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$20 Cheeseburglar Raids Pockets Consumers feel grilled, but markets remain chilled. It’s been exactly a year since Silicon Valley Bank failed in California. That means today is also the day when the Federal Reserve’s Bank Term Funding Program (BTFD) ends. Though banks can continue to hold their bonds in the Fed emergency funding vehicle in exchange for cash for another year, no new exchanges of devalued bonds for cash can happen. (The Fed can, of course, restart the program anytime a new and large enough crisis opens up as it navigates from crisis to crisis.) Termination of the program makes it a little more likely that some banks that were leaning too heavily on the program may have trouble. Of course, the Fed said when it created the program that banks were fundamentally sound, but why would you create a massive emergency bank funding program to rescue banks that are “strong and resilient?”
The fund still has $160-billion in Treasuries banked in it in exchange for cash loans to the banks (only down a few billion from the BTFP’s peak). That won’t all go away today. Only the ability to use the fund for new bailout loans ends today, while loans already made will continue for their full one-year term. (If they were made a year ago, then, yeah, they will end today. About half of today’s full measure were made in the first three months of the program, but some banks may have terminated the original loan early and then made a new one more recently.) What this likely means is that banks become more risk-averse, which they actually should be, but that will mean tighter funding for other businesses. It also means, if they have a run, the banks are back to paying out their “depositors” by selling bonds at current devalued market value (which is where SVB went bankrupt), rather than using them as collateral to get a loan at full face value from the Fed. Ever since Covid, banks are no longer required to hold any reserve funding—an artifact of Covid-era policy that may surprise many and that seems oddly continued in a time when banks are “fundamentally sound” but just struggled from lack of reserves a year ago. It used to be banks had to hold enough in reserves in case they experienced a run on deposits to give depositors their money rapidly. Not so now, even as the BTFP is being pulled. In reality, then, bank deposits are not really deposits at all. “Deposits” are held in custody. It is perfectly legal for your bank to hold no portion of the “deposits” entrusted to it, though it is not likely the case that any bank operates things that tight; but they are now all free to decide for themselves how much they hold in reserve “deposits.” Banks were allowed to take reserves down to zero during Covid in case they needed to during a run. (After all, if you cannot deploy all your deposits during a run, why hold them anytime?) That should have ended when the emergency ended, but your government was content, even at the last congressional meeting with Powell, to let that situation continue since it is what the banks want to do. Consumers are being devoured by inflation The thing markets are intently watching for this week, however, is inflation, not bank troubles, with a couple of major reports coming in. Consumers are really feeling inflation now that the $20 burger meal is becoming increasingly prevalent, so markets may be keeping a watch on the retail numbers that come out, too, as a gauge of how cash-starved and hungry consumers are feeling, which will have a big impact on the consumer-driven economy. I just talked to one local restauranteur at a bistro my wife and I really like, and he was completely downscaling his menu because he said he can no longer offer his high-quality burger and fries for $20 and make any profit on it. He doesn’t feel good about holding Andrew Jackson hostage for a burger meal, so he is taking burgers off the menu. He also laid off 70% of his staff to try to start making a profit again with simpler fair that is quicker to cook than burgers because otherwise he’s going out of business. That’s getting pretty lean on the menu, so I’m not sure how he’ll make that work. What is he going to offer me for under twenty bucks that I actually want? Cauliflower and ranch dressing? I’m not likely to bite on that. Inflation is putting on weight This week’s inflation readings are likely to weigh heavier on stocks than other recent upticks because they will be the last data on inflation the Fed gets ahead of its March 19th-20th rate-setting meeting. The same can be said regarding the bond market:
Last week, Bloomberg wrote,
Markets await the reports with bated breath. Still, stocks and bonds have both been steeped in so much unreality that …
Never underestimate either market’s ability to wear blinders. Consumers, however, have a beef with the cheeseburger pricing issue and are not at all sure inflation is going to cooperate with the Fed:
If the consumer knows more from the street level about food markets and all other markets for tangible goods and services than stock markets, bond markets and the Fed do, then …
Street smarts are now saying the Fed doesn’t have inflation beat and will lose ground. Moreover,
Consumers sound a lot less sure about how well anchored prices will remain than Powell did at last week's congressional meetings. Inflationary shipping pressures still building But, hey, at least the Suez Canal and Panama Canal remain almost totally shut down, so what could pressure prices up more than they are now … unless they start delivering cheeseburgers through the canals? Then expect an $80 cheeseburglar to rob your pockets soon.
“Juggernaut” stock rally poised for correction As for those stocks that are awaiting inflation reports, the Mag-7 led the way down today, though the major indices as a whole more-or-less held their ground, except the tech-heavy Nasdaq. In the interview below, Lance Roberts spells out how stocks and bonds are now perfectly poised for a correction, though he is not sure of the timing, but many significant indicators are saying “correction”: While I won’t say when stocks are going to take the big plunge either, I think those betting high against volatility right now (a popular returned trade) will be stepping down from filet mignon to cheeseburgers soon. Thank you for reading The Daily Doom. This post is public so feel free to share it. The Daily Doom is a reader-supported publication. To receive new posts each weekday, consider becoming a free subscriber. Paid subscribers also receive a weekend “Deeper Dive” and are the sole reason these editorials keep coming. I’m thankful for their support.
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