YOUR QUIVER | December 28, 2022
Today's Rundown
CIO | Nadine Terman @SolsteinCapital details what she's seeing in global financial markets.
Winter Is Here
Equity markets are down roughly -20% this year globally, and BBG is reporting that an index of global bonds is down around -16%. The USD is up 7% (a lot), and the UST 10-yr moved from 1.5% to above 3.8%. Markets appear to be up this morning based on investor optimism for China’s reopening. But volumes are light this week, folks, so FOMO is a NONO.
Staying Put
As 42Macro points out, effective mortgage rates are still near lows because people are staying put. They aren’t going to move and then have to trade their 3% mortgage for a 7% mortgage, so the current US housing market weakness shouldn’t cause any major mortgage credit cycle challenge. The thinking is that mortgage debt service ratios should remain stable also because the labor market is strong. With the Fed holding onto its hawkish stance, long duration bond investors who are staying put, hoping for a near-term Fed pivot or pause (because of pick your reason: declining inflation, layoffs, declining growth, housing price depreciation), should reconsider their positioning, as there could be potential ongoing short-term pain for them. Data out today—US pending home sales fell for a 6th month in Nov to the second-lowest on record since 2001.
Waging Protests
Nikko Asset Mgmt is shining a light on investors’ underestimating the potential threat from millions of global workers protesting for higher wages. Investors positioned for a smooth risk asset rally aren't considering the potential negative impact. As we have explained to our investors, corporate margins’ incredible growth trajectory over the past years sits is in striking comparison to workers’ wage deflation over the same time period. So, it is natural to expect those trends to reverse. You don’t have to read a 10K or 10Q anymore to learn about corporate margin trends. Just this week, we’ve seen Seattle Starbucks baristas striking, South Korean truck drivers disrupting various industries, and a host of UK workers striking, among other examples. According to Bloomberg Law, US strikes are at a 17-year high.
The Lithuanian Lag
This is a new data comparison for me….the ECB’s Simkus told the FT that Eurozone inflation has a 6 mo lag to that of Lithuania, so they’re still not at their peak levels yet. Another data point for Nikko’s prediction about wage protests.
Factoring In the Numbers
Japan factory output declined for a third consecutive month in Nov to pre-pandemic levels.
Prince of Thieves
SBF and buddy Wang borrowed >$545mm from Alameda in the spring of 2022, to buy a 7.6% stake in Robinhood in May. So, that bet is currently underwater. Looking at the chart (below), it could have worked out roughly a month later.
SOL-ana
Solana is down over -90% YTD. Investors are concerned that major holders are going to dump the token. In other crypto news, Gemini and its Winkleboss founders are being sued by investors because their interest-bearing accounts were not registered as securities.
In Distress
Concerns are abound regarding the credit markets. Banks stuck with buyout debt. European pension issues. Real estate challenges in Asia. BBG is reporting that distressed debt in the US is up >300% in the LTM. Leverage ratios are at a record. BBG estimates that $650bn of bonds/loans are distressed. Loan loss provisions are up 75% in 3Q22 y/y. With higher debt costs and a declining economy, this is not surprising or rocket science. Numerator (cashflow) down, and denominator (debt costs) up = bad.
Into Thin Air
BBG is contrasting huge 2-year declines for some major hedge funds, versus the broader HF industry which managed risk fairly well this year, especially in comparison to equity and bond markets globally. Tiger Global is down -57% over 2 years, Whale Rock is -47% over the same period, and Light Street is down >-60%. Rembember Melvin Capital, the firm that closed down in the spring after losing almost -50% of capital in less than 2 years, after pocketing huge fees for six years prior? We still wonder whether the illiquid positions held by some of these funds are even marked down fully….since p/e and v/c don’t have the same public market pricing accountability.
