GM. This is Milk Road Macro, the newsletter that spots a credit panic faster than Twitter spots a typo in a Fed speech.
Here’s what we got for you today:
- ✍️ Should we be worried about a credit and banking crisis?
- 🎙️ The Milk Road Macro Show: Debasement, Inflation, and Investing in the Era of Fiscal Dominance w/ Vincent Deluard
- 🍪 US national debt topped $38T on Wednesday
Consensus Miami is the largest that covers all sides of crypto & web3. Grab your tickets now before prices rise.
Prices as of 8:00 AM ET.
SHOULD WE BE WORRIED ABOUT A CREDIT AND BANKING CRISIS?
Credit fears have been rippling through US markets.
Concerns over a spooky “credit event” have been rising.
We’ve seen some high profile, but relatively small, bankruptcies.
And then some destabilising news from two US regional banks.
The ructions sent social media into a fear tailspin late last week.
So is this similar to the 2023 regional banking crisis? (probably not)
Or the 2008 Great Financial Crisis? (almost certainly not)
Should we be worried?
Let’s take a look…
Trouble brewing?
Tricolor - a subprime auto lender - filed for bankruptcy in early September, and this included $1.1bn in “missing car loans”.
Then later in September, First Brands - a car parts supplier that owed more than $10bn to some of the biggest names on Wall Street - also collapsed.
These bankruptcies, while relatively small, sent ripples through private credit and high-yield bond markets across the US.
You can see this fear by looking at HYG (iShares High-Yield Corporate Bond ETF).
HYG generally moves closely with stocks (it’s essentially the “riskier” end of the bond market).
But in recent weeks it had started to visibly “decouple” from the S&P 500, leaving behind a worrying “gap”.
Some people were concerned these credit fears would drag stocks down.
But, so far, it looks like it’s high-yield credit that is pulling itself back up towards stocks - not the other way around.
Also, high-yield credit spreads widened a little bit (bad news).
(This indicates investors perceive more credit risk, and therefore want higher returns for lending to riskier companies.)
Although, they are still nowhere near the high levels reached recently during the tariff chaos in March and April.
And they have now started to fall again (good news).
THE SUPER BOWL OF BLOCKCHAIN
Most crypto conferences feel the same… but this one’s different.
Consensus Miami brings together both the web3 and AI worlds under one roof.
Here’s why it’s worth checking out:
- Over 20,000 industry leaders will be attending
- It’s the ultimate intersection of crypto and AI
- It’s happening in Miami (you’re bound to have a good time)
And here’s the best part:
Using code MILKROAD will get you a 20% discount on your tickets.
Grab yours now, before prices rise.
SHOULD WE BE WORRIED ABOUT A CREDIT AND BANKING CRISIS? (P2)
Banking issues?
Then early last week, JP Morgan CEO Jamie Dimon said that investors should be “forewarned” that more credit problems were likely to emerge.
He said: “When you see one cockroach, there are probably more.”
And shortly afterwards, two relatively small regional US banks - Zions and Western Alliance - announced they were the victims of fraud on loans to funds that invest in distressed commercial mortgages.
This fueled further concern that more cracks were emerging in credit markets.
KRE - the leading regional bank ETF - started to sink fast (but it’s now recovering well).
At one point last week, it was all looking a little bit similar to the start of the US regional banking crisis in early 2023 - but the reasons for the fears were very different.
According to Goldman Sachs, regional bank stocks saw their biggest outflows in years.
The concerns sent small ripples across the wider US equity world.
The VIX index (the “fear index” - S&P 500 implied volatility) spiked marginally late last week (bad news) to its highest level in months.
But it was very quickly slammed back down again (good news).
Is this similar to the 2023 regional banking crisis?
In March 2023, the US experienced a “regional banking crisis” when Silicon Valley Bank (SVB) and a number of other smaller community banks folded.
At the time, the Federal Reserve was forced to step in to provide emergency liquidity to the banking system.
So is this current situation similar to that period?
The short answer is: no.
This wasn’t/isn’t SVB round 2.
(And don’t get me started on comparisons to 2008.)
My general assessment is this situation is not systemic (not likely to cause cascading problems through the banking/credit system).
It appears to be contained to small pockets (at least it is currently).
And it all seems to be calming down very quickly, judging by the charts I’ve shared here.
Last week, we also got Q3 earnings reports from all the major US banks - and they were pretty good overall.
The message from them was simple: there are very little signs of stress in credit markets overall.
JP Morgan CEO Jamie Dimon noted:
“Credit quality remains quite good. Consumers and businesses alike are in healthy financial shape, and delinquencies are simply normalizing after unusually low levels.”
PNC CFO Rob Reilly noted:
“Total delinquencies declined this quarter. Net loan charge-offs were still below historical averages.”
Citi’s team struck the same tone:
“We’re not seeing any broad-based deterioration. Credit trends are within expectations.”
In fact, “key credit indicators are turning more bullish, contrary to widespread fears”, according to Torsten Slok of Apollo.
Slok believes default rates for high-yield debt have peaked.
And he believes delinquency rates for credit cards have also peaked.
Wrapping up
This is very likely to be yet another “nothing ever happens” storm in a teacup.
Could it get worse? Sure.
It’s definitely worth being aware of and keeping tabs on.
But I’m here to be your handy “destroyer of popular fear narratives”.
An easy and simple way to keep tabs on the situation is probably to watch HYG and KRE (both should be available on most asset tracking websites).
Should either or both keep plunging, the situation could be worsening.
If they both continue to recover - no problems, as you were.
That’s it for this edition - catch you for the next one.
PERMANENT STIMULUS, PERMANENT SHIFT 💰
In today’s episode, we sat down with Vincent Deluard to talk about inflation, asset allocation, and investing under fiscal dominance.
Take a look at what surprised us:
- Why Deluard calls this the “era of fiscal dominance”
- How the Fed became a political tool, not a neutral actor
- The portfolio shifts he says every investor should make now
- Why gold is still underowned despite its run-up
Tune in and see for yourself 👇
YouTube | Spotify | Apple Podcasts
Walrus is making blockchains faster, cheaper and more secure. Click here to learn more about Walrus.
Bridge helps businesses send, store, accept, and launch stablecoins instantly. Learn how Bridge is powering stablecoin-backed money movement.
Want yield strategies that feel like they're passive, but deliver like they're active? Check out EarnPark!
BITE-SIZED COOKIES FOR THE ROAD 🍪
The US Government’s gross national debt surpassed $38 trillion on Wednesday. The debt pile hit $37 trillion in August - and this is the fastest accumulation of a trillion dollars in debt outside the pandemic.
The price of crude oil jumped higher after the US announced sanctions on Russia’s biggest producers. Refinery executives in India - a key buyer of Russian crude - said the restrictions would make it impossible for flows to continue.
Tesla reported mixed Q3 results on Wednesday, as investors had been looking for signs of Robotaxi progress. CEO Elon Musk gave investors a few small updates on Robotaxis - while sales surged but earnings missed the mark.
RATE TODAY’S EDITION
What'd you think of today's edition?
MILKY MEME 🤣
ROADIE REVIEW OF THE DAY 🥛
