Power & Market

Roaring Kitty vs. Chairman Powell

Roaring Kitty vs. Chairman Powell

Stock market technicians are musing that if meme stocks are surging the Fed is not tight enough. Yes, after three years of hibernation “Roaring Kitty” returned with the first of a series of cryptic posts on X. Keith Gill’s (aka Roaring Kitty) post showed a man leaning forward with what looked like a gaming controller. Some traders interpreted it to mean Gill is coming back, according to Bloomberg. Gill rallied day traders on Reddit in an effort to squeeze GameStop short sellers and “reportedly turned a $58,000 options outlay into a $50 million windfall during the initial 2021-era meme stonk frenzy,” reports Almost Daily Grant’s. Needing no other excuses, punters have sent shares of GameStop and AMC soaring. 

A Bloomberg Markets Live Pulse survey just revealed that a third of responders believe tech stocks are the best hedge against inflation while 46% called gold the best shield against a rising price level. Perhaps the next poll will inquire if any Bloomberg subscribers believe meme stocks make for good inflation protection.

The MLIV Pulse survey is conducted among Bloomberg readers on the terminal and online by Bloomberg’s Markets Live team. 

The majority of those surveyed — 59% — cited inflation as the top risk facing financial markets between now and year end. A US recession was listed as top risk by nearly a quarter of those queried. 

Among the gloomy is real estate titan and CEO of Starwood Capital Group, Barry Sternlicht, who told CNBC last week, “I think people are looking for these cracks and you’re going to see the cracks develop now. You’re going to see a regional bank fail every day, or not—every week, maybe two a week.”

The office market bust and its impact on regional banks has Sternlicht concerned, because as Russell Investment summarized in Seeking Alpha, “regional banks are often more concentrated in their underwriting. According to the FDIC, more than 75% of outstanding loan balances of community banks (defined by the FDIC as those having assets less than $10 billion) were real-estate related at the end of the third quarter of 2022. Meanwhile, real-estate loans only made up 25% of the outstanding loan balances of all U.S. banks.”

Regional banks make money lending long and borrowing short, as was the case with Silicon Valley Bank. The folks at Russell say “it’s likely that some regional banks, with less regulatory oversight than larger banks, are willing to operate with greater duration mismatches.”

With real estate loan collateral tanking, higher interest rates and higher vacancy rates, more loans unserviceable. Bank balance sheets are stressed. Fractionalized banking being a confidence game in the view of the Russell analysts “the government had acted quite quickly to contain the impact and restore public confidence.”

Sternlicht is not so sure. Speaking about the Fed’s Jerome Powell, “”He’s got a hard task with a blunt tool, and the consequence is the real estate markets are taking it on the chin because rates rose so fast. We could have handled this, but we couldn’t handle it this fast,” he said. “The 1.9 trillion of real estate loans, that’s a fragile animal right now.” 

To Sternlicht’s point, Pinnacle Bank just took back the 40-story Burnett Plaza in Fort Worth, Texas, a commercial and office tower constructed in 1983, with a credit bid of $12.3 million. Only three years ago, the project reportedly sold for more than $137.5 million.

The economy is already too fragile for more and more businesses with commercial Chapter 11 filings increasing 40% in April to 542 from the 387 filings in April of last year, according to Epiq. For the first four months commercial filings increased 39% year-over-year in April to 2,569 from 1,846.

“In April 2024, we continued to see very strong double-digit percentage year-over-year increases for both individual and commercial new filers for bankruptcy protection,” said Michael Hunter, vice president of Epiq AACER. “As tax season concludes, I would expect the velocity of filings to increase as we approach the summer months.” 

Jerome Powell said “I don’t see the stag or the flation.” He’s not looking hard enough. 

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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