic. Banks use their capital to write loans which keep the economy chugging along its path of steady growth—when banks’ capital falls, like during deposit flight, credit decelerates and the economy slows down thereafter:

And we are witnessing this dynamic of loan deceleration in real-time. Lending from US commercial banks has flatlined from its historical trend of several billion dollars in loans each week to almost no new loans being created. Credit growth, the velocity of money, is slowing. And given that we live in a credit-based economy, you can bet that it will slow down too:

Not to mention the category 5 hurricane that has formed over commercial real estate. Office spaces struggling to pay rent on their vacant property pose a looming threat to the banks who write these loans.

Recall that economic slowdowns are exacerbated when banks’ capital deteriorates. CRE write-downs do exactly that.

Banks are set to take a steady barrage of losses over the next few years as commercial real estate loans and CMBS default, and the fallout will be concentrated within small banks, which not only have far less capital to stomach those losses, but also write the lion’s share of these CRE loans:

A “soft landing” for the economy is partly dependent on banks’ ability to rebuild capital and withstand mortgage, corporate, and consumer loan losses—an ability that will take a major hit if commercial real estate losses pile up on top of the already worsening outlook for lending. If credit contracts rapidly, the economy will follow with a rapid descent instead of a measured fall. We’ll have our eye on credit markets and keep you regularly updated here.

Speaking of which: distressed US corporate debt (at high risk of default) has ballooned to $600 billion. What a prudent time to hike rates again…

In the week ahead, we will receive yet another rate hike from the Federal Reserve. FOMC voters have indicated that further hikes are warranted given a dearth of recessionary economic readings—while we sympathize with the premise, it’s hard to look at CPI’s sharp decline from 9% to 3% in any way other than “rate hikes have worked.” Besides Wednesday’s FOMC decision, we look to S&P’s preliminary PMI surveys for July and Personal Spending from June, both of which give us a good idea of where the economy stands—not in recession, but with modest growth. We’ll also receive Case Shiller home price data, which is expected to show another month-over-month increase. This will corroborate recent data from Redfin that shows home prices are trying to bottom, a phenomenon attributed to wildly low inventories. Finally, we’ll see that Q2 GDP was below trend but above zero, a story that keeps repeating itself in economic data, such as the Personal Spending numbers on Friday:

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Here are your quick links to all of the TBL content for the week:

Monday

In this episode, TBL Africa correspondent Noelyne Sumba is joined by Kumi Nkansah. Kumi is an active bitcoin educator and advocate from Ghana and the founder of Bitcoin Cowries. Kumi describes his journey to bitcoin as a curious technologist, broadcast journalist, and media mogul by trade. He enthusiastically explains the growing bitcoin circular economy in Ghana including the many merchants and vendors that have been orange pilled.

Check out—Inflation Is Eating Ghana, Bitcoin Is Fixing It

Tuesday

The stocks of publicly-traded bitcoin mining companies are a tremendous method of gaining exposure to BTC, particularly for those that prefer traditional asset classes. Given that these companies often use a combination of equity and debt capital to finance the purchase of mining rigs and other operating expenses, their stocks act as leveraged exposure to bitcoin, ebbing and flowing with high sensitivity, or beta, to its price movements.

Check out—Bitcoin Miners Are Up 450% In 2023

Wednesday

In this episode, Joe sits down once again with Michael Howell, the Founder and CEO of CrossBorder Capital. Michael delivers a sweeping lecture on global liquidity bottoming, the world economy is already well into recession, why US QT is effectively 'dead', and how stealth QE paired with Chinese easing is having the net effect of supporting global liquidity, and therefore financial markets.

Check out—The Fed Is Fueling The 2023 Bull Market | Michael Howell

Thursday

Inflation or deflation? Boom times or recession? It seems that with each passing day, arguments on either side grow stronger and more entrenched. And while we have expressed a bias toward the latter of each question, it is not good form as researchers to stay wedded to a thesis when the data or markets suggest otherwise. For that reason, we are constantly looking to confirm or reject our theses.

Lately, we have been presented with some data that suggests inflation has bottomed, including stabilizing housing prices, massive Chinese stimulus afoot, and a weakening dollar which should give life to suppressed commodity prices. But another contributor exists—the fiscal deficit of the United States. Nik dives into a recent Lyn Alden piece and dissects whether deficits can override the disinflationary effects felt elsewhere in the economy.

Check out—Can the US Fiscal Deficit Cause Inflation?

Friday

In this episode, Joe talks to Lawrence Lepard, Investment Manager at Equity Management Associates. They discuss RFK's proposal to back 1% of newly-issued US Treasuries with hard money, what the yield curve signals about the Fed's policy error, the problem of US government interest payments, and what's next for financial markets.

Check out—RFK's Bitcoin Proposal, Fed Driving Blind, & Hard Landing Odds with Lawrence Lepard

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