Basis Points – April 6, 2023

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Above the Fold  

The Great Money Market Banking Suck 

Our banking system is anything but simple or stagnant. Depositors and banking institutions are constantly shifting funds into different areas for a myriad of reasons, whether it be to meet regulatory requirements, liquidity demand or amass the greatest amount of interest. Unfortunately, these monetary shifts can have unintended consequences. One area currently under scrutiny is money market funds. Money market fund assets can generate higher interest rates and are considered relatively safe. While traditional bank deposits have declined $363 billion to $17.3 trillion since March, money market assets have skyrocketed $304 billion to a record $5.2 trillion. 

More than 40% of money market fund assets are invested in a Federal Reserve-sponsored overnight reverse repo facility created 10 years ago in order to lift interest rates on massive bank reserves. To simplify, banks park large sums of reserve money at the facility overnight, generating outsized interest (currently around 4.8%). The problem is that the parked cash is essentially sucked away from the banking system where it could be otherwise lent to borrowers or invested. Banks favor this facility because of a rule change made last decade that changed the treatment of these assets in something called the “leverage ratio,” which is a significant metric used to evaluate a bank’s debts and ability to repay them. As the Fed and lawmakers rethink the current banking structure and ecosystem, they may have to adjust rules or rates around reverse repos to reduce systematic stress. The method of how they do so is still a contentious topic.  

Three Things                                                 

Are There Deals to Be Had in Multi-Family Real Estate? 

Surging interest rates and the recent banking debacle have severely dented the multi-family marketplace. Sales of apartment buildings tumbled 74% year-over-year, the most since the Great Recession as investors grew increasingly cautious. And with just $14 billion in sales, the first quarter of 2023 was the slowest quarter since 2012, with the exception of Q2 2020 when the market was essentially frozen due to COVID-19 lockdowns. The weakness follows record sales in 2021, especially in the southern U.S., and may be good news for tenants as rents are likely to moderate.   

Job Openings Make Two-Year Shift 

America’s tight labor market has been a key focal point and ironic rationale for the Federal Reserve’s rate-tightening regimen. The “good” news (for rate doves out there) is that employers’ demand for workers is easing. The number of job openings fell to 9.9 million in February, dropping below 10 million for the first time in nearly two years. In fact, job openings have declined more than 10% since the start of 2023. January’s data was also revised lower to 10.6 million openings. Despite the declines, open positions far outnumber the 5.9 million unemployed people seeking work. 

Lithium Prices Are Down, but That Doesn’t Solve EV Issues 

Lithium, the key element in lithium-ion batteries found in most EVs (electric vehicles), has experienced a nearly 600% increase in price since 2018. But prices have moderated as of late. Over the last few months, the cost of the rare earth metal has declined 30%, bringing it to a more sustainable level for manufacturers. Unfortunately, prices are sliding because EV demand, especially from China, is waning. Prices are expected to remain volatile for some time as EV trends are still erratic. And since batteries are by far the most expensive component used in EV production, their cost will have a significant impact on consumer costs and producer profitability.  

In the Know                                                 

McDonald’s Unhappy Meal  

Instead of addressing employees at its corporate headquarters directly, the fast-food giant completely shut down its headquarters this week as it laid off hundreds of white-collar workers virtually. Though the layoffs were telegraphed back in January, the shut-down method of firing is certainly unique and is being viewed as a little odd. McDonald’s has said that the layoffs were not a cost-cutting measure, but rather a tactic to help the company innovate faster and operate more efficiently. The company currently employs roughly 45,000 workers in the United States. 

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