Don't Believe the Bullish Economic Rhetoric Pushed by Wall Street
The overnight reverse repo market’s outstanding level is $441 billion, the lowest level since June 2021 and down 13% over the past month. I use the reverse repo outstanding balance as a proxy for excess liquidity in the system. Mid-sized and small companies have less liquidity than a year ago. Ditto for most consumers. The very largest companies take share in an environment like this. The bullish economic rhetoric pushed by wall street is pure bullshit.
As interest rates remain elevated…
The average cost of debt carried on the balance sheet actually increases for most debt issuers as lower rate debt matures and is replaced by higher rate debt. On balance, this will cause companies to become more conservative in terms of general capital allocation as it relates to hiring, product development and internal projects to list several examples. Now is really a great time for companies to focus on driving operating efficiency as well as opportunistically looking for M&A targets - especially those that may have some financial distress.
Equity will take a valuation hit as debt expense remains elevated (particularly for mid-sized and smaller public companies). Venture investors need to recalibrate to lower valuations and move up the chain to later-stage companies with better cash flow potential.
Banks continue to carry large, unrealized losses. Nobody is talking about this. Banks will pull back on lending as these losses become realized. Look to Bank of America’s March quarter results as a proxy. Bank unrealized losses on investment securities will remain high so long as bond yields remain elevated.
Further, many banks will continue to lose deposits to Treasuries and Money Market funds as rates remain elevated. We will see how “robust” the banking sector truly is after March 11th when the BTFP expires. The hard landing that had arrived in March 2023 was only postponed by the BTFP. It’s not as though Real Productivity is higher. If that were the case, real world prices would be coming down.
The bullish GDP rhetoric coming out of Wall Street is pure bullshit. Why? I do not believe the numbers. I believe that Real GDP is significantly overstated because I believe that CPI is significantly understated. It is simple math.