October 2, 2024 | Premium Service | With most eyes fixed on the November election, the smart money is quietly selecting the assets needed to ride the elevator up in the next reflation cycle. The FOMC is gunning liquidity in response to signs of quickening deflation in China and Europe, and stagnation in Japan. Zero growth in Germany in 2025?
We can all forget about fighting inflation and think about which assets will inflate the fastest as the collective holding tank fills. As we've noted, looking at liquidity (h/t to Simon White at BB), the Fed really didn't reduce reserves at all during this "tightening" cycle and now looks scared a la 2019 for reasons we cannot say specifically. Something is clearly bothering Chairman Jerome Powell, but hopefully he won't do another interview with Judy Woodruff.
Looking at the WGA Bank Top 25 Index, there are already signs that managers are loading up on large-cap financials after running away from the group at the end of 2023 and especially in Q1. Fears of a recession was the cause of the outflow of AUM from big banks – a downturn which never materialized. As we’ve noted on X.com more than once, the rate of increase in consumer delinquency and net loss, and also asset returns generally, flattened significantly in 2023, even as commercial real estate worsened. The WGA Bank Top 25 Index is shown below.
With the private credit trade literally disappearing before our eyes due to a lack of available problems to fix, you have to wonder where the big banks and dealers will waste their advertising dollars in 2025. We note that Citigroup (C) and Apollo Global (APO) just closed a private credit venture, yet APO separately says that it has enough internal liquidity including Athene (ATH) to fund credit strategies.
After spending millions and millions promoting retail private credit strategies that must be shut down, the Buy Side must now pivot to the next opportunity. More AI anyone? SoftBank just announced an investment in OpenAI, surely an indication of a top in the sector? Below we give some thoughts on names in financials to pick in the coming liquidity updraft engineered by the Fed.
