Banking on April

Author

Justin Guilder
April 09, 2023

Welcome to the Lumida Ledger: your macro, crypto & regulatory guiding light.

Ram recently joined Bankless to discuss the fractional reserve banking system, the game of chicken between markets and the Fed, and the drawdown in deposits across the banks and what it means for crypto. See the full interview here.

Insight of the Week

As T.S. Elliot put it, "April is the cruelest month” but risk assets beg to differ. April is the most bullish monthly seasonally for equities and digital assets.

The Ten-Year yield has cozied up to a relatively low 3.3%. This is near-term constructive for equity markets as lower rates imply higher valuations, and bonds become less competitive to long-duration growth stocks.

Last month, we witnessed a flurry of panic around the ‘banking crisis’. However, as we shared during peak fear, we believe the Fed and the FDIC have the tools to stop bank runs and enable banks to HTM.

Market focus is shifting away from short-term ‘bank run risk’ to more intermediate-term risks in the banking sector namely, commercial real estate & deposit drawdown. These factors combined with tighter bank lending standards are leading to slower credit growth and contraction in money supply.

Meanwhile, cryptocurrencies are celebrating their own version of "April Fools'" as one of the most seasonally bullish months unfolds. Fears about system wide bank insolvency and Balajis' hyper-inflation thesis are subsiding. The ‘banking crisis’ set off a string of Bitcoin liquidations and an intermediate bounce. Overall, bitcoin is shaking off bad news like a wet dog. Other assets like ETH are starting to play catch-up.

That said, keep an eye on the Commitment of Traders report which shows Asset Managers are long Bitcoin futures at levels not seen since 10/2021. Traders are aware of the positive seasonality and the halving dynamics so there’s a lot of momentum in a market that also has less liquidity than in recent years.

Ethereum has quite the spring fling with April too – ETH blossoms 80% of the time with an average percentage change of 33%.

Source: Bespoke Investment Group

We’re also paying close attention to the credit market. Credit growth in the banking system is still positive but slowing. The US consumer is resilient. Public debt capital markets are largely frozen. Private credit markets are also tightening. Oil futures are in backwardation indicating markets expect slow growth ahead. The latest employment report showed unemployment falling to 3.5% to levels not seen since 1969.

Our non-consensus view, as outlined in our 2023 outlook, is we expect the Fed will keep rates ‘higher for longer’. The Fed will provide liquidity to the banks via the Bank Term Funding Program (BTFP) while ‘staying the course’ on inflation. We believe that inflation will finish the year at elevated levels (say 3 to 4%+) which puts the Fed in an uneasy position.

Normally stimulus occurs after the recession. This time, $2 Tn in Covid stimulus occurred before the recession. That is a unique feature of this cycle that explains why there is a glacially slow macro deterioration despite the Fed’s cause ‘pain’ policy.

We are watching for dislocations in the private credit markets creating opportunities for savvy investors. Public markets have re-rated based on discount rates. Private markets have not. We believe distressed credit strategies will serve as a strong performer and inflation hedge in the years to come.

Let's dance to the rhythm of April's market swings and make the most of this "cruelest month." Remember, when it comes to investing, seek non-consensus and correct. At Lumida we strive to "Invest Beyond the Ordinary" and build a wealth strategy that stands the test of time.

Chart of the Week

Lumida Research Spotlight

We released our State of the Banks Deck. The deck outlines our views on the following:

  • Now vs. 2008

  • Usage of the Fed Window & BTFP

  • Commercial Real Estate Sizing

  • Deposit to money market flows

  • Credit growth & debt capital markets

Twitter

Media

Last week we spoke at Social Leverage’s Palooza event. We talked through what we are building at Lumida, how we create value for clients, and previewed some investment strategies that we find interesting. Check out this 60 second clip discussing our approach to wealth allocation.

Meme of the Week

Upcoming Events

We’ll be at Consensus April 26-28th in Austin, Bitcoin Miami May 18-20th and SALT iConnections New York May 18-20th. Reach out to us at [email protected] if you’d like to connect!

Quote of the Week

The four most dangerous words in investing are "this time is different” - Sir John Templeton.

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