Market Review

At the start of the year, widespread investor pessimism and excess cash met resilient corporate profits and stable macro data with positive results. But while the Fed has likely finished raising rates (now 5.25%), new crises emerged in banking and commercial property, weakening the outlook for growth and price stability.

However tentative, markets year-to-date are still higher: the S&P 500 +6%, treasuries +5%, real estate +2%, gold +11% and bitcoin +65%

Looking Ahead

The extraordinary monetary policy of the recent past established a buildup of assets and practices that are cracking in the face of change. Banks and commercial landlords are the first of many casualties that inevitably dampen our near-term expectations.

Banks have lost more than $1 trillion dollars of deposits in the past 12 months. That’s >5% of deposits – the fastest bank run in 50 years according to Federal Reserve data. The implications are difficult to overstate. Banks typically lend $10-20 for every $1 in deposits. Withdrawal of $10-20 trillion of economic capital will confound growth prospects and raise market-based costs of capital beyond what the Fed has done with policy rates.

Commercial landlords, heavily indebted and with shrinking rents, pose a risk of contagion to adjacent assets. The global growth in popularity of open-ended funds holding long-term property of all types, interconnects far flung markets in unpredictable ways. Investors seeking their money, as in the famed Blackstone BREIT fund, face hurdles or force liquidations which can cascade throughout the market.

Banks and commercial landlords, with long-term assets backed by short-term funding, are now confronting the preference for liquidity with dread. Under such conditions, we expect precious metals and treasuries will continue to drive performance in our portfolios.