What we’re reading (1/25)
“What To Watch In Friday’s Spending Report: A Last Look At Inflation Before The Fed Meeting” (Wall Street Journal). “Prices ticked up slightly in December, economists estimate, but the longer-run trend shows inflation cooling while consumers spent strongly and incomes grew—all ingredients of a soft landing for the economy.”
“The ‘Worst Possible Outcome’ For The Fed Is An Unnecessary Recession, Not Reversing A Cut” (Claudia Sahm). “The Fed faces many challenges. After hiking the federal funds rate aggressively by 5 1/4 percentage points from March 2022 through July 2023, it’s time to start cutting. Inflation has decreased substantially from its peak in the summer of 2022. The consensus is that inflation ended 2023 with a two-handle on both total and core, at 2.6% and 2.9%, respectively. (The Bureau of Economic Analysis will publish the numbers on Friday.) That’s a massive improvement in inflation—down from a peak of 7.1% for total and 5.6% for core. Moreover, there is no reason that the last mile must be the hardest. In addition, families are convinced that inflation is coming down. Here from the Surveys of Consumers out of the University of Michigan (#goblue) on inflation expectations[.]”
“PE Worries Climb As Investors Increasingly Claw Back Incentive Fees” (Institutional Investor). “With private equity firms unable to sell or take their companies public, managers are growing concerned about the risk that investors will ‘claw back’ incentive fees they paid in previous years. Citco reported a 35 percent increase in questions and requests for support from private equity firms for clawback risks in 2023 alone. Citco provides administration services for private equity firms and hedge funds that manage approximately $800 billion. Clawbacks, which protect investors from paying incentive fees on gains one year, only to experience a loss the next, are a common feature of contracts between private market firms and the allocators. Clawback provisions bar managers from collecting more than a certain percentage (usually 20 percent) of the profits of a fund over its lifespan. If they do, managers are required to return the “excess” incentive fees to their investors.”
“Money Isn’t Free” (Dealbreaker). “As investment strategies go, it doesn’t get much easier: Borrow money from the Federal Reserve at 4.88% or so, then deposit it right back with said central bank, which pays you 5.4%. Free money! Plus, you even get to help set the first rate, if you bought enough interest-rate swaps to drive up rate-cut expectations. And you would, because of course if you’re participating in this happy little arbitrage, you’re a bank or credit union with access to the Bank Term Funding Program, set up to reassure depositors that banks wouldn’t go belly-up in the wake of the Silicon Valley Bank/Signature Bank concomitant catastrophe. And boy, have you/they ever: Banks, which are in no apparent danger of running out of money, have been borrowing billions every week since November, when the BTFP’s rate and the Fed’s bank reserve balance rate flipped. Even if it’s gotten a little less fun recently, as the Street becomes less sanguine about a rate-cutting bonanza, pushing the former up a bit, it’s still pretty good—and you had to get while the getting’s good, because the whole party was coming to an end on March 11. Or, you know, now. Appearances to the contrary, Jay Powell doesn’t like looking stupid.”
“Commodity Markets Are In A ‘Super Squeeze’ — And Higher Prices Could Be Here To Stay” (CNBC). “Global commodity markets are in a ‘super squeeze’ amid supply disruptions and lack of investment — and it’s only going to get worse as geopolitical and climate risks exacerbate the situation, HSBC said.”
