"Tell us more, Mr. Science!" In the Season 5 Seinfeld episode "The Hamptons," Elaine drops that line on George, who is in the midst of attempting to use scientific logic to explain an embarrassing personal shortcoming.
That phrase has been running through my head all morning, as I read these nitwitted "explainers" in the financial media about recent events in the U.S banking system.
What is a credit crunch? Seriously? Who writes that, let alone reads it?
First and foremost, the credit benchmarks have performed very well recently. The Vanguard Long-Term Treasury ETF (VGT) has produced a 6.91% year-to-date total return as of yesterday's close, and that will be flattered again today. No bank is getting killed on its Treasury holdings. But what about spreads - the additional price paid to assume the risk for bonds that are not backed by the full faith and credit of the US government?
The ICE BofA US High Yield Index Option-Adjusted Spread has increased this week, but at 510 basis points yesterday, still sat well below its level of July, 2022. Going further afield into mortgages, which generally have higher default risk than corporates, the Janus Henderson MBS ETF (JMBS) has posted a solid 3.73% return ytd.
There just is no bond blowup occurring in the broader market indexes, but in bank-specific derivatives, there have been large increases to pay for credit insurance. This was visible in the price spike in Credit Default Swaps for Deutsche Bank (DB) in today's European trading.
This is when bankers tend to take less risk, and that means extending less credit. According to The Federal Reserve's own weekly data, there was $8.65 trillion in total credit expended in the Federal Reserve system as of Wednesday, a sizable, ~$200 billion, jump from the week before, but still more than $200 billion below the year-ago figure. As of two weeks ago, there was about half a trillion dollars less credit outstanding in the U.S. economy than in the same period one year ago.
The Covid flood of easy money was, as with so many pandemic-related things, a horrible mistake in retrospect. The Fed made a colossal error in wildly inflating its balance sheet and produced a generational tidal wave of inflation fueled by easy money. There has to be a reaction to that, and in today's real-time markets, that usually means an overreaction. It is what it is.
The macro is showing the characteristic signs of credit tightening. For companies that rely on credit to finance operations, many of which are going in the Nasdaq, the economics of their business become more challenging. Forget financial accounting, I mean the real cost of producing Widget A versus the amount of revenue generated from selling it. That cost must include financing costs, such as interest, and when that cost is also a factor of the economics of the ultimate consumer - i.e., most purchases are financed over time using credit - then you have a double whammy.
Stocks of companies that produce houses, cars, anything that is purchased on credit should be radioactive in today's environment. Stay away from those stocks, and yes, that includes Tesla (TSLA) . As one-time unit deliveries bounce from 20% price cuts will only last so long for Elon's company. Also, don't forget that Tesla's costs to produce its cars are rising owing to generational inflation, as well.
What's left? Well, if you have been reading my columns, you will know that that means energy stocks, preferred stocks of energy companies, preferred stocks of energy infrastructure companies (including shipping) and, in special cases where I see a mispricing, preferred stocks of financial companies, although they are more risky here.
This week, for client accounts, I bought these preferreds:
- Zions Bancorp (ZIONP)
- Gladstone Commercial (GOODO) , (GOODN)
- Gladstone Land (LANDO)
- GasLog Partners (GLOP-B) , (GLOP-A) , (GLOP-C)
- NuStar Energy (NS-A) , (NS-C)
- Antero Midstream (AM)
There is not a single common stock on that list. Deal with it!
Seriously, though, these are many of the same names I have been buying since the inception of my HOAX model portfolio on 12/23/21. I don't see a reason to change until the Fed starts lowering -- not, crucially "stops raising" - interest rates.
I will keep reading misleading stories in the financial media and watching FinTV to see the likes of Cathie Wood from (ARKK) (HOAX"s benchmark, which it is beating by nearly 10,000 basis points since inception on 12/23/21) and will keep doing the exact opposite of what they say to do. When they figure out what is actually happening to the financial system, it will, as always, be way too late.
